CENTRAL BANK OF NIGERIA
MONETARY
MONETARY
POLICY REVIEW
POLICY REVIEW
MONETARY
POLICY REVIEW
FEBRUARY, 2016
FEBRUARY, 2016
FEBRUARY, 2016
Volume 5, No. 2
Volume 5, No. 2
Volume 5, No. 2
Central Bank of Nigeria
33 Tafawa Balewa Way
Central Business District
P.M.B. 0187, Garki,
Abuja
Phone: +234 (0)9 462 36011
Website: www.cbn.gov.ng
E-mail:
ISSN: 2141-6281
©2016 Central Bank of Nigeria
Mandate
§Ensure monetary and price stability
§Issue legal tender currency in Nigeria
§Maintain external reserves to safeguard the international
value of the legal tender currency
§Promote a sound financial system in Nigeria
§Act as banker and provide economic and financial
advice to the Federal Government
Vision
“By 2015: Be the model Central Bank delivering Price and
Financial System Stability and promoting
Sustainable Economic Development"
Mission Statement
“To be proactive in providing a stable framework for the economic
development of Nigeria through effective, efficient and
transparent implementation of monetary and exchange
rate policy and management of the financial sector"
Core Values

· Meritocracy
· Leadership
· Learning
· Customer - Focus
Central Bank of Nigeria
iii
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To Facilitate the Conceptualization and Design of
Monetary Policy of the Central Bank of Nigeria
Mandate
To be Efficient and Effective in Promoting the
Attainment and Sustenance of Monetary and
Price Stability Objective of the
Central Bank of Nigeria
Vision
To Provide a Dynamic Evidence-based
Analytical Framework for the Formulation and
Implementation of Monetary Policy for
Optimal Economic Growth
Mission
MONETARY POLICY DEPARTMENT
CONTENTS
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Table of Contents
Statement by the Governor

ix
Chapter 1
Overview..


Chapter 2
Output in the Domestic Economy
..
..
..

Chapter 3
Price Developments ..


Chapter 4
Monetary Policy and Liquidity Management..
..

Chapter 5
Developments in the Financial Markets..
..
..

Chapter 6
Economic Outlook..


List of Tables
Table 3.1:
Inflation Rates, January 2015 – December 2015..
..

Table 3.2:
Major Components of Headline Inflation (Y-on-Y), July -


December, 2015


Table 3.3:
Major Components of Headline Inflation (M-on-M), July -
December, 2015


Table 3.4:
Major Components of Food Inflation (Y-on-Y), July- Dec


Table 3.5:
Major Components of Food Inflation (M-on-M), July-


December 2015


Table 3.6:
Major Components of Core Inflation (Y-on-Y) July-


December 2015


Table 3.7:
Major Components of Core Inflation (M-on-M) July-


December 2015


Table 3.8:
Actual and Seasonally Adjusted Headline Inflation July -


December 2015..


Table 4.1:
OMO Bills Auction (January 2014 – December 2015)
(N'million)..


Table 4.2:
CBN Standing Lending Facility (January 2014 – December


2015) (N'billion)


(January 2013 – December 2014) (N'billion) ..
..

Table 4.3:
CBN Standing Deposit Facility (January 2014 – December


2015) (N'billion)


Table 4.4:
Foreign Exchange Supply by the CBN (US$ Million)
..

Table 4.5:
Monetary Aggregates Outcomes (Growth in % except


otherwise stated)


Table 5.1:
Weighted Average Money Market Interest Rates (July –


December 2015)


Table 5.2:
Average Monthly Spot Exchange Rates (January –


December 2015) (N/US$)..


Table 5.3:
End-Month Exchange Rates (January – December 2015)


(N/US$)


Table 5.4:
Nominal and Real Effective Exchange Rates Indices


(July 2014 – December 2015) ..
..
..
..

Table 5.5:
Monthly Foreign Exchange Flows through the CBN
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Page


(July 2014 – December 2015)..
..
..
..

Table 5.6:
Monthly Foreign Exchange Flows through the Economy


(Jan 2014 – Jun 2015) (US$ Million)..
..
..
..

Table 5.7:
NSE All-Share Index (ASI) and Market Capitalization (MC)
(December 2014 – December 2015)..
..
..

Table 5.8:
Policy Rates of Selected Countries July-December 2015

Table 5.9:
Selected International Stock Market Indices as at


December 30, 2015


Table 5.10
Exchange Rates of Selected Countries (Value in currency


units to US$)


Table 6.1:
Global Output and Inflation Outlook ..
..
..

List of Figures
Figure 1:
Real GDP Growth (%) 2014 Q1 – 2015Q4
..
..

Figure 2.2:
Non-oil Sector Performance 2014Q1 - 2015Q4..
..

Figure 2:3:
Performance of the oil sector 2014Q1 – 2015Q4..
..

Figure 2.4:
Agricultural Sector Contribution by Activity, 2014Q1-2015Q4 8
Figure 2.5:
Industrial Sector's Contribution by Activity, 2014Q1-2015Q4 .. 9
Figure 2.6:
Services Sub-Sector Contribution, 2014Q1-2015Q4
..

Figure 2.7:
Quarterly Oil Production, 2014 Q1 – 2015 Q4 ..
..

Figure 2.8:
Monthly Bonny Light Oil Price, January – December 2015

Figure 3.1:
Headline, Core and Food Inflation Rates (July -


December 2015


Figure 3.2:
CPI Headline, Core and Food (July- December 2015)

Figure 3.3:
Major Components of Headline Inflation (Y-on-Y),


July - December 2015 ..


Figure 3.4:
Major Components of Headline Inflation (M-on-M),


January-June 2015..


Figure 3.5:
Major Components of Headline Inflation (M-on-M),


July-December 2015 ..


Figure 3.6:
Major Components of Food Inflation (Y-on-Y), Jul -


Dec 2015..


Figure 3.7:
Major Components of Food Inflation (M-on-M), July -


December 2015 ..


Figure 3.8:
Major Components of Core Inflation (Y-on-Y) Jan-


December 2015


Figure 3.9:
Major Components of Core Inflation (M-on-M) Jul-


December 2015


Figure 3.10
Actual and Seasonally Adjusted Headline Inflation July -


December 2015


Figure 4.1:
Money Supply (M1) and (M2) (June 2015 –Dec 2015)

Figure 4.2:
Growth in Money Supply (M1) and (M2) (June 2015 –


Dec 2015)


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Figure 4.3:
Net Domestic Asset (NDA) (Jun 2015 – Dec 2015)
..

Figure 4.4:
NDA, NDC and Other Assets (net) (Jun 2015 – Dec 2015)..

Figure 4.5:
Domestic Credit to Private Sector (Dec 2013 – June 2015)

Figure 5.1:
Weighted Average Money Market Interest Rates (June –


December, 2015)..


Figure 5.2:
Interbank Call Rate (July– Dec. 2015) ..
..
..

Figure 5.3:
Open Buy Back Rate (July – December 2015)..
..

Figure 5.4:
Daily Naira/US Dollar Exchange Rate (Jul - Dec 2015) ..

Figure 5.5:
End-Month Exchange Rates (January – December, 2015)


(N/U$$)


Figure 5.6:
Nominal and Real Effective Exchange Rates Indices


(July 2014 – December 2015) ..
..
..
..

Figure 5.7:
Monthly Foreign Exchange Flows through the CBN


(Jan 2014 – June 2015)


Figure 5.8:
Monthly Foreign Exchange Flows through the Economy


(Jul 2014 – Dec 2015) (US$ Million)..
..
..
..

Figure 5.9:
NSE ASI and MC (December 2014 – December )
..

Figure 5.10:
NSE ASI and MC (June 2015 – December 2015)..
.

Figure 5.11:
NSE Market Capitalisation by Sector as at


End-June 2015 ..


Figure 5.12:
NSE Market Capitalisation by Sector as at End-


December 2015


Figure 5.13:
Warren Buffet Valuation of Nigerian Equities Market ..

Figure 5.14:
10-Year U.S. Dollar-denominated Bond Yield for Nigeria


(Jan 1, 2014 – Dec 31, 2015) ..
..
..
..

Figure 5.15:
FGN Bonds Yield Curves: end-Dec. 2014 vs. end-Jun. 2015


vs. end- Dec. 2015


Figure 5.16:
Structure of the Nigerian Capital Market


(December, 2015)..


Figure 5.17:
Indices of Primary Commodity Prices January-December,


2015 (2005=100 US$)


List of Boxes
Box 1:
Rebalancing of the Chinese Economy..
..
..

Box 2:
Implications of the Delisting of Nigeria from JP Morgan


Government Bond Index for Emerging Markets (GBI-EM)

Box 3:
Monetary Policy Divergence in the Advanced Economies.. 59
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STATEMENT BY THE GOVERNOR
Monetary policy in the second half of 2015 was influenced by developments in the
global and domestic economic environment. Slowing global growth, the
rebalancing of the Chinese economy as well as the gradual normalization of US
monetary policy are key global developments that challenged policy-making
during the period. In addition, the protracted decline in crude oil and other
commodity prices exacerbated pressures on the domestic environment,
manifesting in strains on fiscal positions, lower accretion to external reserves and the
resultant pressure on the exchange rate. These weakened domestic spending, thus
moderating the Gross Domestic Product (GDP) to 2.35 per cent (year-on-year) in the
second quarter of 2015, from 3.96 per cent and 6.54 per cent in the preceding and
corresponding quarters of 2014, respectively. Pressures on the exchange rate,
coupled with disruptions to agricultural production resulting from the insurgency in
some parts of the country exerted pressure on the domestic price level as headline
inflation rose to 9.6 per cent in December from 9.2 per cent in July 2015.
Accordingly, monetary policy during the review period was designed to address the
challenges of declining output growth, rising unemployment and the constrained
liquidity position in the domestic banking system. Decline in public and private
spending due to severe strains on the fiscal position of the Federal and sub-national
governments have brought growth under severe constraints. With two consecutive
quarters of slow growth, fears were raised of the economy sliding into recession in
2016 in the absence of proactive steps to restart growth in key sectors of the
economy and stimulate employment. Liquidity conditions in the banking system
came under severe squeeze, owing to factors including full implementation of the
TSA, elongation of the tenor of state government loans as well as their exposure to
the distressed oil and gas sector. Consequently, the Bank embarked on monetary
easing during the period by reducing the MPR from 13.0 per cent with the symmetric
corridor of +/-200 basis points around the midpoint to 11.0 per cent with an
asymmetric corridor of +200 and -700 basis points. The Monetary Policy Committee
(MPC) also reduced the CRR from 25.0 to 20.0 per cent of total reserve eligible
deposits. The Liquidity Ratio was, however, kept unchanged at 30.0 per cent.
The short-to-medium term outlook for the domestic economy indicates that keeping
inflation within the Bank's single digit objective may be challenging, considering the
import dependent economy, the developments in the external sector and the
exchange rates. However, the Bank is still mindful of its mandate to achieve price
stability conducive to growth; therefore monetary policy would remain proactive to
the sustenance of efforts towards minimizing these threats.
Godwin I. Emefiele
Governor, Central Bank of Nigeria
February 2016


CBN Monetary Policy Review

CHAPTER ONE

1.0
OVERVIEW

onetary policy in the second
half of 2015 was shaped by
a number of developments
in the global environment
including
declining
oil
and
other
commodity
prices
due
to
weak
demand and tepid recovery in the
advanced
economies,
general
slowdown in the emerging market and
developing
economies,
and
rebalancing of the Chinese economy.
Other factors were the heightened risk
of deflation in Japan and the euro
area
due
to
weak
response
of
consumer spending to the current
stimulus by the European Central Bank
(ECB) and the ongoing US monetary
policy normalization which led to
monetary policy divergence in the
advanced economies. The resultant
depreciation of currencies of most
emerging
market
and
developing
economies in the wake of the US
monetary policy normalization led to
huge capital reversals from countries
such as Nigeria. Also, the continued
pressure on the exchange rate due to
the decline in foreign reserves coupled
with the perennial liquidity surfeit in the
banking system due to banks’ cautious
approach to lending, as well as supplyside disruptions of the distribution chain
by insurgency in some parts of the
country,
exerted
pressure
on
the
domestic price level. Consequently,
headline inflation increased to 9.6 per
cent in December from 9.2 per cent in
July 2015. The prices of food & nonalcoholic beverages continued to be
the major driver of headline inflation in
the review period. This was followed by
housing, water, electricity, gas and
other fuels, transport and clothing &
foot wear.

The
fragile
domestic
economic
environment
caused
by
declining
public and private expenditure as a
result of lower oil prices, sustained
pressure on the exchange rate, low
credit to the employment-generating
sectors of the economy combined to
dampen economic growth in the
review period. Data from the National
Bureau of Statistics (NBS) showed that
real GDP moderated considerably to
2.11 per cent (year-on-year) in the
fourth quarter of 2015, from 2.84 per
cent and 5.94 per cent in the
preceding quarter of 2015, and the
corresponding
quarter
of
2014,
respectively. The development was
partly attributed to the contraction
witnessed in the industrial sector by the
crude petroleum and natural gas subsector, owing to continued slide in
crude oil prices and receipts. The
fourth quarter real GDP growth was
driven by the contributions of services,
agriculture and trade, with 1.23, 0.83,
and
0.76
percentage
points,
respectively. Overall output growth in
M


CBN Monetary Policy Review

2015 moderated to 2.79 per cent
compared with 6.22 per cent in 2014.
Stability
in
the
foreign
exchange
market was threatened by sustained
demand pressure owing to speculative
activities, capital reversals following the
continued
normalization
of
US
monetary policy and rising import of
goods and services in the face of
declining
accretion
to
external
reserves
occasioned
by
lower
oil
prices.
Also,
negative
investor
sentiment surrounding policy direction
of the new administration led to
reduced foreign inflows. In order to
stem
these
pressures,
additional
measures to support the closure of
rDAS were introduced, including the
use of BVN in BDC transactions and the
Bank’s endorsement of the DMBs’
stoppage of foreign currency cash
deposits.
Developments in Nigeria’s financial
market remained volatile in response
to
changes
in
global
economic
conditions. The continued decline in oil
and other commodity prices stemming
from
weak
demand
and
tepid
recovery in the advanced economies,
slowdown and rebalancing in China,
and the ongoing US monetary policy
normalization, leading to monetary
policy divergence in the advanced
economies, heightened vulnerabilities
in the global financial market with
spillovers to emerging market and
developing economies.
In the wake of the monetary policy
normalization in the US, the U.S. dollar
appreciated against most currencies
particularly
in
response
to
the
November 2015 rate hike by the U.S
Federal
Reserve.
The
resultant
depreciation of currencies of most
emerging
market
and
developing
economies
accentuated
capital
reversals
from
countries
such
as
Nigeria.

The Banks’s objective of price and
macroeconomic stability continued to
underpin the choice of monetary
policy instruments in the review period.
The instruments included: the Monetary
Policy Rate (MPR), the Cash Reserve
Ratio (CRR), Open Market Operations
(OMO)
and
Discount
Window
Operations. During most of the review
period, the MPR was retained at 13.0
per cent and adjusted downwards to
11.0 per cent in November 2015. The
symmetric corridor of +/-200 basis
points around the MPR was also
adjusted in November 2015 to an
asymmetric corridor of +200/-700 basis
points. The CRR was reduced from 25.0
to 20.0 per cent of total reservable
deposits with the understanding that
the liquidity arising therefrom would be
channeled to employment generating
activities
such
as
agriculture,
infrastructural
development,
solid
minerals and industry. The Liquidity
Ratio was, however, kept unchanged
at 30.0 per cent to address liquidity
surfeit in the banking system.


CBN Monetary Policy Review

OMO remained the primary tool of
liquidity management, although the
Bank reduced the use of this instrument
in the review period. In the second half
of 2015, actual OMO sales amounted
to N1,732.55 billion compared with
N4,261.72 billion in the first half of 2015
and
N3,937.76
billion
in
the
corresponding period of 2014. As part
of liquidity management, the CRR was
used to complement OMO sales, in
order
to
moderate
volatility
and
pressure on the exchange rate. The
monetary
aggregates
largely
underperformed
relative
to
their
benchmarks
during
the
period,
reflecting the continued contraction of
net foreign asset (NFA) and the Bank’s
generally tight monetary policy stance.
As in the preceding period, credit to
government rose significantly, thereby
crowding
out
private
sector
investments.

Money market activities were largely
influenced
by
the
downward
adjustments in the CRR from 31.0 to
20.0
per
cent,
intensified
implementation
of
the
TSA
and
temporary suspension of OMO/NTB
auctions during the early part of the
review period. Money market rates
were relatively stable with occasional
spikes driven by fluctuations in banking
system liquidity, maturing government
securities and limited transactions in
CBN bills. Interbank call and open buy
back (OBB) rates remained below the
lower band of the MPR corridor of +/-
200 basis points for most of the review
period. The Nigerian money market
reference rate, the NIBOR, maintained
relative stability across tenors in the
review period.

At the Nigerian capital market, the
bearish trend continued in the second
half of 2015. The All-Share Index (ASI)
declined by 14.39 per cent to 28,642.25
at end-December 2015, from 33,456.83
at end-June 2015, and by 17.36 per
cent, year-on-year. This development
was
attributed
to
a
number
of
domestic and global factors, including
declining crude oil prices and the
impact on external reserves, continued
capital outflows owing to US monetary
policy normalization, as well as weak
corporate earnings.

Activities in the bonds market were
dominated by Federal Government of
Nigeria (FGN) securities. Sub-national
government and corporate bonds also
registered some activities, although
corporate bonds recorded the least
share by market volume. The yield on
the 10-year dollar-denominated bond
rose to 8.48 per cent at end-December
2015, from 5.91 and 6.23 per cent at
end-June 2015 and end-December
2014, respectively, reflecting investors’
demand
for
higher
premium
to
compensate for perceived sovereign
risk.

Headline
inflation
maintained
an
upward trend above the upper band


CBN Monetary Policy Review

of the Bank’s inflation threshold of 6 - 9
per cent, though still within single digits.
This was despite the Bank’s overall tight
monetary policy stance. Year-on-year
headline
inflation
has,
however,
remained in single digits in the last
thirty-six (36) months. Inflation inched
up marginally from 9.2 per cent in July,
2015 to 9.6 per cent in December,
2015, and was projected by the IMF to
rise to 9.7 per cent in 2016 from 9.1 per
cent in 2015. Staff estimates suggest
that year-on-year headline inflation
would inch up slightly but remain in
single digits in the first half of 2016,
moderating to 9.5 per cent in May
2016. The expected moderation would
be
driven
mainly
by
anticipated
stability
in
the
foreign
exchange
market,
reduced
household
expenditures
from
delayed
implementation of the 2016 budget,
and improvements in the supply of
petroleum products across the country.

Domestic output growth slowed to 2.11
per cent in the fourth quarter of 2015
from 2.84 per cent in the third quarter
of 2015 and 5.94 per cent in the
corresponding quarter of 2014. Overall,
the economy is projected to grow by
3.78 per cent in 2016, up from 2.79 per
cent
in

on
the
back
of
anticipated recovery in the non-oil
sector (NBS). The IMF projected a
subdued growth of 2.3 per cent in
2016, while the estimate of 4.37 per
cent in the 2016 FGN budget appears
overly optimistic in view of the current
gloomy oil price outlook, transition
challenges of the new administration
and insurgency in the Northeast, with
negative
impact
on
agricultural
activities. Nonetheless, growth in the
non-oil sector is expected to be
supported by various initiatives of the
CBN and the fiscal authorities to
stimulate domestic production. Given
the declining oil prices and production
challenges in an economy that is
predominantly oil based, achieving the
growth
projection
would
require
greater
co-ordination
of
fiscal,
monetary, trade and industrial policies.
Also,
efforts
by
sub-national
governments
to
boost
internallygenerated
revenue,
prudent
fiscal
management
as
well
as
various
measures to improve the investment
climate would support growth.

The risk to the outlook continues to be
developments
in
the
external
environment, particularly the weak
global recovery, declining demand for
Nigeria’s crude oil and slow accretion
to external reserves.


CBN Monetary Policy Review

CHAPTER 2

2.0
OUTPUT IN THE DOMESTIC
ECONOMY

utput growth in the Nigerian
economy in the second half of
2015 continued to moderate,
driven
largely
by
the
persistent
decline in crude oil prices, which
adversely
affected
government
revenue and expenditure. Real gross
domestic product (GDP) declined to
2.84 per cent in the third quarter of
2015 from 6.23 per cent in the
corresponding quarter of 2014. This
was,
however,
higher
than
the
growth of 2.35 per cent in the
preceding quarter. The major drivers
of growth were services (1.27%),
agriculture (0.92%) and trade (0.70%).
The
industrial
sector,
however,
contracted by 0.05 percentage point
due largely to the contraction of 0.17
percentage
point
by
the
manufacturing
sub-sector.
The
relative shares of the key sectors in
the GDP were services (33.94%),
agriculture (26.79%), industry (19.80%)
and trade (16.24%). The slowdown in
growth in the third quarter was
attributed
to
fiscal
uncertainties
following the transition to a new
government
and
heightened
production costs.


Figure 2.1
Real GDP Growth (%) 2014 Q1 – 2015Q4


In the fourth quarter of 2015, output
growth softened further to 2.11 per
cent compared with 5.94 per cent in
the corresponding quarter of 2014,
and 2.84 per cent in the preceding
quarter. The major drivers of growth
in the fourth quarter were services
(1.23%), agriculture (0.83%) and trade
(0.76%).
The
contraction
in
the
industrial sector intensified in the
fourth quarter by 0.7 percentage
point due to a 0.74 percentage point
contraction in the crude petroleum
and natural gas sub-sector. The
development in the industrial sector
largely accounted for the slowdown
in the fourth quarter. The relative
contributions of the main sectors to
real GDP in the fourth quarter were
services
(38.24%),
agriculture
(24.18%), industry (17.32%) and trade
(16.68%). Overall output growth in
2015 was 2.79 per cent compared
with 6.22 per cent in 2014.


