CENTRAL BANK OF NIGERIA
MONETARY
POLICY REVIEW
MONETARY
POLICY REVIEW
August 2013
August 2013
Central Bank of Nigeria
www.cbn.gov.ng
E-mail:
33 Tafawa Balewa Way
Central Business District
P.M.B. 0187, Garki,
Abuja
Phone: +234 (0)9 462 36011
Website
©2013 Central Bank of Nigeria
:
ISSN: 2141-6281
Mandate
Vision
Mission Statement
§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
“By 2015: Be the model Central Bank delivering Price and
Financial System Stability and promoting
Sustainable Economic Development"
“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
CBN Monetary Policy Review
CBN Monetary Policy Review
CONTENTS
Page
v
CBN Monetary Policy Review
CBN Monetary Policy Review
Table of Contents
List of Tables
Statement by the Governor

ix
Chapter 1
Overview


Chapter 2
Domestic Price Developments and the Real Economy

Chapter 3
Monetary Policy


Chapter 4
Domestic Financial Markets


Chapter 5
Economic Outlook


Table 2.1:
Inflation Rate (June 2012 – June 2013)
..
..

Table2.2:
Quarterly Consumer Price Development
(November 2009=100)..


Table 2.3:
Selected CPI Components' Contribution to Food Inflation
(Year-on-Year) Jan – Jun 2013
..
..
..

Table 2.4:
Selected CPI Components' Contribution to Core Inflation
(Year-on-Year) Jan – Jun 2013
..
..
..

Table 3.1:
MPC Decisions, January – May, 2013 ..
..
..

Table 3.2:
OMO Bills Auction (N million)
January 2009 – December 2012
..
..
..

Table 3.3:
CBN Standing Lending Facility (N'billion)
(January 2009- June 2013)


Table 3.4:
CBN Standing Deposit Facility (N billion)
(January 2009- June 2013)


Table 3.5:
Foreign Exchange Supply by the CBN US$ million
..

Table 3.6:
Performance of Monetary Aggregates
(H1: 2012 and 2013)


Table 4.1:
Weighted Average Money Market Interest Rates (%)
(December 2012 – June 2013)..
..
..
..

Table 4.2:
Average Monthly Spot Exchange Rates (N/US$)
(January 2012 – June 2013)


Table 4.3:
End-Month Exchange Rates Movements,
January 2012 – June 2013 (N/US$)
..
..
..

Table 4.4:
Nominal and Real Effective Exchange Rates Indices
(January 2012 – June 2013)


Table 4.5:
Foreign Exchange Demand and Supply
(US Dollar Million)


Table 4.6:
CBN Monthly Foreign Exchange Flows (US$ million)
(January 2012 – June 2013)


Table 4.7:
Monthly Foreign Exchange Flows through the Economy
(US$ million) (January 2012 – June 2013)
..
..

Table 4.8:
NSE All-Share Index (ASI) and Market Capitalisation (MC)
(June 2012 – June 2013)


Table 5.1:
Global Output and outlook (2011 – 2014)
..
..

vi
CBN Monetary Policy Review
CBN Monetary Policy Review
Page
List of Figures
List of Boxes
Figure 2.1:
Headline Inflation (June 2012 – June 2013)
..
..

Figure 2.2:
Y-o-Y Headline, Core and Food Inflation Rates
(June 2012 - June 2013)


Figure 2.3:
Selected CPI Components' Contribution to Food Inflation
(Year-on- Year) Jan – June 2013
..
..
..

Figure 2.4:
Selected CPI Components' Contribution to Core Inflation
(Year-on-Year) January – June 2013
..
..
..

Figure 2.5:
Actual and Seasonally Adjusted Headline Inflation
(January 2013 – June 2013)


Figure 2.6:
Bonny Light Crude Oil Price (June 2012 – June 2013) ..

Figure 3.1:
The Performance of M2, M1 and RM (H1: 2011 - 2013)

Figure 3.2:
The Performance of NDC, Cg and Cp (H1: 2011 – 2013)

Figure 4.1:
Weighted Average Money Market Interest Rates (%)
(December 2012 – June 2013)..
..
..
..