Q1-2014
Q2-2014
Q3-2014
Q4-2014
Q1-2015
Q2-2015
Q3-2015
Q4-2016

Per cent
O


CBN Monetary Policy Review

2.1
Domestic Economic Activity

Economic activities in the non-oil
sector continued to drive GDP growth
in
the
second
half
of
2015,
as
weaknesses in the oil sector persisted.
Nonetheless, non-oil real GDP slowed
to 3.05 per cent in the third quarter,
compared with 7.51 per cent in the
corresponding period of 2014, and 3.46
per cent in the preceding quarter of
2015. Growth in the non-oil sector in
the third quarter of 2015 was largely
driven by crop production (0.91%),
information and telecommunications
(0.56%),
professional,
scientific
&
technical services (0.22%), finance and
insurance
(0.20%)
and
education
(0.19%). This compares with 1.23, 0.88,
0.28, 0.25 and 0.20 percentage points
in the corresponding quarter of 2014.
In the fourth quarter of 2015, non-oil
output also declined to 3.14 per cent
compared with 6.44 per cent in the
corresponding period of 2014. It was,
however, higher than 3.05 per cent
recorded in the preceding quarter.
Growth in the non-oil sector in the
fourth quarter of 2015 was due largely
to activities in crop production (0.76%),
information and telecommunications
(0.51%),
professional,
scientific
&
technical services (0.13%), finance and
insurance
(0.19%)
and
education
(0.22%) sub-sectors.
The oil sector grew by 1.06 per cent
(year-on-year) in the third quarter of
2015,
representing
a
remarkable
improvement from the contractions of
3.60
and
6.79
per
cent
in
the
corresponding quarter of 2014 and the
preceding
quarter
of
2015,
respectively.
Accordingly,
average
daily crude oil production increased to
2.17 million barrels per day (mbd) in the
third quarter of 2015 compared with
2.15 and 2.05 mbd recorded in the
corresponding quarter of 2014 and the
preceding
quarter
of
2015,
respectively. The recovery in the sector
was attributed largely to reduced
incidence of oil theft and pipeline
vandalism in the oil producing areas.

In the fourth quarter, however, the oil
sector contracted by 8.28 per cent
(year-on-year),
in
contrast
to
the
growth
of
1.18
per
cent
in the
corresponding quarter of 2014 and
1.06 per cent in the preceding quarter
of 2015. Thus, crude oil production
stood at 2.16 mbpd in the fourth
quarter, which was lower by 0.30 per
cent when compared with the level in
the third quarter of 2015. It was also
lower by 1.00 per cent compared with
the
2.19
mbpd
recorded
in
the
corresponding quarter of 2014. The
relapse into contraction, after the
improvement in the preceding quarter,
reflected the sustained weakness in
the oil market with prices at their
historic
lows
fuelled
by
growing
uncertainties
and
supply
glut.
Consequently, the contribution of the
oil sector to total real GDP declined to
8.06 per cent in the fourth quarter from


CBN Monetary Policy Review

10.27 per cent in the third quarter of

and
8.97
per
cent
in
the
corresponding period of 2014.

Figure 2.2
Non-oil Sector Performance 2014Q1 - 2015Q4


Figure 2:3
Performance of the oil sector 2014Q1 – 2015Q4


2.2
Sectoral Analysis

In this section, the performance of the
economy is examined on a sectoral
basis, with emphasis on key institutional
developments that influenced output
growth in the second half of 2015.


2.2.1
Agriculture


2.2.1.1 Agricultural Output

Growth
in
the
agricultural
sector
moderated by 1.01 percentage points
to 3.46 per cent in the third quarter of
2015, from 4.47 per cent in the
corresponding period of 2014. It was
also lower by 0.03 percentage point
when compared with 3.49 per cent in
the preceding quarter of 2015.

At 5.59 per cent, activity in the fishing
sub-sector was the main driver of
growth in the third quarter, followed by
livestock
(5.50%),
crop
production
(3.31%)
and
forestry
(2.24%).
This
indicates a slowdown of activities
when compared with 6.72, 5.71, 4.38
and 2.36 per cent recorded for fishing,
livestock, crop production and forestry,
respectively,
in
the
corresponding
quarter
of
2014.
The
share
of
agriculture in real GDP at 26.79 per
cent in the third quarter of 2015 was
marginally higher than 26.63 per cent
recorded in the corresponding quarter
of 2014.

During
the
fourth
quarter,
real
agricultural GDP increased by 0.02
percentage point to 3.48 per cent from
3.46 per cent in the third quarter. It
was,
however,
lower
by
0.16
percentage point relative to the 3.64
per
cent
recorded
in
the
corresponding period of 2014. In the
quarter, activity in the livestock subsector at 5.64 per cent became the

Q1-2014
Q2-2014
Q3-2014
Q4-2014
Q1-2015
Q2-2015
Q3-2015
Q4-2016

Per cent


CBN Monetary Policy Review

major driver of agricultural growth. This
was followed by fishing (5.41%), forestry
(4.05%) and crop production (3.25%).
This development also represented a
slowdown of activities when compared
with 5.74, 6.78, 4.44 and 3.40 per cent
recorded for fishing, livestock, crop
production and forestry, respectively,
in the corresponding quarter of 2014.
Similarly, the share of agriculture in real
GDP increased marginally to 24.18 per
cent in the fourth quarter of 2015 from
23.86
per
cent
recorded
in
the
corresponding quarter of 2014.

Figure 2.4
Agricultural Sector Contribution by Activity,
2014Q1-2015Q4


2.2.1.2 Agricultural Policies and
Institutional Support
During the review period, the sector
benefited from a number of policies,
reforms and institutional support as
discussed below:


The
Agricultural
Credit
and
Guarantee Scheme (ACGS)
A total of 40,734 loans valued at
N6.00 billion were guaranteed under
the
Scheme
between
July
and
December 2015.


The
N200
Billion
Commercial
Agriculture Credit Scheme (CACS)
The sum of N48.905 billion was released
under the Scheme in respect of
twenty-six (26) projects in the third
quarter and twenty-three (23) projects
in the fourth quarter of 2015.


The
N200
Billion
SME
Credit
Guarantee Scheme (SMECGS)
In the third quarter of 2015, six (6)
projects valued at N432.00 million
were guaranteed under the Scheme.
No project was guaranteed in the
fourth quarter of 2015.


Nigeria
Incentive-Based
Risk
Sharing
System
for
Agricultural
Lending (NIRSAL)
In the second half of 2015, a total of
N357.487 million was approved as
credit
risk
guarantees
for
one
hundred
and
eighty
nine
(189)
projects. In addition, the sum of
N37.300 million was paid as interest
drawback (IDB) claims to thirteen
projects.


Agricultural Credit Support Scheme
(ACSS)
The
Agricultural
Credit
Support
Scheme was established to finance


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large ticket agricultural projects with
an interest rebate of 6.0 per cent
upon timely repayment of the facility.
In the third quarter of 2015, one (1)
rebate valued at N33.134 million was
paid,
bringing
the
total
since
inception to 47 projects valued at
N910.023 million.

2.2.2
Industry


2.2.2.1 Industrial Output

In
the
third
quarter
of
2015,
contraction in industrial sector output
moderated to 0.26 per cent from a
contraction of 5.27 per cent in the
preceding quarter, in contrast to the
growth
of
5.05
per
cent
in the
corresponding quarter of 2014. The
contraction in the industrial sector was
due largely to the 1.75 per cent
contraction of the manufacturing subsector which was moderated by a
growth of 7.03 and 1.06 per cent in
solid minerals and crude petroleum
and
natural
gas
sub-sectors,
respectively.
In
the
corresponding
period of 2014, industrial output was
dampened by the contraction of 3.60
per cent in crude petroleum and
natural gas, while manufacturing and
solid minerals sub-sectors grew by 16.00
and 11.79 per cent, respectively.

In the fourth quarter, the industrial
sector contracted further by 3.80 per
cent from 0.26 per cent in the
preceding quarter. This development
was in contrast to the growth of 7.13
per cent in the corresponding period
of 2014. The negative performance of
the sector was mainly attributed to the
substantial contraction of 8.28 per cent
in crude petroleum and natural gas
sub-sector, and the sluggish growth of
0.38 per cent in the manufacturing
sub-sector. The solid mineral sub-sector,
however, grew by 5.73 per cent. In the
corresponding period of 2014, crude
petroleum
and
natural
gas,
manufacturing and solid mineral subsectors grew by 1.18, 13.47 and 13.57
per cent, respectively.

Figure 2.5
Industrial Sector’s Contribution by Activity,
2014Q1-2015Q4


2.2.2.2 Industrial Policy and Institutions
Support:

The performance of the sector
during the period benefited from the
continuation of a number of reforms
and incentives. These included:


Per cent
Crude Petroleum & Natural Gas
Solid Minerals
Manufacturing


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The N300 Billion Power and Airline
Intervention Fund (PAIF)
No disbursement was made in the
second half of 2015.


N213
Billion
Nigerian
Electricity
Market
Stabilization
Facility
(NEMSF)
No fund was disbursed under Nigeria
Electricity Market Stabilization Facility
(NEMSF) in the period under review.
Cumulatively, the sum of N64.755
billion had been disbursed since
inception to eighteen (18) projects.


N200
Billion
SME
Restructuring/
Refinancing Fund (RRF)
The
N200
Billion
SME
Restructuring/Refinancing Fund (RRF)
was discontinued in December, 2015.
The RRF repayment account is now
under a new scheme called the
N300 billion Real Sector Support
Facility
(RSSF)
established
in
November 2014, to address the
funding needs of large ticket SMEs in
Nigeria. In the review period, the sum
of N9.68 billion was disbursed to the
Bank of Industry (BOI). All outstanding
repayments under the RRF will now
be utilized under the RSSF.


N235 Billion Small and Medium
Enterprises
Credit
Guarantee
Scheme (SMECGS)
As at end-December 2015, eighty
seven (87) projects valued at N4.22
billion were guaranteed under the
Scheme, while forty (40) projects
valued at N2.44 billion were fully
repaid.


N220 Billion Micro, Small and
Medium Enterprises Development
Fund (MSMEDF)
The N220 billion Micro, Small and
Medium
Enterprises
Development
Fund (MSMEDF) was launched on
August 15, 2013. The Fund’s focus is to
channel low interest funds to the
MSME sub-sector of the Nigerian
economy
through
Participating
Financial Institutions (PFIs). A total of
N51.09 billion was disbursed as at
end-December

under
the
project,
while
N0.89
million
was
repaid.


The Entrepreneurship
Development Centres (EDCs)
The EDC initiative by the Bank was
intended
to
support
youth
entrepreneurship to set up businesses
and create self-employment towards
poverty reduction. Currently there
are a total of six EDCs, one located in
each of the six geo-political zones of
the country: North-East (Maiduguri),
North-Central (Makurdi), North-West
(Kano),
South-South
(Calabar),
South-West (Ibadan) and South-East
(Umuahia) with one outreach center
located in the North-Central (Minna).
Since inception, 19,232 participants
have
been
trained
under
the
scheme and a total of 14,221 jobs
created,
while
7,145
successful


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participants accessed a cumulative
sum of N1.090 billion in start-up loans.

2.2.3 Construction

Activity in the construction sector
contracted by 0.11 per cent in the third
quarter of 2015 in contrast to the
growth of 6.42 and 11.32 per cent in
the preceding quarter of 2015 and the
corresponding quarter of 2014. In the
fourth
quarter,
the
sector
further
contracted
by
0.35
per
cent
compared with 12.66 per cent growth
in the corresponding period in 2014.

2.2.4
Trade Sector

In the third quarter of 2015, the trade
sector
grew
by
4.40
per
cent
compared with 5.07 per cent in the
preceding quarter of 2015 and 6.81 per
cent in the corresponding period of
2014. In the fourth quarter, the sector’s
growth strengthened further to 4.69 per
cent compared with 5.32 per cent in
the corresponding period of 2014.

2.2.5
Services Sector
The Services sector grew by 3.78 per
cent in the third quarter of 2015
compared with 4.35 and 7.63 per cent
in the preceding quarter of 2015 and
corresponding period of 2014. The key
drivers in the sector were education;
finance and insurance; utilities; and
information and telecommunication
with growth rates of 8.04, 6.57, 5.35 and
5.27
per
cent,
respectively.
This
compares with growth of 8.78, 8.56, -
12.91 and 8.30, respectively, in the
corresponding quarter of 2014. In the
fourth quarter, the sector moderated
to 3.25 per cent relative to the
performance in the preceding quarter.
The fourth quarter performance was
largely driven by education, finance
and insurance and entertainment and
recreation, with 8.13, 6.41 and 6.54 per
cent,
respectively,
against
their
performance of 11.23, 8.14, and 15.60
per
cent,
respectively,
in
the
corresponding quarter of 2014.

Figure 2.6
Services Sub-Sector Contribution, 2014Q12015Q4

2.2.6
Oil Sector
The sector continued to record weak
performance in the second half of
2015, reflecting the persistent softening
of the international oil market. In the
fourth quarter, average daily crude oil
production declined marginally to 2.16
mbpd
from
2.17
mbpd
in
the
preceding quarter. This represented a
fall of 0.03 mbpd compared with the
2.19 mbpd in the corresponding period


CBN Monetary Policy Review

of 2014. The development in the fourth
quarter represented
a moderation
compared with the preceding quarter.
In the third quarter, average daily oil
production had risen to 2.17 from 2.05
mbpd in the preceding quarter and
2.12
mbpd
in
the
corresponding
quarter of 2014.

Figure 2.7
Quarterly Oil Production, 2014 Q1 – 2015 Q4

The global oil price continued its
downward
movement
during
the
review period. The price of Nigeria’s
reference crude, the Bonny Light
370API fell from a high of US$57.01 per
barrel in July 2015 to US$47.09 per
barrel in August and rose to US$49.20
per barrel in October 2015. The price of
Bonny light fell further to close the year
at a low of US$38.00 per barrel in
December 2015. The fall in price of
Bonny Light crude (and other global
crudes) was largely attributed to the
increase in level of oil and gas output
by the U.S, supply glut from OPEC and
non-OPEC members, expectation of
re-entry of Iranian oil into the market
and weak demand from Europe and
China. The continued decline in oil
price
had
serious
implications
for
government fiscal revenue. Overall,
the average Bonny Light price of
US$52.70 per barrel in 2015 was below
the Federal Government 2015 budget
benchmark price of US$53.00 per
barrel.
Figure 2.8
Monthly Bonny Light Oil Price, January –
December 2015


Million Barrels Per Day

US$


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CHAPTER 3

3.0
PRICE DEVELOPMENTS

n the second half of 2015, the
upward pressure on domestic prices
continued, despite the generally
tight monetary policy stance of the
Bank. Headline and food inflation rates
maintained an upward trajectory and
remained above the Bank’s inflation
benchmark range of 6 - 9 per cent.
Core
inflation
initially
fluctuated
upwards and stabilized in the last
quarter
of
the
year.
This
price
development
indicated
that
the
driving factors were both supply- and
demand-related.
On the supply side, the volatility in the
foreign exchange market continued.
As a result, the depreciation of the
naira exchange rate intensified in all
segments of the market. The Bank
implemented a number of polices and
administrative measures to moderate
the demand pressures. The Bank’s
restriction
of
access
to
foreign
exchange for some 41 import items,
introduced in the preceding period,
was retained and complemented by
the
use
of
the
Bank
Verification
Number (BVN) in Bureau de Change
(BDC)
transactions.
This
additional
measure
was
intended
to
curb
excessive
demand
pressures
and
reduce
the
spread
between
the
interbank and BDC rates. Overall, the
depreciation
of
the
naira
was
attributable to falling oil prices, which
led to reduced accretion to foreign
reserves,
thereby
weakening
the
Bank’s ability to fund the rising demand
in the foreign exchange market.
In the money market, the Inter-Bank
Call and Open Buy Back (OBB) rates
fell remarkably below the standing
facility corridor, signaling the existence
of liquidity surfeit in the banking system.
The excess liquidity largely arose from
the cautious approach to lending by
the
DMBs
and
monetary
easing
measures embarked on by the Bank as
well as the full implementation of the
Treasury Single Account (TSA), which
reduced borrowing by the Federal
Government.

3.1
Trends in Inflation
In the second half of 2015, all
measures of inflation trended upwards.
Food and core measures of consumer
price
index
(CPI)
increased
progressively
between
July
and
December 2015 from 179.5 and 171.6
to 186.2 and 176.7, respectively. Food
inflation (year-on-year) increased from
10.1 per cent in July to 10.6 per cent in
December 2015. On the other hand,
core
inflation
(year-on-year)
fell
marginally from 8.8 per cent in July to
8.7 per cent in December 2015.
Following this development, headline
inflation (year-on-year) increased from
9.2 per cent in July to 9.6 per cent in
December 2015. Thus, in terms of its
I


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Headline
Inflation

Core Inflation
Food Inflation
CPI
Y-on-Y
12MMA
CPI
Y-on-Y
12MMA CPI
Y-on-Y
12MMA
Jan-15

Feb-15

Mar-15

Apr-15

May-15

Jun-15

Jul-15

Aug-15

Sep-15

Oct-15

Nov-15

Dec-15

Table 3.1Inflation Rates, January 2015 – December 2015
weight in the consumer basket, the
food component remained the major
driver
of
headline
inflation.
All
components of food inflation, except
yams, potatoes and other tubers,
experienced an increase in the second
half of the year. The core component
moderated the pressure on headline
inflation during the period, due to the
marginal
decline
in
some
of
its
components
including
furnishing,
household equipment and household
maintenance; health; education and
restaurant and hotels (Table 3.1 and
figures
3.1
and
3.2).


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Figure 3.1
Headline, Core and Food Inflation Rates (July -
December 2015

In the review period, most components
of
food
inflation
continued
their
upward trend as was experienced in
the first half of the year. Farm produce
remained the major driver of food
inflation,
increasing
by
0.25
percentage point to 5.41 per cent in
December from 5.16 per cent in July
2015.
Processed
food
component
increased by 0.28 percentage point to
5.17 per cent in December from 4.89
per
cent
in
July
2015.
Other
components of food inflation that also
recorded
price
increases
include
vegetables (0.13 percentage point),
fish and sea foods (0.12 percentage
point) and meat (0.03 percentage
point). Yam, potatoes and other tubers
component, however, experienced a
decline of 0.06 percentage point in the
review period.


Figure 3.2
CPI Headline, Core and Food (July- December
2015)


3.1.1 Headline Inflation
During the review period, the major
components
of
headline
inflation
continued their upward movement,
reflecting
a
general
increase
in
domestic prices. Food & non-alcoholic
beverages remained the major driver
of headline inflation, rising from 5.29
per cent in July to 5.58 per cent in
December 2015. This was followed by
housing, water, electricity, gas and
other fuels, which increased marginally
by 0.1 percentage point from 1.29 per
cent
to
1.30
per
cent.
Other
components
such
as
transport,
clothing & foot wear and education
also contributed to the uptick (Table
3.2 and Figure 3.3).
Domestic prices continued to rise in the
review period, in spite of the tight
monetary policy stance of the Bank.
This development was due largely to
the continued disruption to the supply

Per cent
Headline
Core
Food

Headline
Core
Food


CBN Monetary Policy Review

chain, occasioned by insurgency in
some parts of the country. The passthrough
of
exchange
rate
depreciation in the parallel market to
domestic prices also contributed to the
observed price increases. In addition,
the persistent shortage of petroleum
products continued to increase the
cost
of
transportation
and
other
economic activities. The liquidity surfeit
in the banking system arising from
redemption of maturing instruments
and
other
injections
also
exerted
upward pressure on domestic prices,
although their effects were largely
moderated by the sustained tight
monetary policy stance of the Bank.

Table 3.2
Major Components of Headline Inflation (Y-onY), July - December, 2015


Figure 3.3
Major Components of Headline Inflation
(Y-on-Y), July - December 2015

Headline inflation fluctuated upwards
on a month-on-month basis during the
period under review. It initially trended
downwards from 0.69 to 0.42 per cent
between July and October, 2015, and
rose to 0.66 and 0.99 per cent in
November
and
December,
respectively. The major components
that accounted for the increase were
prices of food and non-alcoholic
beverages which ranged from 0.24
and 0.62 per cent; and housing, water,
electricity, gas & other fuels, from 0.05
to 0.90 per cent (Table 3.3 and Figure
3.4).

Table 3.3
Major Components of Headline Inflation (M-onM), July - December, 2015

Date
Headline
Food & NonAlcoholic
Bev
Housing,
Water,
Elect. Gas
& Other
Fuel
Clothing &
footwear
Transpor
t
Furnishings,
Household
Equip & HH
Maint.
Education
Jul-15

Aug-15

Sep-15

Oct-15

Nov-15

Dec-15

Date
Headline
Food &
NonAlcoholi
c Bev
Housing,
Water,
Elect. Gas
& Other
Fuel
Clothing &
footwear
Transpor
t
Furnishings,
Household
Equip & HH
Maint.
Education
Jul-15

Aug-15

Sep-15

Oct-15

Nov-15

Dec-15


CBN Monetary Policy Review

Figure 3.4
Major Components of Headline Inflation (M-onM), July-December 2015

3.1.2
Headline Inflation
Food inflation (year-on-year) trended
upwards by 0.54 percentage point
from 10.05 per cent in July to 10.59 per
cent in December 2015. The rise in
food inflation was largely attributed to
increase in the prices of its key
components, notably processed food
and farm produce. The price of
processed food increased from 4.89 to
5.17 per cent, and that of farm
produce from 5.16 to 5.41 per cent.
Thus, of the 0.54 percentage point
increase in food inflation, processed
food
contributed
0.28
percentage
point which is slightly larger than the
0.25
percentage
point
from
farm
produce.
Consequently,
both
processed food and farm produce
drove the food price development
during the review period. The major
driver of the increase in processed
food category was fish and sea foods
which increased by 0.12 percentage
point, while farm produce was largely
driven by the 0.13 percentage point
increase in the price of vegetables. This
price
development
could
be
explained by delayed harvest due to
late rains, the effect of higher import
costs from exchange rate depreciation
and increase in transport costs due to
fuel supply shortages during the period
(Table 3.4 and Figure 3.5).

Table 3.4
Major Components of Food Inflation (Y-on-Y),
July- Dec 2015


Figure 3.5
Major Components of Food Inflation
(Y-on-Y), Jul - Dec 2015


The
month-on-month
analysis
indicated
that
food
inflation
also
July.15
Aug.15
Sept.15
Oct.15
Nov.15
Dec.15
Change
btw Jul -
Dec 2015
FOOD

Processed Food

Farm Produce

Yams, Potatoes & Other Tubers

Meat

Vegetables

Fish & Sea Food


CBN Monetary Policy Review

increased from 0.76 per cent in July to
1.11 per cent in December 2015. The
price of processed food increased to
0.47 from 0.35 per cent and farm
produce to 0.64 from 0.41 per cent
during the period. Accordingly, the
0.35 percentage point increase in food
inflation was contributed by the two
components - farm produce (0.23%)
and processed food (0.12%). The key
driver of the increase in the farm
produce category was vegetable,
which rose by 0.13 percentage points
(Table 3.5 and Figure 3.6).

Table 3.5
Major Components of Food Inflation (M-on-M),
July-December 2015

Jul
y
Augu
st
Sept
e
mbe
r
Octob
er
Nov
e
mb
er
Dec
e
mb
er
Chan
ge
btw
Jul -
Dec

Food
0.7


Processe
d Food
0.3


Farm
Produce
0.4


Yam,
Potatoes
& Other
Tubers
0.0


Meat
0.0


Vegetabl
es
0.0


Fish and
Sea
Food
0.0


Figure 3.6
Major Components of Food Inflation (M-on-M),
July - December 2015


3.1.3
Core Inflation
Core inflation (year-on-year) fluctuated
downwards from 8.8 per cent in July to
8.7 per cent in December 2015,
reflecting a drop of 0.1 percentage
point. It, however, rose to a high of 9.0
per cent in August 2015 and declined
to 8.9 in September and stabilized at
8.7 per cent between October and
December 2015. The 0.1 percentage
point decrease in core inflation was
largely accounted for by Furnishings,
Household Equip & HH Maintenance
(0.11 percentage point), Health (0.05
percentage point) and Restaurant and
Hotel (0.03 percentage point). This
development
dampened
the
increases recorded in Transport (0.07
percentage point); Processed food
(0.05 percentage point); and Clothing
and
foot
wear
(0.02
percentage
point). Other components such as the
Non-Alcoholic beverages;
Alcoholic
beverages
and
Tobacco;
Communication;
Recreation
and


July
August
September
October
November
December
Processed Food
Farm Produce
Yam, Potatoes & Other Tubers
Meat
Vegetables
Fish and Sea Food


CBN Monetary Policy Review

Culture; and Sugar, Jam and Honey,
etc remained unchanged from their
position in July 2015 (Table 3.6 and
Figure 3.8). The decline in core inflation
was largely traceable to reduced
government spending which affected
general
economic
activities
and
household expenditure.

Table 3.6
Major Components of Core Inflation
(Y-on-Y) July- December 2015


Figure 3.7
Major Components of Core Inflation
(Y-on-Y) Jan-December 2015


On a month-on-month basis, core
inflation rose by 0.17 percentage point
from 0.61 per cent in July to 0.78 per
cent in December 2015. Processed
food remained the major driver of core
inflation, increasing from 0.23 to 0.32
per cent in the review period. This was
followed by Clothing and footwear
which increased from 0.07 per cent in
July to 0.13 per cent in December
2015. Transport also increased from
0.06 per cent to 0.10 per cent in the
reviewed period. Other components
that contributed to the increase in
core inflation on a month-on-month
basis
were:
Furnishings,
Household
Equip &HH Maintenance. (0.02 to 0.03
per cent) and Sugar, Jam, Honey, etc
(0.01 to 0.02 per cent) (Table 3.7 and
Figure 3.9).


YEAR-ON-YEAR (CORE)
Weights
J ul'15
Aug'15
Sep'15
Oct'15
Nov'15
Dec'15
Change btw Jul. to
Dec. 2015
ALL ITEMS LESS FARM
PRODUCE CPI

Processed Food

Milk,Cheese & Eggs

Sugar,Jam,Honey,etc

Non-Alcoholic Beverages

Alcoholic Bev. Tobacco & Kola

Clothing & footwear

Housing,Water, Elect.Gas &
Other Fuel

Furnishings, Household Equip
&HH Maint.

Health

Transport

Communication

Recreation & culture

Education

Restaurant & Hotels

Miscellaneous Goods &
Services


CBN Monetary Policy Review

Table 3.7
Major Components of Core Inflation
(M-on-M) July- December 2015


Figure 3.8
Major Components of Core Inflation
(M-on-M) Jul-December 2015


3.1.4
Seasonally-Adjusted Inflation
In the second half of 2015, both
actual
and
seasonally-adjusted
headline inflation rates maintained
their
upward
movement,
in
continuation of the trend observed
during the preceding half year (Table
3.8 and Figure 3.9). Notwithstanding
the moderation recorded in October,
actual headline inflation continued its
upward
trajectory,
reflecting
the
general level of prices. It trended
above the seasonally-adjusted inflation
rate in both the third and fourth
quarters, except in October when it
dipped. This development indicated
that
seasonal
effects
affected
headline inflation during the period.
The general upward trend in both
actual
and
seasonally-adjusted
measures of inflation was ascribed to
scarcity
of
petroleum
products
resulting in increased energy and
transport costs; imported inflation due
to significant depreciation of the naira
as well as food supply bottlenecks and
delayed
harvest
of
agricultural
produce. The uptick in both measures
of
inflation
in
December
largely
resulted from increased consumption
spending associated with social and
religious festivities as well as energy
supply shortfalls.

Table 3.8
Actual and Seasonally Adjusted Headline
Inflation July -December 2015
Date
Inflation
S-A Inflation
Jul-15
9.22
9.14
Aug-15
9.34
9.25
Sept-15
9.39
9.32
Oct-15
9.30
9.34
Nov-15
9.37
9.35
Dec-15
9.55
9.41


MONTH-ON-MONTH (CORE)
Weight
J ul'15
Aug'15
Sep'15
Oct'15
Nov'15
Dec'15
Change btw Jul. to
Dec. 2015
ALL ITEMS LESS FARM
PRODUCE CPI

Processed Food

Milk,Cheese & Eggs

Sugar,Jam,Honey,etc

Non-Alcoholic Beverages

Alcoholic Bev. Tobacco & Kola

Clothing & footwear

Housing,Water, Elect.Gas &
Other Fuel

Furnishings, Household Equip
&HH Maint.

Health

Transport

Communication

Recreation & culture

Education

Restaurant & Hotels

Miscellaneous Goods &
Services


CBN Monetary Policy Review

Figure 3.10
Actual and Seasonally Adjusted Headline
Inflation July - December 2015


3.2
Key Factors that Influenced
Domestic Prices
The headline and food measures of
inflation in the second half of 2015
trended upwards with core inflation
recording marginal decline, reflecting
the impact of both demand and
supply factors. The fluctuation in all
measures of inflation during the period
reflected changes in both domestic
and global economic environment.
Factors such as the liquidity surfeit in
the banking system due to some
monetary easing measures, scarcity of
petroleum products and the passthrough effect of depreciation to
import prices exerted upward pressure
on the price level. Other factors
included
increased
consumption
spending associated with year-end
social
and
religious
festivities,
the
liquidity impact of federal government
bailout
to
states,
supplementary
budget by the federal government,
disruptions to food supply partly due to
security challenges and unfavourable
agricultural season.

3.2.1
Demand-side Factors
A
critical
factor
that
influenced
domestic prices during the period was
the perennial liquidity overhang in the
banking
system,
which
exerted
considerable
pressure
on
the
exchange rate following the persistent
slide in crude oil prices. This was further
accentuated by the liquidity effect of
the bailout to states by the federal
government through the CBN during
the early part of the second half of
2015. In addition, the trend towards
monetary policy easing by the Bank,
which
started
in
July
with
the
harmonization of CRR to 31 per cent
and its further reduction to 20 per cent
in
November,
coupled
with
the
reduction in the MPR to 11.0 from 13.0
per cent was expected to stimulate
aggregate
spending
with
likely
inflationary effects. This was further
heightened
by
the
N574.5
billion
supplementary budget of the federal
government. The aggregate effect of
these developments was that the
liquidity trapped in the banking system
put pressure on the foreign exchange
market leading to the depreciation in
the BDC segment from N236.65/US$ in
July to N258.30/US$ in December 2015.


CBN Monetary Policy Review

3.2.2
Supply-side Factors
Domestic prices in the second half of
2015 were affected by a number of
supply-side
factors,
which
were
principally production and distribution
related.
Industrial
production
and
distribution
were
affected
by
the
decline in electricity generation due to
inadequate
supply
of
gas
and
vandalism of the transmission lines as
well
as
shortage
of
petroleum
products. Insurgency in the north-east
and activities of cattle rustlers led to
communal clashes and displacement
of farmers, which affected production
and
distribution
of
agricultural
products. Other factors were delayed
harvest
due
to
the
late
commencement
of
rain
and
the
outbreak of avian influenza in over 21
states of the Federation and the
Federal Capital Territory (FCT). The
aggregate
effect
of
these
developments was the decline in
output growth to 2.84 and 2.11 per
cent in the third and fourth quarters of
2015, respectively, compared with 6.23
and 5.94 per cent in the corresponding
period of 2014. Another supply side
factor was the depreciation of the
naira exchange rate, which had a
significant
pass-through
to
import
prices,
particularly
the
prices
of
imported raw materials.


3.2.3
Moderating Factors
A
number
of
factors
moderated
pressures on the domestic price level
during the second half of 2015. On the
demand side, the moderating factors
were the relatively tight monetary
policy stance of the Bank as the MPR
was maintained at 13.0 per cent up to
November

and
the
full
implementation of the TSA which led to
the withdrawal of over N2 trillion at
end-December
2015.
In
addition,
reduced
general
government
spending due to the decline in oil
revenue moderated overall economic
activities and household expenditure.
Also, the slowdown in government
activities due to delayed constitution
of the cabinet slowed public spending
and private demand. On the supply
side, the effect of agricultural harvest
on food prices and low global inflation
helped to rein in domestic prices.


CBN Monetary Policy Review

CHAPTER FOUR

4.0
MONETARY
POLICY
AND
LIQUIDITY MANAGEMENT

onetary policy in the second
half of 2015 was influenced
by key global developments
such as slowing global growth, the
rebalancing of the Chinese economy
as well as the gradual normalization of
US monetary policy. In addition, the
protracted decline in crude oil and
other
commodity
prices
and
the
attendant pressures on fiscal positions,
lower accretion to external reserves,
depreciation of exchange rates in
emerging
market
and
developing
economies as well as the divergence
of monetary policy in the advanced
economies, heightened the risk of
capital flow reversals. The persistent
tepid growth and threat of deflation in
major advanced economies, coupled
with the re-entry of Iran into the oil
market as well as the reluctance of
major OPEC members to agree on
output cuts, indicated a grim outlook
for the price of crude oil.
On the domestic front, the challenges
to monetary policy were the sustained
pressure
in
the
foreign
exchange
market
leading
to
continuing
depreciation and the widening of the
premium between the interbank and
BDC rates. The demand pressures,
which heightened the risk of currency
substitution, were fueled by liquidity
surfeit in the banking system and the
DMBs’ cautious approach to lending
during the period. The continued
slowdown in real output and persisting
insurgency in certain parts of the
country heightened the threat of a
recession
with
adverse
effect
on
investor confidence. These challenges
and the need to attain the Bank’s
mandate of price and exchange rate
stability provided the environment for
monetary policy decisions in the review
period.

4.1
Decisions
of
the
Monetary
Policy Committee (MPC)
The
Monetary
Policy
Committee
(MPC) decisions in the second half of
2015 were influenced by key global
and
domestic
developments.
The
global
developments
were
the
divergence
in
monetary
policy
between the US and the Euro Area;
lingering uneven recovery in the global
economy; slowdown and rebalancing
of the Chinese economy away from
manufacturing to consumption and
services; softening crude oil and other
commodity prices; and the gradual
normalization of the US monetary
policy. Other global issues included the
threat of deflation in some advanced
economies; sustained asset purchase
programmes of the ECB, Bank of
England and the Bank of Japan; tight
external
financial
conditions,
deteriorating
global
trade
and
geopolitical tensions.
On the domestic front, the major
concerns
were
low
accretion
to
M


CBN Monetary Policy Review

external
reserves
and
mounting
pressures
on
the
exchange
rate,
declining oil revenue from lower crude
oil prices; persistent liquidity surfeit in
the banking system and high costs of
liquidity
management;
perennial
shortage of petroleum products and
heightened
inflationary
pressures.
Other factors included: rising credit to
government and the crowding out of
private sector investment; uncertainties
surrounding the slow take-off of the
new government as well as security
challenges in some
parts of the
country.

4.1.1
July 2015 MPC Meeting
The July 2015 MPC meeting reviewed
key developments in both global and
domestic macroeconomic indices in
the first half of 2015.

On the external front, the Committee
noted the adverse effect of the
protracted decline in crude oil prices
on the fiscal operations of government.
The committee also noted that the
average naira exchange rate was
relatively
stable
at
the
interbank
segment but was significantly volatile in
the BDC segment. The committee was
concerned about the gradual but
steady increase in headline inflation up
to June 2015, but observed that some
of
the
drivers
of
the
inflationary
pressure were transient and outside the
control of monetary policy. The MPC
further observed that output growth in
the first half of 2015 continued to
decelerate from 3.96 per cent in the
first quarter to 2.35 per cent in the
second quarter mainly as a result of
softening oil prices.

On the exchange rate development,
the MPC emphasized that financial
system
stability
issues
placed
key
limitations on the extent of price
flexibility
considerations,
thereby
creating
a
compelling
need
to
balance measures to address existing
vulnerabilities.
There
were
also
concerns about the rising risk of capital
flow reversal from emerging markets
and developing economies, due to
the
ongoing
monetary
policy
normalization in the US which exerted
pressure on exchange rates. A major
consideration of the committee was
that the newly elected government
required time to settle down and
unfold its economic agenda. On the
slow output growth, the committee
underscored
the
need
for
the
intensification
of
various
ongoing
initiatives to diversify the economy
away from oil and expand the base for
foreign exchange receipts.

Overall,
the
Committee
expressed
optimism that business confidence
would improve as government unfolds
its economic plans. Accordingly, it
highlighted
the
need
for
complementary fiscal policies to restart
growth and stabilize the economy. The
MPC also underscored the imperative
of
growing
and
preserving
the


CBN Monetary Policy Review

country’s
external
reserves
and
building fiscal buffers.

In
the
light
of
the
above
and
considering the need to allow previous
policy measures to work through the
economy, the MPC voted to: retain
the MPR at 13.0 per cent with a
symmetric corridor of +/- 200 basis
points around the midpoint; and the
CRR at 31.0 per cent.

4.1.2
September 2015 MPC Meeting
The September 2015 MPC meeting
reviewed key developments in both
the global and domestic economic
and financial environments as well as
the challenges to monetary policy up
to the third quarter of 2015.

The Committee noted the continued
fragility
of
the
domestic
macroeconomic environment, with the
economy slowing in the first two
quarters of the year. It also observed
that growth had come under severe
constraints owing to declines in private
and public expenditure, accentuated
by the impact of non-payment of
salaries by some states and local
governments. The MPC noted that the
uptick in inflation from 9.2 per cent in
July to 9.3 per cent in August was
mainly traceable to higher energy
prices, delayed harvests and passthrough
from
imports.
Other
observations
included
significant
demand
pressure
in
the
foreign
exchange
market,
fueled
by
continued decline in oil prices. The
Committee further noted that liquidity
withdrawals following the intensified
implementation of the TSA, elongation
of the tenor of state government loans
as well as loans to the oil and gas
sector could aggravate the liquidity
conditions of DMBs. This development
could hamper economic growth and
therefore
indicated
the
need
for
immediate actions to ease liquidity
conditions
in
the
market.
The
Committee
advised
DMBs
to
aggressively
support
the
effort
of
government
at
job
creation
by
targeting lending to growth-enhancing
sectors of the economy.

The Committee expressed concerns
that with two consecutive quarters of
slow growth, the economy was on the
brink of a recession in 2016 if proactive
steps were not taken to restart growth
in key sectors of the economy. The
MPC underscored the imperative of
preserving
the
country’s
external
reserves and rebuilding fiscal buffers to
strengthen
confidence
in
the
economy. In the face of the prevailing
circumstances,
the
Committee
reemphasized that a synergy between
monetary and fiscal policies remained
the most viable strategy to achieve
macroeconomic
stability
and
sustainable growth.

In consideration of the underlying
fundamentals
of
the
economy,
particularly
the
declining
output


CBN Monetary Policy Review

growth, rising unemployment and the
adverse impact on banking system
liquidity of the TSA implementation, the
MPC decided to: reduce the CRR from
31.0 to 25.0 per cent; retain the MPR at
13.0 per cent with a symmetric corridor
of 200 basis points around the midpoint; and retain the Liquidity Ratio at
30.0 per cent.

4.1.3
November 2015 MPC Meeting
At the November 2015 meeting, the
MPC acknowledged the continued
fragile global economic environment,
including the gradual normalization of
the
US
monetary
policy;
poor
commodity price outlook and the
indication of a further slowdown in the
emerging
market
and
developing
economies. The Committee observed
the weakening fundamentals of the
economy, particularly the low output
growth, rising unemployment and the
uncertainty of the global economic
environment. The MPC observed that
real GDP growth declined to 2.84 per
cent in the third quarter of 2015
compared with 3.96 per cent in the
corresponding
period
of
2014.
It,
however, felt that the outlook for
economic activities would improve
following progress on the counterinsurgency operations, improvement in
the supply of petroleum products and
the
inauguration
of
the
federal
cabinet. The Committee expressed
delight in the slight decline in year-onyear headline inflation from 9.4 per
cent in September to 9.3 per cent in
October 2015. Money market rates
were largely low due to the increase in
net liquidity levels, largely reflecting the
cautious approach to lending by
deposit money banks. The MPC noted
the relative stability in the foreign
exchange market, as shown by the
marginal depreciations in the interbank
and
BDC
segments
due
to
the
sustained supply of foreign exchange
by autonomous sources.

On slowing growth, the Committee
restated commitment to evolve and
implement
measures
supportive
of
consolidating
and
strengthening
output while keeping an eye on price
developments. The MPC recognized
that stimulating the economy required
further
liquidity
injections
by
the
banking system. The Committee was,
however, concerned that the previous
liquidity
injections
embarked
upon
through lowering of the Cash Reserve
Ratio
(CRR)
had
not
transmitted
significantly to improved credit to key
growth-
and
employment-sensitive
sectors
of
the
economy.
The
Committee underscored the need for
the DMBs to ensure that measures by
the
Bank
to
inject
liquidity
and
stimulate
the
economy
lead
to
increased lending to employment and
growth-promoting
sectors.
Accordingly, the MPC agreed that
going forward efforts by the CBN to
ease liquidity in the system would be
directed to the real sector, especially


CBN Monetary Policy Review

infrastructure, agriculture and solid
minerals.

The Committee also weighed various
strategies for enhanced credit delivery
to key growth sectors of the economy,
to create employment opportunities
and improve productivity. The MPC
further highlighted the imperative of
close coordination between monetary
and fiscal policies.

In view of the above, the MPC voted
to reduce the CRR from 25.0 to 20.0
per cent, emphasizing that the liquidity
arising from the reduction would only
be available to banks that were willing
to lend to employment-generating
sectors
such
as
agriculture,
infrastructure
development,
solid
minerals and industry. The Committee
also reduced the MPR from 13.0 per
cent to 11.0 per cent and adjusted the
corridor
around
the
MPR
to
an
asymmetric corridor of +200/-700 basis
points.

4.2.0
Instruments
of
Liquidity
Management
In accordance with the objectives of
price and macroeconomic stability,
the Bank employed various instruments
to conduct monetary policy during the
review period. The instruments were
the Monetary Policy Rate (MPR), the
Cash
Reserve
Ratio
(CRR),
Open
Market
Operations
(OMO)
and
Discount Window Operations.

4.2.1
Monetary Policy Rate (MPR)
The MPR remained the key instrument
for monetary management. For most
of the review period, the MPR was
maintained at 13.0 per cent and was
adjusted downwards to 11.0 per cent
in November 2015. The symmetric
corridor of +/-200 basis points around
the
MPR
was
also
adjusted
in
November 2015 to an asymmetric
corridor of +200/-700 basis points. The
adjustments
were
intended
to
stimulate the flow of liquidity into the
economy
to
spur
growth
and
employment.

4.2.2
Open
Market
Operations
(OMO)
The Bank reduced its reliance on
open market operations (OMO) as the
main tool in managing banking system
liquidity in the second half of 2015. As a
result, actual OMO sales fell by 67.61
per cent to N1,380.32 billion in the
second half from N4,261.72 billion in
the first half of 2015. On a year-on-year
basis, this represented a decrease of
64.95 per cent below the level in the
second half of 2014 (Table 4.1). The
reason for reduced reliance on OMO
was
the
rising
cost
of
liquidity
management.


CBN Monetary Policy Review

Table 4.1
OMO Bills Auction (January 2014 – December
2015) (N’million)
Date

% Change
Jan
1,091.49
1,295.88

Feb
307.40
217.33

Mar
714.80
543.86

Apr
285.94
933.74

May
905.99
524.54

Jun
1,179.54
746.37

1st Half
4,485.17
4,261.72
-4.98
Jul
810.92
771.82

Aug
654.53
73.27

Sep
989.58
53.08

Oct
652.50


Nov
830.23


Dec
0.00
482.15

2nd Half
3,937.76
1,380.32
-64.95
Cumulative
Figure
8,422.93
4,642.04


4.2.3
Reserve Requirements
The Bank continued to complement
the use of MPR, OMO and other
macro-prudential instruments with CRR
in liquidity management. During the
review period, the MPC also reduced
the CRR from 25.0 to 20.0 per cent of
total deposits with the understanding
that the liquidity arising there-from
would be channeled to employmentenhancing
activities
such
as
agriculture,
infrastructural
development,
solid
minerals
and
industry. This was aimed at improving
the
efficacy
of
monetary
policy
transmission to the real sector and
effectiveness of liquidity management.
The liquidity ratio was unchanged at
30.0 per cent in the second half of
2015.