Figure 4.2:
Daily Interbank Call Rates (%)
(December 2012 – June 2013)..
..
..
..

Figure 4.3:
Daily Open Buy Back (OBB) Rates (%)
(December 2012 – June 2013)..
..
..
..

Figure 4.4:
Daily Exchange Rate (December 2012 – June 2013) ..

Figure 4.5:
End-Month Exchange Rate (January 2012 – June 2013)

Figure 4.6:
Nominal and Real Effective Exchange Rates Indices
(January 2012 – June 2013)


Figure 4.7:
Demand and Supply of Foreign Exchange at wDAS
(January 2012 – June 2013)


Figure 4.8:
Foreign Exchange Flows Through the CBN
(January 2012 – June 2013)


Figure 4.9:
Foreign Exchange Flows through the Economy
(January 2012 – June 2013)


Figure 4.10:
NSE ASI and MC (June 2012 – June 2013)
..
..

Figure 4.11:
NSE ASI and MC (January – June 2013)
..
..

Figure 4.12:
NSE Market Capitalisation by Sector as at
End-June 2013 ..


Figure 4.13:
Volume and Value of FGN Bonds Traded in the
OTC Market (H2:2011 – H1:2013)
..
..
..

Figure 4.14:
Yields on Nigeria's 10-Year U.S. Dollar-denominated
Bond (June 1, 2012 – June 28, 2013) ..
..
..

Figure 4.15:
FGN Bonds Yield Curves (End-June 2012 vs.
End-December 2012 vs. End-June 2013)
..
..

Figure 5.1:
Fan Chart for Headline Inflation (%)
..
..
..

Figure 5.2:
Fan Chart for Non-Food Inflation (%) ..
..
..

Box 1: Impact of Global Shale Oil Production on Nigeria
..
..

Box 2: Managing Capital Flows in Nigeria


Box 3: Deepening the Bonds Market: Policy Issues
..
..
..

Page
vii
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CBN Monetary Policy Review
Appendices
Communiqué No. 87, January 21, 2013


Communiqué No. 88, March 18 and 19, 2013
..
..
..

Communiqué No. 89, May 20 and 21, 2013


ix
CBN Monetary Policy Review
CBN Monetary Policy Review
STATEMENT BY THE GOVERNOR
Half way into 2013, expectations of speedier recovery of the global economy are
less strong than they were at the end of 2012. Growth prospects for major advanced
economies – US, UK, Euro area – are lower than observed a year earlier. The
slowdown in the emerging market cluster, driven by China, could combine with
sluggish growth in the advanced economies to produce a rather uninspiring pace
of global recovery in the year. Likewise, the international financial environment
continues to be uncertain, posing significant threats to domestic stability. Given the
enormous threats from the external environment, the Monetary Policy Committee's
considerations in the first half accorded due weight to risks from that sector.
Monetary policy remained generally focused on ensuring price stability in the face
of additional domestic pressures, especially on consumer prices and the naira
exchange rate. Monetary policy needed to remain relatively tight to rein-in growing
pressures on both. The Monetary Policy Committee was persuaded by the need to
maintain a tight policy stance for as long as required to bring inflation down to single
digit and sustain stability of the exchange rate. Both objectives were reasonably
met, with end-period headline inflation at 8.4 per cent and the dollar exchanging on
average at around N158.00 in the first half of 2013. The stable naira exchange
helped to maintain orderliness in capital flows and the financial markets; although
concerns about the end of quantitative easing by the US Federal Reserve have
continued to weigh-in heavily on investor sentiment.
As we enter the second half, monetary policy will remain cautious, factoring in real
potential risks from within and also from the external environment. Of particular
importance will be how the US Fed handles QE3, the slowing growth and other
unfolding dynamics in emerging market economies and global output and inflation
developments. While not expecting a sudden switch to a contractive monetary
policy mode in the advance economies, market reactions to a scale back in
monetary easing easy policy may be disproportionate. Flow reversals remain a key
risk in frontier economies especially given the high likelihood of increased yields and
interest rates in the advanced economies. In the short- to medium-term, monetary
policy will continue to support stability of the exchange rate and building of reserve
buffers to elicit greater confidence in the economy.
The outlook for the rest of 2013 and first half of 2014 indicates continued moderation
in inflation on the back of appropriate monetary policy and developments in the
real sector of the economy including the ongoing reform of the power sector and
special interventions in support of micro, small and medium enterprises.
Sanusi Lamido Sanusi, CON,
Governor,
Central Bank of Nigeria.