4.2.4
Standing Facilities
In the second half of 2015, the Bank
maintained
its
standing
facility
(lending/deposit) windows for the use
of DMBs and discount houses (DH) to
meet their daily liquidity requirements.
The request for standing lending facility
(SLF) increased by 41.37 per cent to
N3,555.62 billion in the second half of
2015 from N2,515.05 billion in the first
half of 2015. The volume of SLF at endDecember

compared
with
N1,664.00 billion in the corresponding
period of 2014 represented an increase
of 113.68 per cent (Table 4.2). The
volume of deposits at the standing
deposit facility window increased by
42.86 per cent to N13,224.91 billion in
the second half of 2015 from N9,257.46
billion in the first half of 2015. This,
however, represented a decrease of
55.0
per
cent
relative
to
the
corresponding period of 2014 (Table
4.3). The transactions at the two
windows resulted in a net deposit of
N9,669.29 billion in the second half of
2015.
This
development
reflected
banks’ cautious approach to lending
and the perennial liquidity surfeit in the
banking system despite the effect of
the full implementation of TSA and
lower FAAC disbursements to the three
tiers of government, owing to the


CBN Monetary Policy Review

dwindling
crude
oil
receipts.
The
combination of liquidity management
instruments deployed by the Bank,
however,
helped
moderate
the
liquidity surfeit in the banking system.

Table 4.2
CBN Standing Lending Facility (January 2014 –
December 2015) (N’billion)
Date

% Change
Jan
615.59
104.75

Feb
653.74
922.28

Mar
560.27
541.13

Apr
50.29
529.77

May
44.88
229.36

Jun
96.42
187.76

1st Half
2,021.19
2,515.05
24.43
Jul
96.42
48.75

Aug
55.46
1,415.06

Sep
133.80
1,154.96

Oct
23.84
667.62

Nov
224.59
207.39

Dec
1,129.89
61.84

2nd Half
1,664.00
3,555.62
113.68

Total
3,685.19
2,515.05


Table 4.3
CBN Standing Deposit Facility (January 2014 –
December 2015) (N’billion)
%
Change
over
the
Preceding/
Correspondi
ng Period
Jan
13,543.87
2,562.15
-81.1
Feb
4,953.72
862.15
-82.6
Mar
5,844.76
1,298.46
-77.8
Apr
8,190.69
864.11
-89.5
May
8,061.09
1,958.72
-75.7
Jun
5,902.50
1,711.87
-71
1st Half
46,496.63
9,257.46
-79.6
Jul
7,049.30
2,005.52
-71.6
Aug
4,309.30
752.78
-82.5
Sep
6,734.45
1,928.37
-71.4
Oct
7,436.35
2,625.93
-64.7
Nov
2,804.84
3,035.04
8.2
Dec
1,076.73
2,877.27
167.2
2nd Half
29,410.97
13,224.91
-55.0
Total
75,907.60
9,257.46
-87.8
Date

4.2.5
Foreign Exchange Intervention
The Bank sustained its intervention in
the
foreign
exchange
market
to
stabilize the naira exchange rate in the
review period. The total supply of
foreign exchange declined by 22.23
per cent to US$10,867.47 million in the
second half of 2015 from US$13,974.27
million in the first half of 2015. It also
decreased
by
33.18
per
cent
compared with US$16,263.03 million in
the corresponding period of 2014
(Table 4.4). The reduced supply of
foreign exchange was largely due to
the declining accretion to foreign
reserves occasioned by continued fall
in
oil
receipts.
The
administrative
measures introduced by the Bank


CBN Monetary Policy Review

were, therefore, intended to moderate
the speculative demand in the foreign
exchange
market,
limit
arbitrage
opportunities and the rate of depletion
of
the
external
reserves.
The
administrative measures included the
use of BVN at the BDC segment and
the Bank’s endorsement of the DMBs’
decision to stop accepting foreign
currency cash deposits as well as the
sustained
implementation
of
the
restriction
on
access
to
foreign
exchange for 41 imported items.

Table 4.4
Foreign Exchange Supply by the CBN (US$
Million)
Date
Sales to
rDAS
Sales to
BDC
Total Supply
(RDAS +
BDC)
Sales to
rDAS
Sales to
interbank
Sales to
BDC
Total Supply
(rDAS+inter
bank + BDC)
Jan
2,989.43

556.30

3,545.73

1,987.40

N/a
184.70

2,172.10

Feb
3,101.87

567.05

3,668.92

1,197.10

2,334.90

371.40

3,903.40

Mar
3,151.59

560.95

3,712.54

1,866.10

301.60

2167.7
Apr
2,663.92

712.80

3,376.72

1,375.70

370.40

1746.1
May
2,928.49

619.84

3,548.33

1,856.60

309.90

2166.5
Jun
2,398.55

501.22

2,899.77

1,448.50

369.97

1818.47
1st Half
17,233.85

3,518.16

20,752.01

3,184.50

8,881.80

1,907.97

13,974.27

Jul
2,494.76

184.94

2,679.70

1,801.97

399.99

2,201.96

Aug
3,201.10

169.08

3,370.18

1,694.74

385.51

2,080.25

Sep
2,598.45

143.24

2,741.69

1,348.02

485.04

1,833.06

Oct
3,498.48

178.86

3,677.34

1,220.96

530.09

1,751.05

Nov
2,296.93

145.71

2,442.64

1,545.21

330.74

1,875.95

Dec
1,241.13

110.35

1,351.48

1,018.88

106.32

1,125.20

2nd Half
15,330.85

932.18

16,263.03

-

8,629.78

2,237.69

10,867.47

Total
32,564.70

4,450.34

37,015.04

3,184.50

17,511.58

4,145.66

24,841.74

4.3
Developments
in
Monetary
Aggregates
In the second half of 2015, the
monetary
aggregates
largely
underperformed
relative
to
their
targets. This development reflected the
continued contraction of net foreign
asset (NFA) and the Bank’s generally
tight monetary policy stance during
the period. As in the previous period,
credit to the public sector increased
significantly in the review period, thus
crowding out the private sector.

4.3.1
Broad Money (M2)
Broad Money (M2) grew by 6.48 per
cent to N20,029.83 billion at endDecember 2015 from N18,811.43 billion
at end-June 2015. Compared with the
end-December

level
of
N18,913.03 billion, M2 increased by 5.90
per cent. The year-on-year growth in
M2 of 5.90 per cent was below the
2015 indicative growth target of 15.20
per cent.

Figure 4.1
Money Supply (M1) and (M2) (June 2015 –Dec
2015)


CBN Monetary Policy Review

Figure 4.2
Growth in Money Supply (M1) and (M2) (June
2015 –Dec 2015)


4.3.2
Narrow Money (M1)
Narrow Money (M1) increased by
31.02 per cent to N8,571.70 billion at
end-December 2015 from N6,542.39
billion at end-June 2015. Compared
with the end-December 2014 figure of
N6,904.79 billion, M1 grew by 24.14 per
cent. The year-on-year growth in M1 of
24.14
per
cent
was
above
the
indicative growth target of 9.91 per
cent (Figures 4.4 and 4.5), indicating
that M1 over-performed during the
review period.

4.3.3
Net Foreign Assets (NFA)
Net Foreign Assets (NFA) decreased
by 5.01 per cent to N5,653.32 billion at
end-December 2015 from N5,951.45
billion at end-June 2015. Compared
with the end-December 2014 figure of
N6,954.21 billion, NFA declined by 18.71
per cent. The year-o-year decline in
NFA of 18.71 per cent was below the
indicative growth target of 10.60 per
cent.
The
continued
weak
performance of NFA was attributed to
lower receipts from falling oil prices
and capital flow reversals to take
advantage of improved economic
fundamentals
in
some
advanced
economies such as the US and the UK
as well as uncertainties surrounding the
policy
direction
of
the
new
government.

4.3.4
Net Domestic Assets (NDA)
Net Domestic Assets (NDA) rose by
11.79 per cent to N14,376.51 billion at
end-December 2015 from N12,859.98
billion at end-June 2015. Compared
with the end-December 2014 figure of
N11,958.81 billion, growth in NDA of
20.22 per cent was close to the
indicative growth target of 20.37 per
cent, largely on account of huge
growth in credit to the government.

Figure 4.3
Net Domestic Asset (NDA) (Jun 2015 – Dec 2015)


CBN Monetary Policy Review

Figure 4.4
NDA, NDC and Other Assets (net) (Jun 2015 –
Dec 2015)


4.3.5
Credit to the Government (Cg)
Credit to government (Cg) grew by
15.15 per cent to N2,893.19 billion at
end-December 2015 from N2,512.46
billion
at
end-June
2015.
When
compared with the end-December
2014 figure of N1,150.11 billion, Cg
grew significantly by 151.56 per cent
above
the
indicative
growth
benchmark of 36.05 per cent. The
development
was
attributed
to
government’s
effort
at
bridging
budget financing gap following the
significant
drop
in
government
revenues due to lower oil prices.

4.3.6
Credit to the Private Sector
(Cp)
Credit to the private sector (Cp)
decreased by 0.94 per cent to N18,719
billion at end-December 2015 from
N18,897.31 billion at end-June 2015.
Compared with the end-December
2014 figure of N18,123.65 billion, Cp
rose by 3.29 per cent, which was,
however, significantly lower than the
indicative growth target of 26.06 per
cent for 2015. Over the years, the
continued poor performance of credit
to the private sector indicates banks’
aversion
for
lending
to
the
real
economy
in
preference
for
government securities. This could be
traced to the tight provisions under
Basel 2 in the aftermath of the global
financial crisis.

Figure 4.5
Domestic Credit to Private Sector (Dec 2013 –
June 2015)

N’Billion
JunJulAugSepOct- Nov- Dec-

Credit on
Private
Sector

4.3.7
Reserve Money (RM)
Reserve Money (RM) decreased by
2.24 per cent to N5,812.74 billion at
end-December 2015 from N5,945.76
billion at end-June 2015. Compared
with its end-December 2014 level of N
5,930.95 billion, RM decreased by 1.99
per cent and was significantly below
the indicative benchmark of N7,095.49
billion by 16.78 per cent.

The year-on-year decrease in RM was
due to the further reduction in CRR to


CBN Monetary Policy Review

Table 4.5
Monetary Aggregates Outcomes (Growth in % except otherwise stated)


Change in
H1 2015
Change
in H2

Actual
Dec

Actual
June

Actual
Dec

Benchmark

Deviation
(N'b)
Actual
Actual
M2 (N'b)

M2 (%)

M1 (N'b)

M1 (%)

RM (N'b)

RM (%)

NDC (N'b)

NDC (%)

Cg (N'b)

Cg (%)

Cp (N'b)

Cp (%)

NFA (N'b)

NFA (%)

20.0 per cent in November 2015 after
the harmonization of CRR on both
public and private sector deposits at
31.00
per
cent
in
May
2015.
Furthermore, the transfer of public
sector funds from DMBs following the
full implementation of the Treasury
Single
Account
(TSA)
significantly
reduced
the
required
reserves
component of RM. A summary of the
major
monetary
aggregates
and
provisional
outcome
as
at
endDecember 2015 is presented in Table
4.5.


CBN Monetary Policy Review

BOX 1
Rebalancing of the Chinese Economy

The Chinese economy for almost three decades remained the fastest growing in
the world, averaging 10 per cent annual growth in real terms. Notwithstanding, the
policy discussions since the mid-2000s focused on China’s twin imbalances, i.e.,
the disproportionally high investment-to-GDP ratio existing alongside a low
consumption-to-GDP ratio, with a high current account surplus. Thus, growth in
China was driven by investment in heavy industries and manufacturing. This
growth path was not sustainable in the long run, without a change to the structure
of demand and a rise in the efficiency of investment. Rapid growth is sustainable
when generated by domestic consumption demand by households rather than
investment for the export market, as was the case in China.
Indications that investment-led growth in China can only go on for so long without
unsustainable increases in debt levels became apparent following diminishing
returns to investment over time. Furthermore, rapid economic growth and longerterm demographic changes precipitated rising labour costs, leading to a gradual
erosion of China’s competitive advantage in labour-intensive manufacturing.
The realization that rapid growth of this kind was not sustainable in the long run,
informed the Chinese authorities’ new commitments to maintaining GDP growth
targets of 7 per cent, with a range of measures designed to fundamentally alter
the sources of growth by transitioning from an investment and export led
development to a growth path that relies more on expanding domestic
consumption. Thus, economic rebalancing in China encompasses policies aimed
at achieving a reduction in the ratio of investment-to-GDP and increasing the
consumption-to-GDP ratio. These measures, amongst others, include the
promotion of urban and rural development aimed at fueling domestic
consumption, implementation of consumption oriented policies to lowering of
domestic savings and investment, and reduction in the influence of Chinese Stateowned Enterprises through the promotion of competition.
The gradual rebalancing of aggregate demand from fixed investment to
consumption in China has started manifesting in decelerating and tepid growth
since 2011. Growth has continued to slow to an annual average of 7 per cent, and
it is widely anticipated that this gradual slowing will continue in coming years to
around 5–6 per cent. Opportunities for productive investment are becoming
limited as the traditional investment-led growth strategy is giving way to
consumption demand propelled sustainable growth strategy. Besides, China’s


CBN Monetary Policy Review

production structure continues to evolve increasingly from industry to services, as
more Chinese have become richer and many can afford to increase their
consumption beyond basic necessities.
Change in China’s growth paradigm has implications on the global economic
landscape, given its enormous global influence as the world’s second largest
economy and importer of most primary commodities. China is the world’s largest
importer of iron ore and copper, and the second largest importer of crude oil.
Worries over China’s slowing growth and rebalancing of demand is already
causing anxiety in global commodity and financial markets.
For Africa, there are both knock-on and upside effects of the slowing growth and
rebalancing in China. The slowing and less resource-intensive Chinese growth has
resulted in slackening demand and falling commodity prices, with unfavorable
effects on African commodity exporters. For example, metals and coal prices
have fallen, causing problems for mineral exporters like Mozambique and
Tanzania. The Chinese slowdown and the possibility of a further deterioration in
China’s growth prospects portend severe implications for African countries heavily
dependent on commodity exports to China.
The review of the state-led developmental models under the rebalancing strategy
has led to a drastic review of China’s SOE-led outbound investment expeditions.
This will particularly be the case with China’s policy banks and their financing of
SOEs abroad. This could well have an adverse effect on Chinese state-driven
investment in Africa. On the upside, rising labour costs in China may tilt Chinese
manufacturing away from competing with Africa’s nascent manufacturing
industry. The tripling of Chinese labor costs over the over the years will enable most
African countries with large labor forces and low wage rates to compete with
Chinese producers and even attract investment from Chinese firms. In recent
times, Chinese firms have started to relocate some of their low-skilled production
lines to other countries, and African countries with abundant and inexpensive
labor stand to be beneficiaries.


CBN Monetary Policy Review

CBN Monetary Policy Review

CHAPTER FIVE

5.0
DEVELOPMENTS
IN
THE
FINANCIAL MARKETS

he Nigerian financial market was
largely influenced by a number of
economic
and
financial
developments in the review period.
These included declining oil and other
commodity
prices
due
to
weak
demand and tepid recovery in the
advanced
economies,
general
slowdown in the emerging market and
developing
economies
and
rebalancing of the Chinese economy
from investment and manufacturing to
consumption
and
services.
Others
were: the heightened risk of deflation
in Japan and the euro area due to
weak response of consumer spending
to the current stimulus by the European
Central Bank (ECB) and the ongoing
US
monetary
policy
normalization
which
led
to
monetary
policy
divergence
in
the
advanced
economies.
In
the
wake
of
this
normalization,
the
U.S.
dollar
appreciated against most currencies
particularly
in
response
to
the
November 2015 rate hike by the U.S
Federal
Reserve.
The
resultant
depreciation of currencies of most
emerging
market
and
developing
economies
led
to
huge
capital
reversals
from
countries
such
as
Nigeria.

Money market rates were generally
volatile but later moderated due to the
progressive reduction of the CRR from
31.0 to 20.0 per cent which increased
liquidity in the banking system. In the
foreign exchange market, the demand
pressure intensified leading to the
introduction
of
additional
administrative measures to stem the
depreciation
of
the
naira.
The
measures included the use of BVN in
BDC
transactions
and
the
endorsement by the Bank of the DMBs’
decision to stop accepting foreign
currency cash deposits. As a result, the
bearish trend in the equities market
moderated.

5.1
The Money Market
Money market activities were largely
influenced by the reduction in CRR
from 31.0 to 20.0 per cent, intensified
implementation
of
the
TSA
and
temporary suspension of OMO/NTB
auctions in the earlier part of the
period under review. Money market
rates
were
relatively
stable
with
occasional
spikes
driven
by
fluctuations in banking system liquidity,
maturing government securities and
limited
transactions
in
CBN
bills.
Interbank call and open buy back
(OBB) rates remained below the lower
band of the MPR corridor of +/-200
basis points for most of the period. The
corridor was, however, adjusted in
November 2015 to an asymmetric
corridor of +200/-700 basis points to
stabilize money market rates. Between
T


CBN Monetary Policy Review

July and September, 2015, interbank
call and OBB rates, however, soared
occasionally above the upper band of
the corridor.

At the beginning of the review period,
the
market
witnessed
persistent
rebound
of
activities
in
the
uncollateralized
segment,
with
frequent OMO/NTB transactions used
to manage liquidity surfeit arising from
FAAC injections. OMO/NTB transactions
were, however, suspended until 23rd
December,

when
auctions
resumed. Thus, to effectively manage
liquidity conditions in the banking
system as well as improve credit
delivery to the real sector, the Bank
reduced the CRR from 31.0 to 25.0 per
cent in September, 2015, and further to
20.0 per cent in November 2015. In
addition, the MPR was reduced from
13.0 to 11.0 per cent and the corridor
adjusted from +/-200 to +200/–700 basis
points
around
the
MPR
while
maintaining the liquidity ratio at 30.0
per cent.

5.1.1
Short-term
Interest
Rate
Developments
In the second half of 2015, money
market rates were largely influenced
by the liquidity level in the banking
system. The liquidity was from frequent
OMO/NTB
transactions,
FAAC
disbursements, maturing government
securities and temporary suspension of
OMO transactions, but was moderated
by the intensified implementation of
the
TSA.
The
Bank
also
began
monetary easing during the period by
lowering the CRR progressively from
31.0 to 20.0 per cent and the MPR from
13.0 to 11.0 per cent. The interbank call
rate rose from 7.79 per cent in July and
peaked at 33.26 per cent in August,
and
subsequently
moderated
substantially to 0.84 and 0.77 per cent
in
November
and
December,
respectively. Similarly, the OBB rate rose
from 7.86 per cent in July to peak at
27.92 per cent in August before
moderating to 0.89 and 0.98 per cent
in November and December 2015,
respectively. The average OBB rate
which was 8.76 per cent, ranged
between 0.89 and 27.92 per cent,
while the interbank call rate which
averaged
9.00
per
cent,
ranged
between 0.77 and 33.26 per cent.
Consequently, the OBB rate was higher
than the interbank call rate for most of
the period. The 30-day NIBOR was
between 14.10 and 9.11 per cent
(table 5.1).

Table 5.1
Weighted Average Money Market Interest Rates
(July – December 2015)
Date
Inter
OBB
MPR
*30
Day
NIBOR
bank
Jul
7.79
7.86

14.1
Aug
33.26
27.92

16.94
Sept
8.12
10.43

15.09


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Oct
3.22
4.45

13.15
Nov
0.84
0.89

12.71
Dec
0.77
0.98

9.11
Average


Figure 5.1
Weighted Average Money Market Interest Rates
(June – December, 2015)

(i)
The Interbank Call Rate
Activity
in
the
interbank
market
increased between July and August
2015, leading to a hike in the call rate
from 7.79 per cent in July to 33.26 per
cent in August, 2015. The substantial
increase in rate was due, primarily, to
the full implementation of the TSA. The
rate, however, declined significantly to
8.12 per cent in September, 2015. The
observed volatility in interbank market
rates persisted until the later part of the
period with rates decreasing to as low
as 0.77 per cent in December, 2015.
The sharp decline witnessed at the
interbank call segment at the later part
of the review period was attributed to
the liquidity surfeit in the banking
system, due to liquidation of matured
CBN Bills, and reduction in CRR and
MPR (Figure 5.2).

Figure 5.2
Interbank Call Rate (July– Dec. 2015)


(ii)
The Open Buy Back Rate
The OBB rate fluctuated between 0.89
and 27.92 per cent, averaging 8.76 per
cent in the second half of 2015. The
weighted average rate rose sharply
from 7.86 per cent in July to 27.92 per
cent in August, before decreasing to
10.43, 4.45, 0.89 and 0.98 per cent in
September, October, November and
December,
2015,
respectively.
Transactions in the OBB segment were
moderate, but remained active in the
review period. The improved activity in
the segment at the initial stage of the
review period was largely due to
enhanced confidence by DMBs in the
collateralized segment of the market.
The full implementation of the TSA
squeezed banking system liquidity in
the third quarter, accounting for the
hike in OBB rate during the period. The


CBN Monetary Policy Review

substantial monetary easing by the
Bank in addition to the maturity of CBN
bills in the fourth quarter of 2015,
accentuated liquidity surfeit in the
banking
system;
causing
marked
decline in rates during the period.

Figure 5.3
Open Buy Back Rate (July – December 2015)


(iii)
The Nigeria Interbank Offered
Rate (NIBOR)
During the review period, the Nigerian
money market reference rate, the
NIBOR
maintained
relative
stability
across tenors. The weighted average
30-day NIBOR, rose from 14.10 per cent
in July to 16.94 per cent in August 2015.
It, however, decreased progressively to
15.09 and 9.11 per cent in September
and December, respectively, owing
largely to the excess liquidity in the
banking system from the liquidation of
matured CBN Bills, and reduction in
CRR and MPR (Table 5.1).


5.2
Foreign Exchange Market
The Bank sustained its commitment to
maintaining stability in the foreign
exchange market during the review
period.
Accordingly,
the
interbank
foreign exchange market opened and
closed at N196.99/US$. Stability in the
foreign
exchange
market
was,
however,
threatened
by
sustained
demand pressure owing to speculative
activities, capital reversals following the
normalization of US monetary policy
and rising import of goods and services
in the face of low accretion to external
reserves due to lower oil prices. Also,
negative
investor
sentiment
surrounding the policy direction of the
new administration led to reduced
foreign exchange inflows. In order to
stem
these
pressures,
additional
measures to support the sustained
closure of rDAs earlier in the year were
introduced, including the use of BVN at
the BDC segment and the Bank’s
endorsement of the DMBs’ stoppage
of foreign currency cash deposits.
These actions helped to curb demand
and stabilize the interbank foreign
exchange market in the review period.


CBN Monetary Policy Review

Figure 5.4
Daily Naira/US Dollar Exchange Rate (Jul - Dec
2015)


5.2.1
Average Exchange Rates
The Interbank foreign exchange rate
at
an
average
of
N196.99/US$ depreciated by 1.52 per
cent
in
the
second
half
from
N194.04/US$, in the first half of 2015.
Over the same period, the BDC rate
equally depreciated by 7.96 per cent
from an average of N213.55/US$ to an
average of N232.03/US$ (Table 5.2).


Table 5.2
Average Monthly Spot Exchange Rates (January
– December 2015) (N/US$)
Month/Year
Interbank Rate
BDC 'B' Rate
Jan-15
181.78
196.13
Feb-15
194.48
213.03
Mar-15
197.07
222.93
Apr-15
197.00
210.70
May-15
197.00
219.55
Jun-15
196.92
218.98
Average
194.04
213.55
Jul-15
196.97
237.15
Aug-15
197.00
216.64
Sep-15
197.00
222.68
Oct-15
196.99
224.98
Nov-15
196.99
232.40
Dec-15
196.99
258.30
Average
196.99
232.03

5.2.2
End-Period (Month) Exchange
Rates
The naira depreciated by 15.54 per
cent to N267.00/US$ at the BDC
segment of the foreign exchange
market
at
end-December
2015,
compared with the N225.50/US$ at
end-June
2015.
At
the
interbank
foreign
exchange
market,
the
depreciation moderated by 0.03 per
cent
to
N197.00/US$
at
endDecember, 2015 from N196.95/US$ at
the end-June 2015 (Figure 5.5 and
Table 5.3).


US$
Interbank


CBN Monetary Policy Review

Table 5.3
End-Month Exchange Rates (January –
December 2015) (N/US$)
Month/Year
Interbank
Rate
BDC 'B' Rate
Jan-15
185.20
207.50
Feb-15
198.00
224.00
Mar-15
197.00
214.50
Apr-15
197.00
221.00
May-15
197.00
216.00
Jun-15
196.95
225.50
Average
195.19
218.08
Jul-15
197.00
229.00
Aug-15
197.00
218.00
Sep-15
196.95
223.00
Oct-15
197.00
225.00
Nov-15
197.00
242.00
Dec-15
197.00
267.00
Average
196.99
234.00

Figure 5.5
End-Month Exchange Rates (January –
December, 2015) (N/U$$)


5.2.3
Nominal
and
Real
Effective
Exchange Rates

The Nominal Effective Exchange Rate
(NEER) appreciated by 0.89 per cent to
106.86 in the second half of 2015 from
107.82 in the first half. It, however,
depreciated by 10.71 per cent when
compared with the corresponding
period of 2014. The Real Effective
Exchange Rate (REER) appreciated by
4.00 to 71.86 in the second half from
74.74 in the first half of 2015. The REER,
however, depreciated by 4.36 per
cent
when
compared
with
the
corresponding period of 2014 (Table
5.4). Therefore, the trend towards
stability of the naira, as measured by
the NEER and REER, indicated that the
pass-through of inflation from Nigeria’s
major trading partners to the naira is
largely subdued, thus accounting for
the appreciation (table 5.4 and figure
5.6).


CBN Monetary Policy Review

Table 5.4
Nominal and Real Effective Exchange Rates
Indices (July 2014 – December 2015)
Date
NEER
REER
Jul-14
95.37
69.67
Aug-14
94.92
69.03
Sep-14
92.96
67.28
Oct-14
92.95
66.93
Nov-14
97.96
69.94
Dec-14
98.37
69.54
2014:H2 Av
95.42
68.73
Jan-15
96.97
67.82
Feb-15
111.94
78.15
Mar-15
108.72
75.66
Apr-15
110.56
76.62
May-15
109.09
75.11
Jun-15
109.62
75.08
2015:H1 Av
107.82
74.74
Jul-15
108.89
74.22
Aug-15
107.79
73.05
Sep-15
106.76
71.91
Oct-15
106.7
71.74
Nov-15
105.42
70.43
Dec-15
105.58
69.78
2015:H2 Av
106.86
71.86

Figure: 5.6
Nominal and Real Effective Exchange Rates
Indices (July 2014 – December 2015)


5.2.4
Foreign
Exchange
Flows
through the CBN
Foreign exchange inflow through the
CBN on a gross basis, increased
significantly by 27.98 per cent to
US$19,559.89 million in the second half,
from US$15,283.00 million in the first half
of 2015. When compared with the
figure of US$23,753.92 million in the
corresponding
period
of
2014,
it
dropped by 17.66 per cent. Gross
foreign exchange outflow decreased
by 17.98 per cent to US$17,281.62
million
in
the
second
half,
from
US$21,070.36 million in the first half of
2015.
When
compared
with
US$26,327.84
million
in
the
corresponding
period
of
2014,
it
decreased significantly by 52.35 per
cent. Thus, in the review period, foreign
exchange flows turned to a net inflow
of US$944.74 million compared with net
outflows of US$5,787.40 million and
US$2,573.93 million in the preceding
period of 2015 and corresponding
period of 2014, respectively (see Table
5.5 and Figure 5.7).

Table 5.5
Monthly Foreign Exchange Flows through the
CBN (July 2014 – December 2015)
Dates
Inflow
(CBN)
Outflow
(CBN)
Net Flow
(CBN)
Jul-14
5,103.82
3,299.90
1,803.92
Aug-14
3,760.04
4,254.45
(494.41)
Sep-14
4,229.24
4,250.56
(21.32)
Oct-14
3,255.20
5,298.36
(2,043.16)


CBN Monetary Policy Review

Nov-14
4,120.82
5,060.15
(939.34)
Dec-14
3,284.80
4,164.42
(879.62)
2014: H2
Total
23,753.92
26,327.84
-2,573.93
Jan-15
2,442.00
4,108.06
(1,666.10)
Feb-15
2,554.50
5,338.00
(2,783.50)
Mar-15
3,310.50
3,429.70
(119.20)
Apr-15
2,859.50
2,569.10
290.30
May-15
1,744.50
2,916.40
(1,171.80)
Jun-15
2,372.00
2,709.10
(337.10)
2015: H1
Total
15,283.00
21,070.36
-5,787.40
Jul-15
4,313.26
3,383.08
2,929.08
Aug-15
3,266.24
3,153.98
(555.93)
Sep-15
3,360.96
2,987.06
(806.33)
Oct-15
2,603.42
2,341.09
480.13
Nov-15
2,767.66
2,499.76
(18.54)
Dec-15
3,248.35
2,916.65
(1,083.67)
2015: H2
Total
19,559.89
17,281.62
944.74

Figure 5.7
Monthly Foreign Exchange Flows through the
CBN (Jan 2014 – June 2015)


5.2.5
Foreign Exchange Flow through
the Economy
Gross foreign exchange inflow to the
economy declined by 8.75 per cent to
US$47,610.47 million in the second half,
from US$52,172.80 million in the first half
of 2015. Compared with the figure of
US$78,398.49
million
in
the
corresponding
period
of
2014,
it
decreased significantly by 39.27 per
cent. Similarly, gross foreign exchange
outflow declined by 10.43 per cent to
US$19,559.89 million in the second half,
from US$21,837.20 million in the first half
of
2015.
When
compared
with
US$27,161.04 million in the second half
of 2014, it declined significantly by
27.99 per cent.

Thus, during the second half of 2015,
foreign exchange flows through the
economy resulted in a reduced net
inflow
of
US$28,050.58
million,
compared with US$30,335.60 million in
the
preceding
period,
and
US$51,238.62
million
in
the
corresponding period of 2014. This
represented decreases of 7.53 and
45.26
per
cent
relative
to
the
preceding and corresponding periods,
respectively.
The lower net inflow
during the period reflected the impact
of decreased oil receipts, due to lower
oil prices and the decline in invisible
inflows through autonomous sources
(Table 5.6 and Figure 5.8).

Table 5.6
Monthly Foreign Exchange Flows through the
Economy (Jan 2014 – Jun 2015) (US$ Million)
Dates
Total
Inflow
Total
Outflow
Net Flow
Jul-14
13,837.28
3,377.44
10,459.84
Aug-14
15,536.52
4,342.52
11,194.00


CBN Monetary Policy Review

Sep-14
14,886.02
4,606.46
10,279.56
Oct-14
14,113.71
5,400.97
8,712.74
Nov-14
12,781.36
5,152.69
7,628.67
Dec-14
7,243.60
4,280.96
2,962.64
2014: H2
Total
78,398.49
27,161.04
51,237.45
Jan-15
8,861.70
4,190.30
4,671.40
Feb-15
9,091.50
5,415.20
3,676.30
Mar-15
10,470.40
3,620.80
6,849.60
Apr-15
8,299.80
2,784.80
5,515.00
May-15
6,447.50
3,002.40
3,445.10
Jun-15
9,001.90
2,823.70
6,178.20
2015: H1
Total
52,172.80
21,837.20
30,335.60
Jul-15
13,081.61
4,313.26
8,768.35
Aug-15
6,547.27
3,266.24
3,281.03
Sep-15
7,687.11
3,360.96
4,326.15
Oct-15
7,033.96
2,603.42
4,430.54
Nov-15
6,625.76
2,767.66
3,858.10
Dec-15
6,634.76
3,248.35
3,386.41
2015: H2
Total
47,610.47
19,559.89
28,050.58


Figure 5.8
Monthly Foreign Exchange Flows through the
Economy (Jul 2014 – Dec 2015) (US$ Million)


5.3
Capital Market
The bearish trend in the Nigerian
capital
market
continued
in
the
second half of 2015. This development
was
attributed
to
a
number
of
domestic
and
global
influences,
including declining crude oil prices
and the impact on external reserves
and continued capital outflows due to
US monetary policy normalization. In
addition, the depreciation of the naira
exchange rate at the BDC segment;
ongoing insurgency and communal
tensions in various parts of the country
as
well
as
general
economic
downturn, affected activities in the
market.
Furthermore,
the
level
of
uncertainty
surrounding
the
slow
transition to a new administration
hampered investor confidence in the
market.

5.3.1
Equities Market
The All-Share Index (ASI) declined by
14.39 per cent to 28,642.25 at endDecember 2015, from 33,456.83 at endJune 2015, and by 17.36 per cent
compared with 34,657.15 at endDecember 2014. Market Capitalization
(MC) also declined by 13.75 per cent
to N9.85 trillion at end-December 2015,
from N11.42 trillion at end-June 2015,
and by 14.20 per cent compared with
N11.47 trillion at end-December 2014
(Table 4.8 and Figure 4.9).

The year-on-year decline of 17.36 per
cent in the ASI was driven mainly by


CBN Monetary Policy Review

weak performance in the banking,
consumer goods, insurance and oil
and gas sectors, which declined by
23.6, 17.4, 4.7 and 6.2 per cent,
respectively, below their levels at endDecember 2014.

Table 5.7
NSE All-Share Index (ASI) and Market
Capitalization (MC) (December 2014 –
December 2015)
Date
ASI
MC (Equities)
(N’ Trillion)
Dec-14
34,657.15
11.48
Jan-15
29,562.07
9.85
Feb-15
30,103.81
10.04
Mar-15
31,744.82
10.72
Apr-15
34,708.11
11.79
May-15
34,310.37
11.66
Jun-15
33,456.83
11.42
Jul-15
30,180.27
10.34
Aug-15
29,684.84
10.21
Sep-15
31,217.77
10.73
Oct-15
29,177.72
10.03
Nov-15
27,385.69
9.42
Dec-15
28,642.25
9.85


Figure 5.9
NSE ASI and MC (December 2014 – December

Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15
MC
ASI
ASI
MC (Equities) (N’ Trillion)


Figure 5.10
NSE ASI and MC (June 2015 – December 2015)


Source: NSE

5.3.2
Market Turnover
Aggregate stock market turnover in
the second half of 2015 decreased by
16.57 per cent to 42.13 billion shares,
valued at N395.83 billion, in 409,818
deals, compared with 50.50 billion
shares, valued at N556.99 billion, in
534,624 deals in the first half of 2015.
Compared with the second half of
2014, market turnover also decreased
by 24.75 per cent from 55.99 billion
shares valued at N761.40 billion, in
595,915
deals.
Foreign
portfolio
investment outflow exceeded inflow
by N83.41 billion in the second half of
2015. This was due largely to sell-off
and divestment from the stock market
owing to the persistent decline in oil
prices which increased the pressure on
the exchange rate.

Jun-15
Jul-15
Aug-15
Sep-15
Oct-15
Nov-15 Dec-15
MC (N'trillion)
ASI
ASI
MC (Equities)


CBN Monetary Policy Review

5.3.3
Sectoral Contribution to Equities
Market Capitalization
The construction sector continued to
dominate
market
capitalization,
primarily due to the valuation of the
building materials sub-sector. The subsector’s
share
in
overall
market
capitalization increased to 36.9 per
cent at end-December 2015 from 31.8
per cent in the first half of 2015. This
was due to the market share of
Dangote cement. Other major subsectors were banking, breweries, and
food & beverages, with respective
market shares of 19.2, 13.6 and 11.3 per
cent, at end-December 2015 (Figure
5.12).

Figure 5.11
NSE Market Capitalisation by Sector as at EndJune 2015
Breweries
13.6%
Banking
22.1%
Food &
Beverages
9.7%
Conglomerates
1.7%
Insurance
1.3%
Oil and Gas
6.9%
Building
Materials
31.8%
Other Sectors
12.9%
Source: NSE


Figure 5.12
NSE Market Capitalisation by Sector as at EndDecember 2015
Breweries
13.6%
Banking
19.2%
Food &
Beverages
11.3%
Conglomerat
es
1.1%
Insurance
1.6%
Oil and Gas
7.7%
Building
Materials
36.9%
Other
Sectors
8.7%

Source: NSE

5.3.4
The Warren Buffett Valuation
Metric and Nigeria’s Equities
Market
Analysis of the Nigerian stock market
indicated an undervaluation in the
fourth quarter of 2015 based on the
Warren Buffett valuation metric of 53.0
per
cent,
which
was
below
the
threshold of 75.0 to 115.0 per cent. The
Warren-Buffet valuation measures the
market value of securities as a ratio of
GDP. In the third quarter, the metric
stood at 55.78 per cent, also indicating
an undervaluation. The development
can be attributed to a number of
factors, such as capital reversals and
low
crude
oil
prices
leading
to
depreciation of the exchange rate,
perceived
sovereign
risk
of
the
Nigerian economy and normalization
of the US monetary policy, resulting in


CBN Monetary Policy Review

sell-off by foreign portfolio investors.
The undervaluation of equities holds
out
investment
opportunities
for
domestic and foreign investors to
increase their stakes in the Nigerian
stock
market
in
expectation
of
recovery.

Figure 5.13
Warren Buffet Valuation of Nigerian Equities
Market

5.3.5
Bond Market
Activities in the bonds market was
dominated by Federal Government of
Nigeria (FGN) securities. Sub-national
government and corporate bonds also
registered some activity. The corporate
bonds segment recorded the least
share by market volume.

5.3.5.1 FGN Eurobond
The yield on the 10-year dollardenominated bond increased to 8.48
per cent at end-December 2015, from
5.91 and 6.23 per cent at end-June

and
end-December
2014,
respectively
(Figure
5.14).
This
development
was
attributed
to
investor preference for higher premium
to reflect perceived sovereign risk,
owing to the delisting of Nigeria from
the JP Morgan’s Government Bond
Index
for
Emerging
Markets
in
September, 2015.
Figure 5.14
10-Year U.S. Dollar-denominated Bond Yield for
Nigeria (Jan 1, 2014 – Dec 31, 2015)

The FGN bond yield curve as at endDecember 2015 trended downwards
by 531 basis points to 9.80 per cent
compared with 15.11 per cent at endJune 2015. It also trended downwards
by 509 basis points when compared
with 14.89 per cent at end-December
2014 (Figure 5.15). This implied that FGN
bond
yields
were
positive
and
exceeded the December 2015 rate of
inflation, reflecting the generally tight
monetary policy stance of the Bank.


Q1-2014 Q2-2014 Q3-2014 Q4-2014 Q1-2015 Q2-2015 Q3-2015 Q4-2015
Per cent
WARREN BUFFET INDICATOR

Yields (%)


CBN Monetary Policy Review

Figure 5.15
FGN Bonds Yield Curves: end-Dec. 2014 vs. endJun. 2015 vs. end- Dec. 2015


5.3.5.2 State/Local Government Bonds
The
sub-national
bonds
market
recorded low activity during the review
period. At end-December 2015, the
total value of outstanding state/local
governments bonds stood at N536.47
billion, compared with N544.43 billion
at end-June 2015 and N524.67 billion at
end-December 2014.

5.3.5.3 Corporate Bonds
In the review period, activity in the
corporate bonds segment moderated.
The value of outstanding corporate
bonds at end-December 2015 was
N205.89 billion, compared with N220.39
billion at end-June 2015 and N144.96
billion at end-December 2014. The
decline in activity was due to lower
crude
oil
prices
resulting
in
the
depreciation of the exchange rate,
perceived
sovereign
risk
of
the
Nigerian economy and increase in the
US policy rate, leading to sell-off and
capital reversal by foreign portfolio
investors.

5.3.5.4 Overall Analysis of the Nigerian
Capital Market
The value of FGN bonds increased by
35.49 per cent to N6.49 trillion at endDecember 2015 from N4.79 trillion at
end-June 2015, and by 35.49 per cent
over the level at end-December 2014.
FGN bonds accounted for 37.5 per
cent
of
aggregate
market
capitalization as at end-December
2015. The value of state/municipal
bonds,
corporate
bonds
and
supranational bonds were
N536.47
billion,
N205.89
billion
and
N24.95
billion, accounting for 3.2, 1.2 and 0.1
per
cent
of
aggregate
market
capitalization, respectively. The equity
market constituted 58.0 per cent of
aggregate market capitalization at
end-December
2015,
while
the
combined
shares
of
FGN
bonds,
state/municipal
bonds,
corporate
bonds
and
supranational
bonds
accounted for the balance of 42.0 per
cent (Figure 5.16).


Yield
Years to Maturity
FGN Bond Yield Curves: Dec 31, 2014 vs. Jun 30, 2015 vs. Dec 31, 2015
Jun 30, 2015
Dec 31, 2014
Dec 31, 2015


CBN Monetary Policy Review

Corporate Bonds
1.2%
FGN Bonds
37.5%
State/Municipal Bonds
3.2%
Supra-National Bonds
0.1%
Equities
58.0%


Figure 5.16 Structure of the Nigerian Capital Market (December, 2015)


CBN Monetary Policy Review

BOX 2
Implications of the Delisting of Nigeria from JP Morgan Government Bond
Index for Emerging Markets (GBI-EM)

The Federal Government of Nigeria (FGN) Bond was recently delisted from the JP
Morgan’s Government Bond Index for Emerging Markets (GBI-EM). The Index,
launched in June 2005, is the first comprehensive global emerging markets debt
instrument, which tracks local government currency bonds. The rating institution
added Nigeria to the index on January 16, 2012, following the existence of an
active domestic market for FGN bonds, supported by a two-way quote system,
dedicated market makers and diverse investor base. Until its delisting, Nigeria was
the second African country, beside South Africa, to be included in the JP
Morgan’s bond index. Nigeria’s inclusion added Nigeria's 2014, 2019, 2022 and
2024 bonds, a whopping 1.8 per cent weight to the index, indicating the
significance of Nigeria’s bond in the index. In its delisting decision, the rating
institution warned that Nigeria would not be eligible for re-inclusion in the index
until after a minimum of 12 months; and to get back in its reading, Nigeria would
have to satisfy the consistent liquid currency criteria.

The rating institution placed Nigeria on a negative watch in January 2015, before
finally delisting it on September 8, 2015. According to the rating agency, the
delisting of Nigeria from its Government Bond Index was due to perceived
restrictions on the country’s foreign exchange transactions, which were alleged to
have prompted investor concerns regarding liquidity situation in the market as well
as the lack of transparency in exchange rate determination. The rating agency’s
decision was also hinged on a number of measures by the Central Bank of Nigeria
(CBN) to moderate the demand pressure in the foreign exchange market. The
decision to exclude Africa’s biggest economy, according to the rating institution,
was also based on the fact that foreign investors who track the Index have
continued to face challenges and uncertainties when transacting in the naira.

The CBN actions were largely due to current limitations facing the country’s
economy, notably, falling oil receipts on the back of the declining global oil
prices. Oil is the main source of foreign exchange to the Nigerian government,
and with the plunge in oil receipts, the CBN continued to adopt demand
management measures to stabilize the naira, stem the depletion of external
reserves. The measures by the CBN were also aimed at curbing speculative
demand, round tripping, and rent-seeking in the market foreign exchange market.
The Bank’s use of administrative measures besides policy has largely succeeded in


CBN Monetary Policy Review

stabilizing rates in the inter-bank segment, although strong and persistent pressure
lingers in the parallel segment.

Implications of the Delisting
The delisting led to widespread debate and analysis of the implications including
the following:

The delisting of Nigeria’s bond was popularly expected to exert pressure on
Nigeria’s external reserves and foreign exchange market. Since the country was
delisted, it has been popularly expected that the action would lead to a
significant loss of portfolio capital inflows. This was expected to further weaken the
country’s external position, due to additional upward pressure on the exchange
rate and domestic bond yields;

The increase in bond yields as a result of withdrawal of foreign portfolio investors is
expected to lead to additional pressure on the naira. Although the Naira has been
stable in the interbank market, it continues to fluctuate and depreciate in the
parallel market. The delisting was also expected to lead to significant sell-off of
Nigerian bonds, triggering capital outflows and raising government borrowing
costs; and

The inclusion of Nigeria in the Index was generally seen as a further step towards
the country’s integration into global financial markets, opening its market to new
investment opportunities and raising its profile worldwide. The recent delisting was
expected to reverse these benefits.

On the upside, however, it has been argued that the impact of the delisting would
not be pronounced as widely envisaged as the delisting cannot be interpreted as
a downgrade. The Standard and Poor’s (S&P) recent affirmation of the country’s
‘B+/B’ long- and short-term foreign and local currency sovereign credit ratings is
expected to help moderate the perceived investment risks associated with the
delisting.