CBN Monetary Policy Review

CHAPTER 1
OVERVIEW

The conduct of monetary policy in the first half of 2013 was
tailored primarily towards the achievement of price stability.
Against the background of inflationary pressures, especially
the headline inflation observed up to end-December 2012,
the sluggish global economic recovery and the uncertainties
in the financial system, monetary policy was designed to
balance the risks during the review period. The orientation of
monetary policy was also informed by the challenges of
sustaining a stable exchange rate of the naira, creating a
buffer of external reserves, sustaining stability of the money
market rates, narrowing the spread between lending and
deposit rates and mitigating the impact of the slow recovery
of the global economy on domestic output. In consideration
of these multi-dimensional challenges, monetary policy
applied a mix of instruments to deliver on price stability and
restore confidence in the economy.

The Monetary Policy Rate (MPR) remained the major
instrument for signalling the direction of interest rates in order
to lock-in inflation expectations. Open market operations
(OMO) was employed as the principal instrument of liquidity
management, which was complemented by repurchase
agreements and discount window operations. In addition,
reserve requirements and foreign exchange net open
position (NOP) limit for deposit money banks were deployed
to address the surge in banking system liquidity and pressure
on the exchange rate during the review period.

The public auction of Nigerian Treasury Bills and interventions
in the foreign exchange market were also used in monetary
management to mop up excess liquidity while the Bank
strengthened its communication strategy through periodic
information to the markets of its determination to maintain
exchange rate stability by defending the naira in order to
sustain confidence among market operators and other
stakeholders.
Against the
background of
inflationary
pressures
observed up to
end-December
2012,
uncertainties in
the international
oil market, and
sluggish global
economic
recovery,
monetary policy
was deployed to
balance multiple
risks during the
review period
...Nigerian
Treasury Bill
auctions and
foreign
exchange
market
interventions
were also used
for monetary
management,
while the Bank
sustained efforts
towards
improving
communication
with market
operators and
other
stakeholders


CBN Monetary Policy Review

The Monetary Policy Committee (MPC) held three regular
meetings in the review period, during which the MPR was
retained at 12.0 per cent with a symmetric corridor of +/- 200
basis points. In keeping with the monetary tightening stance,
cash reserve requirements (CRR) was maintained at 12.0 per
cent and NOP limit was left at 1.0 per cent. The Liquidity Ratio
(LR) was kept at 30.0 per cent while the mid-point of the
exchange rate was unchanged at N155/US$ with a band of
+/-3.0 per cent. The decision of the MPC to retain previous
policy measures in the first half of 2013 was to allow the full
effects of past policy actions to work through the economy
and deliver on stable and low inflation.

Inflationary pressures continued to moderate mainly in
response to the policy measures implemented by the Bank.
Year-on-year headline inflation decelerated to 8.4 per cent
in June 2013, from 12.0 per cent in December, 2012. Also,
core inflation declined significantly to 5.5 per cent from 13.75
per cent over the same period. Similarly, food inflation
declined to 9.60 per cent in June 2013, from 10.20 per cent in
December 2012.