5.4
Global
Financial
Market
Developments
The
global
financial
market
was
relatively
stable,
although
risks
heightened in the euro area following

US monetary policy normalization and
the
ongoing
rebalancing
of
the
Chinese economy. Liquidity concerns
were largely shaped by the continued
monetary policy divergence between
the US and other major advanced


CBN Monetary Policy Review

economies, reflected in the gradual
normalization of the US monetary
policy and the continued qualitative
and
quantitative
easing
(QE)
programmes in the euro area, the UK
and Japan. As a result, monetary
conditions
remained
generally
accommodative, with most currencies
depreciating against the US dollar.
Global commodity prices continued
their decline due to sluggish demand
in the environment of excess supply
arising
from
earlier
investments
in
response to the commodity price
boom of the 2000s. The continued slide
in
global
commodity
prices,
particularly crude oil fuelled capital
reversals and the depreciation of
emerging
market
and
developing
economy
currencies.
In
the
environment of growing fragilities, the
performance of major stock markets
became bearish during the review
period.

5.4.1
Money
Market
and
Central
Bank Policy Rates
Global liquidity conditions were largely
shaped by the continued monetary
policy divergence between the US and
other major advanced economies,
reflected in the gradual normalization
of the US monetary policy and the
continued quantitative easing (QE)
programme in the euro area, the UK
and
Japan.
Monetary
conditions
remained generally accommodating
in the advanced economies following
a number of measures to expand or
extend ongoing QE programmes. In
the
review
period,
the
European
Central
Bank
(ECB)
reaffirmed
its
commitment to increase the quantum
and duration of its QE programme if
prices do not move towards the 2 per
cent inflation target. Accordingly, the
ECB lowered its overnight deposit rate
further into the negative territory to -
0.30 per cent. Similarly, the Bank of
Japan
(BOJ)
adjusted
its
QE
programme to provide more liquidity in
the market by extending the maturity
of Japanese government bonds (JGB)
in its portfolio from 7 – 10 years to 7 – 12
years. The BOJ also added ¥300 billion
to its already existing annual ¥3 trillion
exchange traded fund and extended
the asset purchase programme to real
estate investment trusts. In the same
vein, the Bank of England (BOE)
sustained its £375 billion QE programme
throughout
the
review
period.
Consequently, with the exception of
the US, policy rates in the advanced
economies were largely unchanged
during the second half of 2015.
The volatility induced in the financial
market by the trend towards US policy
normalization
was
evident
in
the
behavior
of
policy
rates
in
the
emerging
market
and
developing
economies
(EMDEs).
China,
India,
Russia and Nigeria lowered their policy
rates to stimulate growth as oil and
other commodity prices weakened
further against an appreciating US
dollar. South Africa and Kenya, on the
other hand, raised their policy rates to


CBN Monetary Policy Review

stem
inflationary
pressures
and
depreciation of their currencies, while
other economies such as Ghana and
Brazil maintained their rates.

Table 5.8
Policy Rates of Selected Countries JulyDecember 2015

5.4.2
Capital Market
Globally, performance of major stock
markets was mostly negative during
the review period. In Europe, the UK
FTSE 100, French CAC 40 and German
DAX indices decreased by 4.3, 3.2 and
1.8 per cent, respectively, while the
Russian MICEX index increased by 6.5
per cent. In North America, the United
States S&P 500, Canadian S&P/TSX
Composite and Mexican Bolsa indices
decreased by 0.9, 10.6 and 4.6 per
cent, respectively.
In Asia, the Japanese Nikkei 225, the
Chinese Shanghai SE and the Indian
BSE Sensex indices decreased by 5.9,
17.3 and 6.0 per cent, respectively. In
Africa, the Nigerian NSE All-Share,
South African JSE All-Share, Kenyan
Nairobi NSE 20, Egyptian EGX CASE 30
and Ghanaian GSE All Share Indices
decreased by 14.4, 2.1, 17.6, 16.3 and
15.2 per cent, respectively.


COUNTRY/MONTH JULY AUGUST SEPTEMBER OCTOBER NOVEMBER DECEMBER
USA

UK

EU

JAPAN

S. AFRICA

KENYA

GHANA

RUSSIA

CHINA

INDIA

BRAZIL

NIGERIA


CBN Monetary Policy Review

Country
Index
End-Dec, 2014 End-June, 2015
End-December,

% Change
Jun - Dec 15
AFRICA
Nigeria
ASI

South Africa
JSE African AS

Kenya
Nairobi NSE 20

Egypt
EGX CSE 30

Ghana
GSE All Share

NORTH AMERICA
US
S&P 500

Canada
S&P/TSX Composite

Mexico
Mexico Bolsa (IPC)

SOUTH AMERICA
Brazil
Bovespa Stock

Argentina
Merval

Colombia
COLCAP

EUROPE
UK
FTSE 100

France
CAC 40

Germany
DAX

Russia
MICEX

ASIA
Japan
NIKKEI 225

China
Shanghai SE A

India
BSE Sensex

Source: Bloomberg
Table 5.9: Selected International Stock Market Indices as at December 30, 2015


CBN Monetary Policy Review

5.4.3
Commodities
In the second half of 2015, global
commodity
prices
continued
their
decline due to sluggish demand and
ample
supply.
The
weak
global
demand stemmed from continued
slow growth in most regions in the
environment of excess supply arising
from earlier investment response to the
commodity price boom of the 2000s.
This development led to a general
softening of commodity prices. In
addition, the appreciation of the US
dollar following moves to normalize US
monetary policy, coupled with the
reduction of the commodity positions
of financial investors (owing to the
downturn in commodity prices and
returns),
further
weakened
the
commodity market.

Energy prices as measured by the
Energy Price Index fell by 36.49 per
cent to 72.4 points in December from
114.0 points in June 2015. In terms of
actual
prices,
crude
oil
prices
decreased by 37.32 per cent from
US$76.35 per barrel at end-June to
US$47.86 per barrel at end-December
2015. This development was driven by
several factors, including large stock of
oil inventories in the US, Organization of
the
Petroleum
Exporting
Country
(OPEC)’s reaffirmation of its market
share
strategy
as
opposed
to
production cuts at its December 2015
meeting, and expected re-entry of Iran
into the oil market following the lifting
of sanctions.
Non-Fuel commodity prices also fell by
11.28 per cent to 121.9 points in
December from 137.4 points in June
2015, owing to continued weak global
demand. Metal prices fell by 19.87 per
cent in response to softening growth
prospects in China and continued
increases in supply due to earlier
investments. Cost reductions, notably
for
energy,
and
exchange
rate
depreciation
in
many
producing
countries delayed the closure of highcost mines. The fall in metal prices was
also attributed to weaker demand
prospects
in
emerging
market
economies
leading
to
reduced
investments.

The Food and Agriculture Organization
(FAO) Price Index declined by 6.97 per
cent to 153.4 points in December from
164.9 points in June 2015. On a yearon-year basis, the Index fell by 17.44
per
cent
from
185.8
in
the
corresponding period of 2014. Apart
from sugar, all sub-indices of meat,
dairy,
cereal,
and
vegetable
oil
declined in the review period. The
implications of weak growth prospects
in
emerging
market
economies,
especially combined with financial
stress, would be a further reduction in
commodity prices, thereby lowering
growth prospects amongst commodity
exporters.


CBN Monetary Policy Review

Figure 5.17:
Indices of Primary Commodity Prices JanuaryDecember, 2015 (2005=100 US$)

Source:IMF

5.4.4
Foreign Exchange Market
In the review period, the depreciation
of most currencies against the US dollar
continued, reflecting the effect of the
US
monetary
policy
normalization,
which led to the appreciation of the
dollar and dollar-denominated assets.
The ongoing QE programmes of the
ECB and BOJ as well as intervention by
the Chinese government to stabilize
the yuan, helped to further strengthen
the dollar through the outflow of
capital from these economies into the
US. Also, the continued slide in global
commodity prices, particularly crude
oil fuelled capital reversals and the
depreciation of currencies of most
emerging
market
and
developing
economies. Consequently, the euro,
the British pound and the Canadian
dollar depreciated by 2.17, 5.88 and
12.32 per cent, respectively, while the
Japanese yen appreciated by 1.60 per
cent.

Among the emerging market and
developing economies, the Brazilian
real, the Mexican peso and Indian
rupee depreciated by 21.72, 8.94 and
3.78 per cent, respectively. In subSaharan Africa, the Nigerian naira,
South African rand, Kenyan shillings,
and Egyptian pound depreciated by
0.03, 21.51, 2.98 and 2.55 per cent,
respectively, while the Ghanainan cedi
appreciated by 14.17 per cent.


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Table 5.10
Exchange Rates of Selected Countries (Value in currency units to US$)


Currency
31-Dec-14
30-Jun-15
31-Dec-15
June 30,
2015 - Dec
31, 2015
%App/Dep
AFRICA
Nigeria
Naira

South Africa
Rand

Kenya
Shilling

Egypt
Pound

Ghana
Cedi

NORTH
AMERICA
Canada
Dollar

Mexico
Peso

SOUTH
AMERICA
Brazil
Real

Argentina
Peso

Colombia
Peso

EUROPE
UK
Pound

Euro Area
Euro

Russia
Ruble

ASIA
Japan
Yen

China
Yuan

India
Rupee

Source: bloomberg


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BOX 3
Monetary Policy Divergence in the Advanced Economies

Across the globe, various economies operate at different stages of the
business cycle. At a particular point in time some economies may be in the
expansionary phase, while others may be at their peak, commencing the
contractionary phase or sitting in the trough of the cycle. Divergent monetary
policy simply refers to the adoption of broadly different stance of monetary
policy by countries or group of countries, such that while some are raising
interest rates to reduce money supply; others are lowering interest rates to
increase money supply and stimulate economic activity.

During the 2007/08 financial crisis, a number of advanced economies
including the US, Euro Area, Japan, and the United Kingdom, lowered their
interest rates to aggressively increase money supply as the crisis caused most
of these economies to slowdown rapidly. These countries were very close to
the contractionary phase and the action by the central banks was targeted at
pulling them back into the productive and expansionary phase. Many of the
economies unfortunately failed to respond to this stimulus due to negative
investor sentiment, causing a further slowdown.

With the passage of time, however, pockets of recovery was noted in
economies such as the US and the UK, while Europe and Japan continued in
the contractionary phase. This implied that the US and UK had moved to a
different phase of the business cycle (expansion) from Europe and Japan
(contraction). Thus, these two sets of countries required different monetary
policies to manage their macroeconomic aggregates. The US and UK required
measures to ensure that their economies did not overheat in the near term
due to rapid expansion, while Europe and Japan required measures to reverse
the contraction of their economies. Accordingly, the European Central Bank
(ECB) adopted various measures to help pull the euro area economy out of
the contractionary phase. Such measures included quantitative easing, a
process whereby outright monetary injections are made by the central bank
to stimulate economic activities. The ECB injected liquidity into the economy
by purchasing various instruments such as government and corporate bonds,
mortgage-backed securities and a host of other instruments. In Japan, the
Bank of Japan (BoJ), also injected a significant amount of liquidity into the
economy in a bid to reverse the contraction of the economy. Monetary Policy
divergence began when at the same time that Europe and Japan were
injecting liquidity into their economies, the US Federal Reserve commenced
normalization of monetary policy by raising its benchmark policy rate from 0.00.25 to 0.25-0.50 per cent. This trend towards policy divergence created
significant challenges for policy makers in the advanced economies.
In today’s globalized economy where several emerging market economies
such as Brazil, Russia, India, China, South Africa and Nigeria have become well


CBN Monetary Policy Review

integrated and interconnected, the monetary policy of advanced economies
such as the US exerts a significant impact on the flow of capital around the
globe.

The first impact is on the flow and allocation of capital. As the US economy
returns to growth while the Euro Area recedes deeper into recession, a mild
contraction or some inflationary pressure presents risk-averse investors with
fairly difficult choices. Higher interest rates in the US implies higher return for the
somewhat milder risk posed by investment in US assets compared with similar
assets in Europe and other emerging market economies. This means that
capital will flow away from Europe and emerging market and developing
economies into the US where investors feel safer as asset values appreciate
with the rise in US policy rate. As capital flows away from these areas, the
economies will be pushed deeper into the contractionary phase, making
recovery even more painful.

Second is the impact on exchange rates across the globe. As investors move
their capital away from Europe and emerging market and developing
economies into the US, the demand for US dollar increases forcing it to
appreciate rapidly against other currencies. These countries are thus forced to
depreciate their currencies in order to reduce pressure This would inadvertently
cause investors to panic further and increase their demand for safer US dollar,
forcing further depreciation of the currencies. The third aspect to note is the
price of commodities. While the above strategy ensures that more capital
flows to the US, it tends to hurt US exports as US goods become more expensive
compared with goods elsewhere due to the appreciation of the US dollar. The
economies that earlier depreciated their currencies will now have an
advantage over the US as their exports become cheaper. US citizens and
residents will then be confronted with the choice of importing cheaper goods
from those economies compared with purchasing the more expensive goods
produced in the US. This will stimulate activity in economies with a strong
manufacturing sector while the US experiences a slower-than-expected
recovery.

In conclusion, monetary policy spillovers resulting from divergent monetary
policies can no longer be ignored. The spillovers have the ability to reinforce
volatility in money, capital and commodity markets as they cause global
assets and commodities to be rapidly re-priced. The implication of this analysis
is that fiscal policy now has a more crucial role to play in re-balancing market
swings as limitations of monetary policy is brought to light. The good news,
however, is that the recent spate of volatility across markets, due to divergent
monetary policies, is forcing increased coordination between the monetary
and fiscal authorities.


CBN Monetary Policy Review

CHAPTER 6
ECONOMIC OUTLOOK

6.1
OVERVIEW

n 2015, the global economy grew by
3.1 per cent, reflecting a downward
revision of 0.2 percentage point from
the earlier projection of 3.3 per cent in
July by the IMF (WEO Update, July
2015). The revised growth estimate was
lower than the 3.4 per cent in 2014. The
subdued growth in 2015 was primarily
due to the lower prices of energy and
commodities,
slowdown
and
rebalancing of the Chinese economy
and gradual normalization of the US
monetary policy.
Growth in the advanced economies
was projected at 1.9 per cent in 2015
up from 1.8 per cent in 2014, driven by
increase
in
consumption
and
investment in the US, as the labour and
housing market conditions continue to
improve as well as easier financing
conditions. In the United States, growth
was estimated at 2.5 per cent in 2015,
above the 2.4 per cent recorded in
2014. Growth in the Euro area rose to
1.5 per cent in 2015 from 0.9 per cent in
2014,
driven
by
stronger
private
consumption supported by lower oil
prices and easy financing conditions.
Growth in the emerging markets and
developing economies was estimated
to slow to 4.0 per cent in 2015 from 4.6
per cent in 2014. The decline was
attributed
to
the
impact
of
the
continued lower commodity prices,
tighter external financing environment,
the
rebalancing
of
the
Chinese
economy away from manufacturing to
consumption and services, structural
bottlenecks as well as the effect of
geo-political tensions in some countries
of the Commonwealth of Independent
States (CIS) and the MENA region.
Among the emerging markets, growth
in China was projected to decline to
6.9 per cent in 2015 from 7.3 per cent in
2014. Russia is expected to remain in
recession as it continues to adjust to
low oil prices and economic sanctions
from
the
Western
countries.
The
contraction of the Russian economy by
3.7 per cent in 2015 from 0.6 per cent in
2014, affected the performance of
other
economies
in
the
Commonwealth of Independent States
(CIS).
In
Latin
America
and
the
Caribbean,
the
Brazilian
economy
contracted by 3.8 per cent in 2015
compared with a growth of 0.1 per
cent in 2014 as a result of low oil prices
and lagged effect of several tax
increases targeted at balancing the
overall budget deficit. The Venezuelan
economy contracted further by 7.0 per
cent in 2015 from a contraction of 3.0
per cent in 2014 due mainly to the
impact of the fall in crude oil prices at
the international market.
I


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In sub-Saharan Africa (SSA), growth
was projected to slow to a revised
estimate of 3.5 per cent in 2015 from
5.0 per cent in 2014. This mainly
reflected the continued adjustment to
lower commodity prices and lower
demand from China (the region’s
largest trading partner) as well as
tighter external financing conditions,
leading to higher borrowing costs.
Growth of the Nigerian economy was
projected at 2.79 per cent in 2015 from
6.22 per cent in 2014. The slowdown
was due to the continued weakness in
oil and other commodity prices. In
South Africa, growth was projected at
1.3 per cent in 2015 down from 1.5 per
cent in 2014, due to the effect of
electricity supply challenges, labour
market issues and declining business
confidence.

6.2
Outlook for Global Output
Global growth forecast for 2016 will be
determined
by
a
number
of
developments. The slow and uneven
recovery is expected to continue in the
advanced economies to gradually
narrow output gaps. The outlook for
emerging
market
and
developing
economies varies but in many cases
remains challenging. The slowdown
and
rebalancing
of
the
Chinese
economy, lower commodity prices,
and heightened risks in some large
emerging
market
economies
will
continue to weigh on the growth
outlook. The gradual improvement of
growth rates in countries currently in
economic strains, notably Brazil, Russia,
and some countries in the Middle East
and
North
Africa
(MENA)
would
account for the projected rise in global
growth over the next two years,
despite the ongoing slowdown in
China. Accordingly, global economic
growth is forecast to rise to 3.4 and 3.6
per cent in 2016 and 2017, respectively
from 3.1 per cent in 2015. Growth in
2016 is expected to be driven by
gradual
recovery
in
advanced
economies on account of relaxed
financial
conditions,
increased
consumption spending, lower fuel cost,
and
improving
labour
market
conditions.

Growth in the advanced economies is
forecast to improve and stabilized at
2.1 per cent in 2016 and 2017 from 1.9
per cent in 2015. This will be driven by
expected strong performance in the
US of 2.1 per cent in 2016 from 1.9 per
cent in 2015 and in the UK by 2.2 per
cent apiece in 2015 and 2016. The
expected strong activity in the US
would be supported by relatively easy
financing, improved labour market
conditions and the recovering housing
market. The appreciating US dollar
could
weigh
down
manufacturing
activity while lower oil prices would
curtail investment in the oil sector. In
the Euro Area, growth is forecast to rise
from 1.5 per cent in 2015 and stabilize
at 1.7 per cent in 2016 and 2017,
respectively. The improved outlook is


CBN Monetary Policy Review

expected to be driven by stronger
private consumption, fuelled by lower
oil
prices
and
relaxed
financing
conditions. Japan is forecast to grow
by 1.0 and 0.3 per cent in 2016 and
2017,
respectively,
due
largely
to
favourable fiscal measures, lower oil
prices,
continued
financial
accommodation
and
improving
incomes.
In
the
emerging
market
and
developing
economies
(EMDEs),
growth is projected to rise from 4.0 per
cent in 2015 to 4.3 and 4.7 per cent in

and
2017,
respectively.
The
development would be driven by
expected improvement in economic
conditions in a number of countries,
some
of
which
are
currently
in
recession, notably Russia and Brazil, as
well as some economies in the MENA
region. Growth in China is forecast to
moderate to 6.3 and 6.0 per cent in
2016 and 2017, respectively, from 6.9
per cent in 2015, reflecting slower
investment growth as the economy
continues to undergo a rebalancing.
Slower Chinese growth is expected to
have spillover effects on Emerging Asia
and
its
trading
partners.
The
contraction in Brazil is expected to
moderate from 3.8 per cent in 2015 to
3.5 and 0.0 per cent in 2016 and 2017,
respectively, due to improving political
and economic environment.

In
sub-Saharan
Africa,
growth
is
forecast to rise from 3.5 per cent in
2015 to 4.0 and 4.7 per cent in 2016
and 2017, respectively, as the region
implements prudent macroeconomic
policies to counteract the effect of
lower commodity prices. In South
Africa, growth is projected at 0.7 and
1.8 per cent in 2016 and 2017,
respectively, while Nigeria’s growth is
expected to rise to 3.78 per cent in
2016 from 2.79 per cent in 2015.

In the Middle East and North Africa
(MENA) region, growth is forecast at 3.6
per cent apiece in 2016 and 2017 from
2.5 per cent in 2015. Lower oil prices
and geopolitical tensions continue to
weigh on the outlook (Table 6.1).

6.3
Downside
Risks
to
Global
Outlook
Risks to the global outlook include the
continued normalization of the US
monetary
policy
in
the
face
of
divergent
policies
in
other
major
advanced
economies,
continued
slowdown and rebalancing of the
Chinese economy and persistent lower
commodity
prices.
Global
growth
could
be
hampered
if
these
bottlenecks and key transitions in the
world economy are not successfully
managed.

The progressive exit of the United States
from monetary accommodation could
create
corporate
balance
sheet
problems and currency depreciation
for
countries
with
ongoing
QE


CBN Monetary Policy Review

programmes.
Also,
the
associated
capital reversals from emerging market
and developing economies would
further weaken their currencies.

In the euro area, the fear of deflation
poses a risk to recovery through
confidence channels. Weaker business
confidence would create uncertainties
and distortions in the financial market.
Also, the continued slowdown in total
factor productivity poses a further risk
to output growth.

In
the
emerging
market
and
developing
economies,
the
key
downside
risk
is
higher-thananticipated
slowdown
in
China
coupled with its transition to a more
balanced growth model. Also, the
associated spillovers through trade,
commodity prices, and confidence
channels would impact adversely on
global
financial
markets
and
currencies.
In order to overcome the downside risk
to growth, a number of measures may
be
necessary
including
demand
support
and
structural
reforms
as
canvassed
by
the
IMF.
In
the
advanced economies, low inflation
rates,
which
are
generally
below
central banks’ targets, provide policy
headroom for continuing monetary
accommodation.
Addressing
the
migrant
crisis
in
Europe
through
integration programmes would allay
concerns
about
social
exclusion,
labour force participation and longterm fiscal costs, while harnessing the
economic benefits of migrant inflow.
In emerging market and developing
economies,
policy
priorities
vary,
reflecting country-specific peculiarities.
Policies, therefore, need to address
vulnerabilities and manage shocks in
order to support growth. The trend
towards
economic
rebalancing
in
China as well as diversification away
from
primary
commodity
exports
should be encouraged.

Table 6.1
Global Output and Inflation Outlook

A. World Output


World Output

Advanced
Economies

USA

Euro Area

Japan

UK

Canada

Other
Advanced
Economies

Emerging &
Developing
Economies


CBN Monetary Policy Review

Commonwea
lth of
Independent
States

Latin America
and the
Caribbean

Middle East
and North
Africa

Sub-Saharan
Africa

B. Commodity
Prices (US'
Dollars)


Oil

Non-fuel

C. Consumer
Prices


Advanced
Economies

Emerging &
Developing
Economies

Source: IMF WEO Update, July 2015

6.4
Global Inflation Outlook
Global inflation is expected to remain
subdued in 2016 relative to historical
averages, on account of lower oil
prices and weak demand. Inflation in
the advanced economies is projected
to rise in 2016 compared with 2015, but
remain below central banks’ targets.
This would be on account of the
persisting output gap due to sluggish
recovery. In emerging market and
developing
economies,
inflation
outlook is projected to be mixed, with
some
countries
experiencing
low
inflation due to weak demand and
lower commodity prices. Others such
as Russia and Brazil may, however,
continue to experience high inflation
as their currencies depreciate.

In the advanced economies, inflation
is expected to rise to 1.1 per cent in
2016 from 0.3 per cent in 2015, due
largely to continued implementation of
the qualitative and quantitative easing
programmes in the region as well as
expected moderation in the pace of
the US monetary policy normalization.
In the US, inflation is projected at 1.1
per cent in 2016 up from 0.1 per cent in
2015. In the euro area, headline
inflation is projected to increase to 1.0
per cent in 2016 from 0.2 per cent in
2015. Inflation in Japan is, however,
forecast to fall to 0.4 per cent from 0.7
per cent in 2015.
In the EMDEs, inflation is projected to
rise marginally to 5.6 per cent in 2016
from 5.5 per cent in 2015. China’s
inflation is expected to rise to 1.8 per
cent in 2016 from 1.5 per cent in 2015,
reflecting the depreciation of the
renminbi. In India, inflation is projected
to rise to 5.5 per cent in 2016 from 5.4
per cent in 2015. However, inflation in
Brazil is expected to moderate to 8.7
per cent in 2016 from 9.0 per cent in
2015, as the economy continues to
adjust to lower oil prices. In the same
vein, Russia’s inflation is projected to
moderate to 8.3 per cent in 2016 from
15.5 per cent in 2015.


CBN Monetary Policy Review

In sub-Saharan Africa (SSA), inflation is
forecast to edge up to 7.3 per cent in
2016, from 6.9 per cent in 2015. This
development reflects the effect of
currency weaknesses which would
result in higher inflation in many
countries. The continued appreciation
of the dollar makes imports more
expensive in the region, which fuels
inflationary pressures in addition to
lower investment and slowing growth.

6.5
Outlook for Domestic Output
Growth
Real GDP grew by 2.84 and 2.11 per
cent in the third and fourth quarters
of 2015, respectively, with an overall
growth of 2.79 per cent in 2015
compared with 6.22 per cent in 2014
(NBS, 2016). The sluggish growth in
GDP in 2015 has been attributed to
the decline in oil prices, which
adversely
affected
government
revenue.

In 2016, the economy is expected to
grow by 3.78 per cent (NBS) on the
back of anticipated recovery in the
non-oil sector relative to 2015. The IMF
projected a growth of 4.1 per cent for
Nigeria in 2016, while the African
Development Bank (AfDB) projected
a growth of 6.0 per cent. The
estimate of 4.37 per cent in the 2016
FGN
budget
appears
overly
optimistic. Growth in the non-oil
sector is expected to be supported
by various initiatives of the Central
Bank
of
Nigeria
and
the
fiscal
authorities
to
stimulate
domestic
production. The improved growth
outlook is hinged largely on sustained
implementation
of
on-going
economic reforms in the power,
aviation, transport, agriculture and
SME sectors. Also, efforts by state
governments
to
boost
internallygenerated revenue, prudent fiscal
management as well as various
measures
to
improve
investment
climate will support output growth.

The potential risks to growth in the
near-term include developments in the
external environment, particularly the
decline in oil price which poses a
threat to public sector revenue in the
medium-term
with
negative
consequences
for
achieving
fiscal
stability, and accretion to reserves. The
risks from the domestic front are the
continuing insurgency in some parts of
the country, whose prosecution is
already
draining
the
resources
required for growth as well as the
recession in the oil sector due to
vandalism and oil theft. In addition, the
delayed 2016 budget process will
hamper
the
flow
of
necessary
spending to stimulate the economy.

The quarterly outlook indicates that
the economy is expected to continue
on its growth trajectory in the first
quarter of 2016, with less robustness
compared with the corresponding
quarter of 2015. The relatively weak


CBN Monetary Policy Review

growth outlook is based largely on the
current low oil price which is likely to
remain low in the medium-to-long
term. Crude oil price prospects appear
bleak as OPEC production quota
decision remains inconclusive in the
face of supply glut, and oil prices are
expected to be low for long.

6.6
Outlook for Domestic Inflation
Headline inflation maintained an
upward trajectory above the upper
band of the Bank’s inflation threshold
of 6 - 9 per cent, though still within
single digits. This was despite the
Bank’s overall tight monetary policy
stance.
Year-on-year
headline
inflation has remained in single digits
in the last thirty-six (36) months.
Headline
inflation
inched
up
marginally from 9.22 per cent in July,
2015 to 9.6 per cent in December,
2015. Keeping inflation within single
digits
will,
however,
remain
challenging
for
the
monetary
authority in view of the importdependent nature of the Nigerian
economy and developments in the
external sector.

The IMF forecasts inflation to rise to 9.7
per cent in 2016 from 9.1 per cent in
2015 (IMF’s Regional Outlook, Oct.
2015). CBN estimates suggest that
year-on-year headline inflation would
inch up slightly but remain within
single digits in the first half of 2016,
moderating to 9.5 per cent in May
2016.
The
expected
moderation
would be driven mainly by the
anticipated stability in the foreign
exchange market, delayed passage
and implementation of the 2016
budget,
resulting
in
reduced
household
spending,
and
improvements
in
the
supply
of
petroleum
products.
The
risks
to
inflation outlook, however, are the
pass-through effect of depreciation
on imported food and expected
increase in electricity tariff.

Receding global inflation is expected
to moderate the impact of import
costs on the domestic price level. The
Bank would continue to manage
liquidity conditions in the domestic
economy to ensure that inflationary
developments
will
not
constitute
downside risks to growth.

Table 6.2

Source: CBN Statistics Dept.
Figure 6.1


CBN Monetary Policy Review

Inflation Forecast

Source: CBN Statistics Dept.

6.7
Outlook for Monetary Policy in

Global and domestic developments
will
continue
to
shape
the
formulation,
implementation
and
outcomes of monetary policy in 2016
and
beyond.
Current
global
imbalances
present
significant
headwinds to macroeconomic policy
management. The persistent decline
in crude oil prices continue to impact
on public finances, external reserves
and the general price level, resulting
in lower-than-expected growth in the
domestic economy. Also, the reversal
of capital flows following the trend
towards
monetary
policy
normalization
in
the
advanced
economies is impacting adversely on
the naira exchange rate. Similarly, the
trend
towards
monetary
policy
divergence
in
the
advanced
economies
is
likely
to
heighten
financial market risks and volatility.
The coordination of monetary and
fiscal policies is therefore necessary
as monetary policy has a limited
range of instruments.
The persistent decline in global crude
oil prices and its impact on fiscal
revenue continue to pose near-term
challenges to monetary policy. In
addition, the market share of Nigeria’s
crude oil has been shrinking due to
sustained
global
over-supply,
compelling the authorities to offer
further discounts in order to attract
buyers.
With
crude
oil
receipts
accounting for over 90 per cent of
foreign exchange earnings and the
price
of
bonny
light
below
the
benchmark of $US38/barrel in the 2016
appropriation bill, accretion to reserves
continued to be threatened, resulting
in sustained pressure on the exchange
rate
with
high
pass-through
to
domestic prices.
The normalization of the US monetary
policy and divergence between its
monetary policy and other advanced
economies
will
likely
accentuate
capital flow reversals and heighten
instability in the financial markets. This
will thus exert greater pressure on
exchange rates. Monetary policy is
likely to respond to this development
with further tightening measures to
stem the outflow of capital. But this
could
harm
growth
due
to
the
expected rise in interest rates.


CBN Monetary Policy Review

The perennial liquidity in the banking
system remains despite the various
tightening measures. Most recently,
liquidity injections by the CBN through
the banking system targeted at the
real economy was invested by the
DMBs in treasury securities and the
foreign
exchange
market.
The
implication is that the real sector
continues to be starved of funds
leading to rising cost of credit. The
Bank will continue to encourage the
flow of credit to the real sector through
targeted interventions and proactive
polices.
Going forward, there appears to be
stronger
optimism
that
investor
confidence
will
improve
in
the
economy as the new government
unfolds
its
agenda
following
the
expansionary 2016 budget proposal in
the National Assembly. In addition, the
reassuring
efforts
of
the
new
administration
to
resolve
fiscal
challenges at the sub-national level,
combat graft and corruption, intensify
counter-insurgency
and
improve
foreign relations, are expected to
unlock
economic
recovery,
boost
inflows and stem the reversal of
capital.
Nonetheless,
improved
coordination between the fiscal and
monetary authorities is necessary to
minimize risks.


CBN Monetary Policy Review

Appendices

Central Bank of Nigeria Communiqué’
No.

of
the
Monetary
Policy
Committee Meeting of Thursday and
Friday, July 23 and 24, 2015

The Monetary Policy Committee met
on 23rd and 24th July, 2015 against the
backdrop of lingering uneven recovery
in the global economy and slowing
growth in the domestic economy. In
attendance were all 12 members. The
Committee reviewed the global and
domestic
economic
and
financial
environment in the first half of 2015 as
well as the outlook for the rest of the
year.

International Economic Developments

The Committee observed that global
output
recovery
remained
largely
sluggish although with strong promise in
the United States and the Euro area.
The IMF maintained its growth forecast
of 3.5 per cent for 2015 with improved
outlook for the advanced economies
but
weak
performance
in
the
emerging and developing economies.
Softening
oil
prices
continued
to
present improved growth opportunities
for the advanced economies and oil
importing countries while dampening
growth
prospects
in
oil
exporting
economies. The United States led
growth in the advanced economies
largely on account of lower energy
prices, increased consumer spending
and housing market recovery. The
expectations of US monetary policy
normalization in the medium term
continued
to
fuel
investor
expectations. Growth outlook for the
US remains steady as inflation stays
below the Federal Reserve’s 2 per cent
target.

The Bank of Japan continued its
accommodative
monetary
policy
stance by injecting ¥6.7 trillion ($55.83
billion)
monthly
under
its
assets
purchase programme. In the Euro
area, the Greek debt crisis crystalized
into uncertain and difficult negotiations
with the tripartite group of creditors
and altered the underlying confidence
in the survival of Greece in the
Eurozone.

Meanwhile,
the
ECB’s
€61
billion
monthly asset purchase programme
continues, in an effort to combat the
effects
of
deflation
and
high
unemployment
in
the
peripheral
economies. The Bank of England has
maintained
its
£375
billion
asset
purchase programme in the face of
the downward trend in inflation, in
most of the surrounding euro area
economies.
These
expansionary
policies by the ECB, Bank of England
and
the
Bank
of
Japan,
could
moderate the threat of capital reversal
posed by the imminent normalization
of US monetary policy.


CBN Monetary Policy Review

Amongst the emerging markets and
developing
economies,
growth
is
expected to slow considerably but
resume moderately in 2016. Growth in
China is projected to slow at 6.3 per
cent in 2016 from 6.8 per cent in 2015
due to continued financial market
vulnerabilities, declining productivity,
excess
capacity
and
weakening
domestic demand.

Growth in the developing economies is
expected to remain uneven in the
short-to-medium-term,
largely
reflecting their weak demand, lower
commodity prices and tight financial
conditions.

Global inflation is expected to remain
moderate at 3.5 per cent in 2015 but
projected to accelerate to 3.7 per
cent in 2016, due to rising downside
risks, particularly in the Euro area, as
well as the tailwinds arising from the
sharp
drop
in
oil
prices,
excess
capacity in the advanced economies
and the appreciation of the US dollar.

Domestic
Economic
and
Financial
Developments

Output

Output growth in the first half of 2015
continued to decelerate compared
with the end-December 2014 level,
mainly as a result of softening oil prices.
According to the National Bureau of
Statistics (NBS), growth in real GDP
declined to 3.94 per cent in the first
quarter of 2015, from 5.94 and 6.21 per
cent in the preceding quarter and
corresponding
period
of
2014,
respectively. Real GDP growth is
projected at 5.54 per cent for fiscal
2015,
reflecting
a

basis
point
decrease compared with the 6.22 per
cent in 2014. At 5.59 per cent, the nonoil sector continued to be the main
driver of output growth in the first
quarter of 2015, at 5.59 per cent with
the leading growth sectors being
construction, services, agriculture and
trade which grew by 11.17, 6.85, 4.70
and 4.47 per cent, respectively. On the
other hand, the oil and gas sector
declined by 8.15 per cent, in contrast
to the modest growth of 1.2 per cent
achieved in the last quarter of 2014.

While the successful conduct of the
2015 general elections was a stabilizing
factor for the economy, persistent
scarcity of fuel products as well as slow
improvements
in
electricity
supply
could be a drag on output growth in
the
near
term.
The
Committee
underscored
the
need
for
the
intensification
of
various
ongoing
initiatives to diversify the economy
away from oil, and expand the base
for foreign exchange receipts.

Prices

The Committee was concerned about
the gradual but steady increase in
headline inflation up to June 2015, and
noted that this reflected a rise in both


CBN Monetary Policy Review

the core and food components of
inflation. Core inflation rose to 8.4 per
cent in June from 8.3 per cent in May,
and food inflation increased to 10.0
per cent from 9.8 per cent, over the
same period.

The Committee observed that the
uptick in year-to-date inflation rates
was traceable to transient factors such
as energy, arising from scarcity of
petroleum
products
around
the
country, poor electricity supply and
increased demand for transportation
and food, from the build-up to the
general elections and the ensuing
Easter and Sallah celebrations.

The
Committee
reiterated
its
commitment to price stability, and
observed that monetary policy would
remain tight because of the high
liquidity in the system. It however,
noted that the drivers of the current
upward inflationary spiral were of a
transient nature and mostly outside the
direct control of monetary policy.
Consequently,
the
opportunity
for
further
policy
maneuver
remains
largely constrained in the absence of
supporting fiscal measures. It therefore,
urged for coordination of monetary,
fiscal
and
structural
policies
to
stimulate output growth, and stabilize
the exchange rate.


Monetary, Credit and Financial Market
Developments

Broad money supply (M2) declined by
0.61 per cent in June 2015, below the
level at end-December 2014. The
modest
decline
in
money
supply
reflected the decreases in the net
foreign assets of 16.15 per cent and
other assets (net) of 21.40 per cent. Net
domestic credit (NDC), however, grew
by 13.45 per cent. Annualized, NDC
grew by 27.90 per cent over the endDecember 2014 level but essentially
within the provisional benchmark of
29.30 per cent for fiscal 2015. The
growth
in
aggregate
credit
was
attributable
to
growth
in
Federal
Government borrowing which reached
40.81 per cent in June 2015.

During the period under review, money
market interest rates were relatively
volatile,
owing
to
fluctuations
in
banking system liquidity. Average interbank call and OBB rates opened at
6.55 and 6.45 per cent on 1st July, 2015
and closed at 26.51 and 21.00 per
cent, respectively, on July 23, 2015.
Average inter-bank call and OBB rates
for the period were 9.83 and 10.23 per
cent, respectively.

The Committee noted a bearish trend
in the equities segment of the capital
market during the review period. The
All-Sh are Index (ASI) declined slightly
by 1.66 per cent from 31,744.82 on
March 31, 2015 to 31,216.72 on July 23,


CBN Monetary Policy Review

2015. Similarly, Market Capitalization
(MC) decreased by 0.37 per cent from
N10.72 trillion to N10.68 trillion during
the same period. Relative to endDecember 2014, the market indices
decreased by 9.9 and 6.9 per cent,
respectively. The slight decline in share
prices year-to-date was largely due to
subdued sentiments preceding the
general elections as well as the
lingering effects of falling oil prices.

External Sector Developments

The average naira exchange rate was
relatively stable at the inter-bank
segment, but significantly volatile in the
BDC segment during the review period.
The exchange rate at the interbank
market opened at N197.00/US$ and
closed at N197.00/US$, with a daily
average of N197.00/US$ between July
21 and July 23, 2015. The relatively
stable exchange rate in the inter-bank
segment can be attributed to the
effects
of
some
recent
demand
management measures. Gross official
reserves increased from US$28.57 billion
at end-May 2015 to $31.53 billion as at
July 22, 2015, reflecting the blockage
of leakages as well as the bank’s
management policies.

Committee’s Considerations

The Committee was concerned about
the trends in key macroeconomic
indices in the first half of 2015.

The Committee acknowledged the
absence of easy choices in the
circumstance but monetary policy
alone is limited, and would require
urgent complementary fiscal policies
to define the path of growth and
create the basis for stabilization.

On the external front, the adverse
effect of the protracted decline in
global crude oil prices on the fiscal
position of government is becoming
increasingly obvious. The expected
policy normalization in the US could
accentuate capital flow reversals from
emerging and developing economies
and further tighten global monetary
conditions,
thus
exerting
greater
pressure on exchange rates in those
countries. Given the choice between
controlling either quantity or price, the
limitations on choosing quantity were
evident necessitating the need to
employ some flexibility around price
while
allowing
current
demand
management measures to fully work
their way through the economy. The
Committee
however
noted
that
financial system stability considerations
placed key limitations on the extent of
considering price flexibility, creating a
compelling need to balance measures
to address the current vulnerabilities.

On inflation, the Committee stressed
that some of the drivers of the current
pressure on consumer prices were
transient
and
outside
the
direct
influence of monetary policy. Pressure


CBN Monetary Policy Review

on food prices is expected to gradually
wane as the planting season gives way
to harvests in the months ahead. Early
resolution
of
fuel
scarcity
would
dampen
transportation
costs
and
improve food distribution across the
country
while
improvements
in
electricity supply could steady output
at lower costs.

Overall,
the
Committee
expressed
optimism that business confidence
would
continue
to
improve
as
Government continues to unfold its
economic plans. In addition, some of
the
reassuring
measures
of
the
administration including efforts aimed
at resolving fiscal challenges at the
sub-national
levels,
and
the
fight
against corruption and improving the
business environment would unlock the
inflow of foreign direct investment. The
Committee
also
underscored
the
imperative of growing and protecting
the country’s foreign reserves and
building fiscal buffers in the process of
strengthening
confidence
in
the
economy
which
is
essential
for
promoting growth and stability.
The Committee’s Decision
In consideration of the underlying
fundamentals of the economy, the
evolving
international
economic
environment,
developments
in
oil
prices as well as the need to allow for
the unveiling of the economic agenda
of
the
Federal
Government,
the
Committee decided by a vote of 8 to
4 to retain the Monetary Policy Rate at
its current level of 13 per cent, by a
unanimous vote to retain the CRR at 31
per cent while 4 members voted to
remunerate the CRR.

Overall, the MPC voted to hold its
position.
In summary, the MPC voted:
(i)
To retain the MPR at 13 per
cent with a corridor of +/- 200
basis
points
around
the
midpoint;
(ii)
Retain the CRR at 31 per cent;
and
(iii)
To retain the symmetric corridor
of 200 basis points around the
MPR.

Thank you.

Godwin I. Emefiele, CON
Governor, Central Bank of Nigeria
21st July, 2015


CBN Monetary Policy Review

Central Bank of Nigeria Communiqué’
No.

of
the
Monetary
Policy
Committee Meeting of Monday and
Tuesday, September 21 and 22, 2015

The Monetary Policy Committee met
on 21st and 22nd September, 2015
against the backdrop of lingering
uneven
recovery
in
the
global
economy
and
slowing
domestic
growth. In attendance were 10 out of
12 members. The Committee reviewed
developments in global and domestic
economic and financial environments
in the first eight months of 2015 in order
to provide the policy direction for the
rest of fiscal 2015.

International Economic Developments
The
Committee
observed
a
divergence in the global economic
environment,
with
a
gradual
but
steady growth in the United States and
UK but a slowdown in emerging and
developing economies. The underlying
drivers of growth in the advanced
economies
included
improving
financial conditions and consumer
sentiments,
suppressed
commodity
prices and favorable labour market
conditions.
On
the
flip
side,
the
slowdown
in
the
emerging
and
developing
economies
is
mainly
attributable to tight external financial
conditions,
mostly
a
direct
consequence of reduced revenues
from weak commodity prices, fragile
global
demand
and
other
geopolitical factors.
Aided by strong consumer spending,
continuous
improvement
in
the
housing and labour markets and wage
growth, the United States continues to
benefit from soft energy and other
commodity prices evidenced by the
country’s revised second quarter 2015
GDP growth of 3.7 per cent. Growth
outlook in the second half, however,
remains moderate as exports could
slow on the heels of a strengthening
dollar and slowing growth in China.

The
Bank
of
Japan
maintained
accommodative
monetary
policy
through its asset purchasing program,
with monthly injection of ¥6.7 trillion
(US$55.48 billion), resulting in stronger
than
anticipated
second
quarter
growth. Following its September 3, 2015
meeting, the European Central Bank
(ECB) retained its key policy rate, even
as
its
asset
purchasing
program
continued, while inflation remained
largely subdued.

In the United Kingdom, the Bank of
England
also
continued
its
asset
purchase program as the economy
maintained a robust growth path in the
second quarter, with a modest uptick
in inflation. These developments have
started to trigger the debate over
when the Bank of England (BoE) would
start raising its rates.

Mindful of the potential impact of a
rate adjustment, particularly on the
emerging markets and considering the


CBN Monetary Policy Review

sluggish recovery in the Euro Area and
Japan as well as the need to firm up
recent growth and employment gains
in the domestic economy, the US
Federal Reserve voted at its September
meeting to maintain its key interest
rate,
and
delay
monetary
policy
normalization. The decision is expected
to
strengthen
stability
in
global
economy and moderate volatility in
the
financial
markets,
while
also
consolidating recovery at home.

In
the
emerging
markets
and
developing economies, expectations
of low growth continued into the third
quarter of 2015, with strong likelihood
of moderate uptick in 2016. Output
growth in China at 7.0 per cent in the
second quarter of 2015, is expected to
moderate
further,
due
to
slower
productivity and exports, collapsing
assets value and excess capacity in
the manufacturing sector.

Global inflation is expected to remain
tepid
as
the
recent
temporary
rebound in oil prices and stronger
consumer
sentiments
have
mildly
raised
consumer
prices
in
the
advanced
economies.
Consumer
price developments were mixed in
emerging and developing economies.
Commodity importing economies have
continued to benefit from low global
oil and other commodity prices, while
others, especially exporters of primary
commodities, are contending with
increased pressure on their currencies
and fiscal position; and in some cases,
significant inflation pass-through to
domestic prices.

Domestic
Economic
and
Financial
Developments

Output
Output growth in the first half of 2015
trended downwards from the level in
the fourth quarter of 2014, mainly on
account
of
softening
oil
prices.
According to the National Bureau of
Statistics (NBS), real GDP grew by 2.35
per cent in the second quarter of 2015,
a
significant
decrease
when
compared with the 3.96 and 6.54 per
cent in the preceding quarter and
corresponding
period
of
2014,
respectively.
Real
GDP
growth
is
projected by the National Bureau of
Statistics (NBS) to stabilize at 2.63 per
cent in 2015, compared with the 6.22
per cent recorded in 2014. The non-oil
sector remained the main driver of
growth in the second quarter of 2015,
at 3.46 per cent. The key drivers were
services,
trade
and
agriculture,
contributing
1.80,
0.95
and
0.82
percentage points, respectively. On
the other hand, Oil and Natural Gas
sector declined by 0.73 percentage
point
an
improvement
of
1.13
percentage points relative to the first
quarter of 2015.

The overall outlook for economic
activity is expected to improve on
account of sustained improvement in


CBN Monetary Policy Review

the supply of power and refined
petroleum products and progress with
counter-insurgency in the North East
axis. The Committee reiterated its
commitment to efforts in support of the
various ongoing Federal Government
initiatives to stimulate output growth.

Prices
The Committee noted that the yearon-year
headline
inflation
edged
upwards to 9.3 per cent in August, from
9.2 per cent in June and July, 2015. The
increase in headline inflation in August
reflected marginal increases in both
the core and food components of
inflation. Core inflation rose to 9.0 per
cent in August from 8.8 per cent in July,
while food inflation increased to 10.1
per cent from 10.05 per cent over the
same period.

The Committee observed that the
uptick in inflation was mainly traceable
to
higher
energy
prices,
delayed
harvests
and
pass
through
from
imports.
It
however,
noted
with
satisfaction, the continued moderation
in all measures of month-on-month
inflation across all the measures. In
August, on a month-on-month basis,
headline inflation rose by 0.59 per cent
from 0.69% in July; core inflation rose by
0.61 per cent, same as in July. Monthon-month
food
inflation
also
moderated to 0.63 per cent in August,
from
0.77
per
cent
in
July.
The
Committee,
while
reiterating
its
commitment to price stability, noted
that the rising inflationary trend was a
concern
given
the
already
tight
monetary policy stance of the Bank.

Monetary,
Credit
and
Financial
Markets Developments
Broad money supply (M2) contracted
by 2.23 per cent in August 2015, below
the level at end-December 2014.
When annualized, M2 contracted by
3.34 per cent, which was significantly
below the growth benchmark of 15.24
per cent for 2015. Net domestic credit
(NDC) rose by 11.00 per cent, which
annualizes to 16.49 per cent in the
same period. At that level, NDC was
within the provisional benchmark of
29.30 per cent for 2015. The growth in
aggregate
credit
was
attributable
mainly
to
growth
in
Federal
Government borrowing which reached
140.13 per cent in August 2015 or
210.19 per cent when annualized.

During the period under review, rates in
all segments of the money market
were largely influenced by the level of
liquidity in the banking system. Money
market interest rates were relatively
volatile,
reflecting
fluctuations
in
banking system liquidity during the
period. Average inter-bank call and
OBB rates, which opened at 10.85 and
10.65 per cent in June, 2015, closed at
31.07 and 28.10 per cent, respectively,
in August, 2015. Average inter-bank
call and OBB rates for the period were
14.95 and 17.17 per cent, respectively.


CBN Monetary Policy Review

The Committee noted the bearish
trend in the equities segment of the
capital
market
during
the
review
period.
The
All-Share
Index
(ASI)decreased by 9.3 per cent from
33,456.83 on June 01, 2015 to 30,332.68
on
September
18,
2015.
Similarly,
Market Capitalization (MC) fell by 8.8
per cent from N11.42 trillion to N10.42
trillion
during
the
same
period.
However, relative to end-December
2014, the indices decreased by 12.5
and 9.3 per cent, respectively. The
decline in share prices (year-to-date)
was largely due to subdued sentiments
preceding
the
general
elections,
which held in March and concerns for
the country’s foreign reserves position
due to declining global oil prices.

External Sector Developments
The average naira exchange rate
remained relatively stable at the interbank segment, but significantly volatile
in the BDC segment of the foreign
exchange market during the review
period. The interbank exchange rate
opened at N196.95/US$ and closed at
N197.00,
at
a
daily
average
of
N196.98/US$ between June 29 and
September 18, 2015 representing a
depreciation of N0.5K for the period. At
the bureau-de-change segment, the
exchange rate opened at N224.50/US$
and
closed
at
N211.50.
This
represented
an
appreciation
of
N13.00k for the period. The relative
stability in the inter-bank market and
improvement in the BDC segment
were attributed to the effects of
various
administrative
and
policy
measures. Consequently, gross official
reserves
decreased
modestly
from
US$31.20 billion at end-July 2015 to
$30.63 billion on September 17, 2015.

Committee’s Considerations
The Committee noted that the overall
macroeconomic
environment
remained fragile. The economy further
slowed in the second quarter of the
year,
making
it
the
second
consecutive
quarterly
less-than
expected
performance.
The
Committee noted that growth had
come under severe strains arising from
declining
private
and
public
expenditures. In particular, it noted the
impact of non-payment of salaries at
the state and local government levels
as
a
key
dampening
factor
on
consumer
demand.
Year-on-year
headline inflation continued to trend
upwards,
although
the
month-onmonth measure moderated. Demand
pressure
in
the
foreign
exchange
market remained significant as oil
prices continued to decline. Arising
from these developments, there were
indications that some of the banking
sector performance indicators could
be stressed if conditions worsen further.
Specifically, the Committee noted that
liquidity
withdrawals
following
the
implementation of the TSA, elongation
of the tenure of state government
loans as well as loans to the oil and gas
sectors
could
aggravate
liquidity


CBN Monetary Policy Review

conditions in banks and impair their
financial
intermediation
role,
thus
affecting economic growth, unless
some actions were immediately taken
to ease liquidity conditions in the
markets.

Having seen two consecutive quarters
of
slow
growth,
the
Committee
recognized that the economy could
slip into recession in 2016 if proactive
steps were not taken to revive growth
in key sectors of the economy.

In
the
face
of
prevailing
circumstances,
the
Committee
acknowledged that synergy between
monetary and fiscal policies remained
the most potent option to sustainable
growth.
The
Committee
further
observed that the impact of the
persistent decline in global crude oil
prices
on
the
fiscal
position
of
Government continues to reflect in
rising
credit
to
government.
The
Committee also noted that the initial
market reaction to the decision by JP
Morgan to exclude the country from its
Government Bond Index for Emerging
Economies
(GBI-EM)
had
largely
dissipated as yields soon adjusted to
their pre-announcement levels’ adding
that there may be second round
effects over the next two months as
the economy adjusts to that decision.
The
Committee
reiterated
its
unwavering
commitment
to
naira
exchange rate stability despite the
pressures. Mindful of the possibility of
diversion of any extra liquidity to the
foreign
exchange
market,
the
Committee urged the Bank to closely
monitor the nature and sources of
demand
pressure
in
the
foreign
exchange market to ensure that funds
were not diverted to demand for
foreign exchange but applied to
specific
growth
enhancing
asset
creation lending by banks. It further
noted that sectors such as agriculture
and MSMEs were sectors for rapid
generation of productive employment
and
wealth
creation,
and
must
therefore,
be
painstakingly
encouraged.

On
inflation,
the
Committee
was
optimistic that as harvests progress in
the coming months, pressure on food
prices would gradually recede, while
growth enhancing measures would
over the medium term have some
moderating effect on food prices.

Overall,
the
Committee
expressed
optimism that business confidence
would continue to improve as the
Government continues to unfold its
economic plans. In addition, some of
the
reassuring
measures
of
the
administration including efforts aimed
at resolving fiscal challenges at the
sub-national
levels,
and
the
fight
against corruption and improving the
business environment would unlock the
inflow of foreign direct investment. The
Committee
also
underscored
the
imperative of growing and protecting


CBN Monetary Policy Review

the country’s foreign reserves and
building fiscal buffers in the process of
strengthening
confidence
in
the
economy,
which
is
essential
for
promoting growth and stability. The
MPC also observed that despite the
TSA, banking system liquidity ratio
remained
moderate.
Consequently,
the Committee advised on the urgent
imperative of banks to aggressively
support the efforts of government at
job creation by channeling available
liquidity into target growth enhancing
sectors of the economy such as
agriculture and manufacturing. This is
with a view to promoting employment
creation
through
conscious
efforts
aimed at directing lending to the
growth
enhancing
sectors
of
the
economy. The Committee considered
that the Bank and deposit money
banks, must strive to reverse the
slowing GDP trajectory by actively
stepping up their efforts in catalyzing
the economy with substantial new
loans to the target sectors earlier
highlighted.

The Committee’s Decisions
In consideration of the underlying
fundamentals
of
the
economy,
particularly
the
declining
output
growth, rising unemployment, evolving
international economic environment
as well as the need to properly position
the economy on a sustainable growth
path, the MPC decided by a vote of 7
to reduce the Cash Reserve
Requirement (CRR) from 31 per cent to
25 per cent while 3 voted to hold. By a
unanimous vote, the MPC voted to
retain the MPR at 13 per cent.

In summary, the MPC voted to:
(i)
Reduce the CRR from 31 to 25
per cent;
(ii)
Retain the MPR at 13 per cent;
(iii)
Retain the symmetric corridor of
200 basis points around the
MPR; and
(iv)
Retain the Liquidity Ratio at 30
per cent.

Thank you.

Godwin I. Emefiele
Governor, Central Bank of Nigeria
22nd September 2015


CBN Monetary Policy Review

Central Bank of Nigeria Communiqué
No.

of
the
Monetary
Policy
Committee Meeting of Monday and
Tuesday, November 23 and 24, 2015

The Monetary Policy Committee met
on 23rd and 24th November, 2015
against the backdrop of slowing global
growth and a weakening domestic
economic environment, attributable
largely to the down turn in oil prices. In
attendance
were

out
of

members. The Committee appraised
the global and domestic economic
and financial environments up to
October 2015 as well as the economic
outlook for the first half of 2016.

International Economic Developments
The Committee noted the moderation
in global output recovery evidenced
by the less-than-expected growth of
2.9 per cent in the first half of 2015. The
development was underpinned largely
by deteriorating global trade, reversal
in output growth in the advanced
economies and a significant slowdown
in
growth
in
the
emerging
and
developing economies. The key drag
on growth in the advanced economies
included unfavorable labour market
conditions,
suppressed
foreign
demand and weaker than anticipated
domestic
aggregate
demand.
Consequently,
growth
in
the
U.S.
slowed to 1.5 per cent in the third
quarter of 2015 as a result of a
drawdown in inventories; deceleration
in
exports;
drag
in
private
consumption, government spending
and residential fixed investment. The
outlook for the fourth quarter, however,
remains
optimistic
as
consumption
spending is expected to drive growth,
supported by low inflation.

The Bank of Japan continued with
monetary easing, through its asset
purchase program, with a monthly
injection of ¥6.7 trillion ($54.27 billion);
but this was insufficient to restart output
as third quarter growth is projected to
be weaker than the second quarter,
thereby increasing the likelihood of
dampening growth and pressure for
higher stimulus. The European Central
Bank (ECB) in October 2015; reaffirmed
commitment
to
its
monthly
asset
purchase of €60 billion ($64.2 billion)
until September, 2016; although the
package may fall short of what is
required for meaningful impact on
growth. Similarly, the Bank of England
continued its ₤375 billion ($570 billion)
monthly asset purchase program, as
the economy is expected to retreat
from its performance of 0.7 per cent in
the second quarter to about 0.5 per
cent in Q3 with the decline in foreign
demand, potentially dampening the
prospects for an interest rate hike.

Growth in the emerging markets and
developing
economies
(EMDEs)
continued
to
sag;
reflecting
the
protracted slowdown in China as well
as recession in Russia and Brazil. The
slowdown among EMDEs has been


CBN Monetary Policy Review

mainly due to weak import growth in
China, low commodity prices, capital
flow reversals, rising debt levels and
other geopolitical factors. In effect,
the poor growth expectations could
continue into the fourth quarter with
the likelihood of further dampening in
2016.

Overall,
monetary
policy
in
most
advanced
and
emerging
market
economies appears oriented towards
easing to revive output and strengthen
employment. No substantial upswing is
expected around the current tepid
global inflation, projected to remain
moderate
through
2016.
The
continuously bearish commodity prices
and
stronger
consumer
sentiments
have dampened consumer prices in
the advanced economies. In the
emerging and developing markets, the
major risk to domestic prices is mainly
the increased pressure on domestic
currencies. However, in most emerging
markets, the low prices of oil and other
commodities
continue
to
cushion
consumer inflation pressures.

Domestic
Economic
and
Financial
Developments

Output
Data from the National Bureau of
Statistics (NBS) indicated that real GDP
grew by 2.84 per cent in the third
quarter of 2015, compared with 2.35
per cent in the second quarter.
However, economic growth in Q3 was
lower than the 3.96 and 6.23 per cent
in the first quarter of 2015 and the
corresponding
period
of
2014,
respectively. Both the oil and non-oil
sectors contributed to growth in the
third quarter of 2015. In the non-oil
sector, the key drivers of output growth
were Crop Production, Trade and
Telecommunications and Information
Services, contributing 0.91, 0.79 and
0.40 percentage points, respectively.

The overall outlook for economic
activity is expected to improve on
account of sustained improvement in
the supply of power and refined
petroleum
products,
progress
with
counter-insurgency in the North-East
and targeted interventions in the real
sector. In addition, the inauguration of
the Federal Executive Council and the
assumption of office of the Ministers,
earlier this month, are expected to add
impetus to the growth momentum. The
Committee reiterated its commitment
to
support
the
various
ongoing
initiatives of the Federal Government
to stimulate output growth.

Prices
The Committee noted with delight the
slight decline in year-on-year headline
inflation to 9.3 per cent in October,
from 9.4 per cent in September, 2015.
The decline in headline inflation in
October 2015, reflected decreases in
both the core and food components.
Core inflation declined for the second
consecutive month to 8.7 per cent in


CBN Monetary Policy Review

October
from
8.9
per
cent
in
September, while food inflation slowed
to 10.1 per cent from 10.2 per cent
over the same period. The Committee
further
noted
the
continued
moderation
in
month-on-month
inflation
and
reaffirmed
its
commitment to price stability, stressing
the need for complementary supply
side policies as part of an overall
strategy
to
lock-in
inflation
expectations.

Monetary,
Credit
and
Financial
Markets Developments
Broad money supply (M2) contracted
by 3.75 per cent in October, 2015, over
the level at end-December, 2014.
Annualized, M2 declined by 4.5 per
cent, which is significantly below the
growth benchmark of 15.24 per cent
for 2015. Net domestic credit (NDC)
grew
by
10.8
per
cent,
which
annualizes to 12.96 per cent in the
same period. At this level, NDC fell
below the provisional benchmark of
29.30 per cent for 2015. Growth in
aggregate
credit
reflected
mainly
growth in net credit to the Federal
Government which grew by 96.66 per
cent in October, although lower than
the 142.38 per cent in September,
2015. The sharp moderation in credit to
government may be partly attributable
to the effect of implementation of the
Treasury Single Account (TSA).

During the period under review, money
market interest rates were low but
sometimes
volatile,
reflecting
fluctuations in banking system liquidity.
Average inter-bank call and Open Buy
Back (OBB) rates, which stood at 15.50
and 35.00 per cent on September 21
and 22, 2015, respectively, fell to 9.67
and 9.00 per cent on September 23,
2015. On October 19, 2015, OBB rate
closed at 1.00 per cent with no
transaction
at
the
interbank
call
segment. Following the increase in net
liquidity level, the interbank call and
OBB rates further declined and closed
at 3.76 and 0.73 per cent, on October
29 and 30, 2015, respectively. Between
the last MPC meeting and endOctober 2015, interbank call and OBB
rates averaged 6.66 and 6.72 per cent,
respectively, and were 0.41 per cent
and 1.33 per cent on 19th November,
2015.

The Committee also noted the bearish
trend in the equities segment of the
capital
market
during
the
review
period.
The
All-Share
Index
(ASI)
decreased by 9.9 per cent from
31,217.77 on September 30, 2015 to
28,131.28
on
November
20,
2015.
Similarly, Market Capitalization (MC)
fell by 9.9 per cent from N10.73 trillion
to N9.67 trillion during the same period.
However, relative to end-December
2014, the indices decreased by 18.9
and 9.5 per cent, respectively. These
developments reflected, largely the
cautious approach to lending by the
deposit money banks.


CBN Monetary Policy Review

External Sector Developments
The average naira exchange rate
remained relatively stable at both the
inter-bank
and
Bureau-de-Change
(BDC)
segments
of
the
foreign
exchange market during the review
period. The exchange rate at the
interbank
market
opened
at
N197.00/US$ and closed at N197.00,
with a daily average of N196.99/US$
between September 21 and October
30, 2015. At the BDC segment, the
exchange rate opened at N223.50/US$
and closed at N225.00, with a daily
average of N224.46/US$, representing
a depreciation of N1.50k for the
period. The relative stability in the
foreign
exchange
market
is
attributable to the sustained supply of
foreign exchange from autonomous
sources as well as the effects of various
administrative measures taken by the
Bank. Gross official reserves increased
from
US$29.85
billion
at
endSeptember, 2015 to $30.31 billion on
20th November, 2015.

Committee’s Considerations
The Committee acknowledged the
continued fragile global economic
environment, including the possibility of
monetary policy normalization in the
United
States;
poor
outlook
for
commodity
prices
and
further
slowdown in the Emerging Markets and
Developing Economies. The MPC also
noted the fragility of the domestic
macroeconomic
environment;
reflected partly in low output growth,
soft oil prices, low credit to the high
employment elastic sectors of the
economy and sustained inflationary
pressure, which however, softened
moderately in October. The MPC was,
particularly,
concerned
that
the
previous liquidity injections embarked
upon through lowering of the Cash
Reserve Ratio (CRR), in the last MPC,
has not transmitted significantly to
improved credit delivery to key growth
and employment in sensitive sectors of
the economy. Rather, more credit was
to
sectors
with
low
employment
elasticity.

The
Committee
restated
its
commitment to evolve and implement
measures that would be supportive of
consolidating and strengthening in
output growth with an eye on price
stability.
The
Committee,
however,
recognized the limits of monetary
policy
under
conditions
of
huge
infrastructure
gap
and
significant
global financial market fragilities. While
noting
the
imperative
of
complementary
fiscal
policies
to
augment monetary policy, under the
circumstance, monetary policy must
remain bold in charting the desired
course
that
would
stimulate
sustainable output growth in Nigeria.

Concerned
about
the
state
of
unemployment in the country, the
MPC evaluated various options for
ensuring increased credit delivery to
the
key
growth
sectors
of
the


CBN Monetary Policy Review

economy,
capable
of
generating
employment
opportunities,
and
improving productivity and growth. The
Committee underscored the need for
banks, to ensure that measures taken
by the Bank to inject liquidity and
stimulate the economy adequately
translate into increased lending to the
sectors
with
sufficient
employment
capabilities
and
the
potential
to
generate growth. Accordingly, the
MPC agreed that going forward, any
attempt by the CBN at easing liquidity
into the system shall be directed at
targeting real sector, infrastructure,
agriculture and solid minerals. The MPC
further
directed
the
Bank’s
Management
to
put
in
place
necessary
measures/regulations
to
ensure strict compliance by the DMBs.
This
is
aimed
at
ensuring
that
employment
and
productivity
is
stimulated
while
also
moderating
prices.

The Committee noted with satisfaction
the stability, soundness and resilience
of the banking system even against
adverse global financial conditions.
Given
the
situation,
the
MPC
emphasized the necessity of focusing
on
financial
market
stability
and
proactive engagement of policy and
administrative
levers
needed
to
support the environment in which
market institutions operate. On their
part,
market
institutions
are
encouraged to employ more stringent
criteria in evaluating their portfolio and
business decisions.

The MPC considered that although,
headline inflation had remained at the
borderline of single digit, the observed
moderation, especially in the monthon-month inflation, provided some
room for monetary easing to support
output in the short to medium term,
while keeping in focus the primacy of
price stability. In effect, the Committee
will continue to monitor developments
around the Naira exchange rate,
interest rates, and consumer prices,
even
as
targeted
measures
are
needed to channel liquidity to the key
sectors of the economy.

The
Committee
noted
that
close
coordination between monetary and
fiscal
policy
was
imperative
for
sustainable growth enhancing policies.

The Committee’s Decision
In consideration of the weakening
fundamentals
of
the
economy,
particularly the low output growth,
rising
unemployment
and
the
uncertainty of the global economic
environment, the MPC, by a vote of 8
out of 10, reduced the MPR from 13.0
to 11.0 per cent while 2 members
voted for a retention of the rate at 13.0
per cent; 7 members voted to reduce
the Cash Reserve Requirement (CRR)
from 25.0 per cent to 20.0 per cent
while 3 members voted to hold. In
addition, 8 members voted for an


CBN Monetary Policy Review

asymmetric corridor of +2/-7 per cent
while 2 voted to retain the symmetric
corridor of +/-2 per cent around the
Monetary Policy Rate (MPR).

The MPC emphasized that the liquidity
arising from the reduction in the CRR to
20 per cent, will only be released to the
banks that are willing to channel it to
employment generating activities in
the economy such as agriculture,
infrastructure and solid minerals.

In summary, the MPC voted to:
(i)
Reduce the CRR from 25.0 per
cent to 20.0 per cent;
(ii)
Reduce the MPR from 13.0 per
cent to 11.0 per cent;
(iii)
Change the symmetric corridor
of 200 basis points around the
MPR to an asymmetric corridor of
+200 basis points and -700 basis
points, around the MPR.

Thank you.

Godwin I. Emefiele
Governor, Central Bank of Nigeria
24th November, 2015


CBN Monetary Policy Review

CBN Monetary Policy Review