Short-term interest rates remained largely within the MPR
corridor and movements in the interbank interest rates were
less volatile. The average interbank call and open buy back
(OBB) rates declined by 29 and 54 basis points to 11.59 and
11.19 per cent in June 2013, from 11.88 and 11.73 per cent in
December 2012, respectively. This development in short term
interest rates was influenced by liquidity surfeit in the system
despite the tight monetary policy stance maintained during
the period. In addition, the implementation of administrative
measures such as the prohibition of concurrent dealings in
wDAS and the Standing Lending Facility Window affected
market activities. However, there was an upsurge in the
demand for foreign exchange in the latter part of the review
period, owing mainly to seasonal dividend repatriation by
foreign investors.

The demand for foreign exchange at the wDAS segment,
during the first half of 2013, declined by 2.0 per cent when
compared with the demand in the first half of 2012. Supply to
The decision by
the MPC to retain
previous policy
measures in the
first half of 2013
was to allow the
effects to work
fully through the
economy and
deliver on stable
and low inflation
Short-term
interest rates
were largely
within the MPR
corridor.
The non-oil sector
continued as the
major driver of
growth during the
period. The share
of the oil sector in
output suffered a
severe setback
during the period
under review,
due largely to the
incidents of
pipeline
vandalisation,
illegal oil
bunkering and
shut down of oil
facilities.


CBN Monetary Policy Review

the market was similarly lower in the review period, relative to
the same period in 2012. But relative the second half of 2012,
average demand at the wDAS segment rose by 20.51 per
cent. In the same vein, average supply of foreign exchange to
the bsame market segment increased by 20.62 per cent over
the level in the corresponding period of 2012. The Bank’s
interventions in the foreign exchange market in the first half of
2013 provided strong support for the naira. As a result, the
average exchange rate appreciated by 0.03, 0.12 and 0.52
per cent at the wDAS, Interbank and Bureau de Change
(BDC) segments of the foreign exchange market, respectively.

Domestic output growth experienced slight decline caused by
the challenges in the global economy. Data from the National
Bureau of Statistics (NBS) showed that Nigeria’s real GDP grew
by 6.18 per cent compared with 6.39 per cent in the first half of
2012. Also, relative to the growth of 6.99 per cent in the second
half of 2012, growth performance in the review period showed
a marginal decline. The non-oil sector, particularly agriculture,
wholesale trade and services, remained the major drivers of
growth during the review period. The share of the oil sector in
total output declined during the period under review, due
largely to the incidents of pipeline vandalisation, illegal oil
bunkering and shut down of oil facilities.

The outlook for inflation in the domestic economy suggests that
it would remain within the single digit in the rest of 2013. This is
underpinned by expected improvements in output growth
arising from favourable and continued stable macroeconomic
conditions. Key risks to output growth in the near-term include
the lingering sluggish growth in Europe and revenue shortfalls in
the oil sector. In addition, the lingering security challenges as
well as slow progress in the provision of critical infrastructure
could further undermine output growth.


Key risks to output
growth in the
near term include
the lingering
sluggish growth in
Europe, rising
revenue leakage
from oil theft,
lingering security
challenges as
well as delays in
the reform of
critical
infrastructure...


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CBN Monetary Policy Review

CHAPTER 2
DOMESTIC PRICE DEVELOPMENTS AND THE REAL
ECONOMY

In the first half of 2013, inflationary pressures moderated
significantly, partly in response to the sustained tight monetary
policy and the base effects of the partial withdrawal of subsidy
from the pump price of premium motor spirit (PMS) in the first
half of 2012. The moderation was complemented by the
relative stability in the exchange rate of the naira. Domestic
output growth in the review period was modest compared
with the corresponding period of 2012, owing to persistent
security challenges in some parts of the country, which
affected
economic
activities,
particularly
agricultural
production and consumer demand in the affected areas.

2.1
Domestic Economic Activity
Domestic output growth remained resilient on the back of
favourable conditions for increased agricultural production
despite the security challenges and the slow pace of recovery
in the global economy. Growth in both the oil and non-oil real
Gross Domestic Product (GDP) was higher in the review period,
relative to the corresponding period of 2012. Real GDP stood
at 6.36 per cent as in the corresponding period of 2012 but
lower than the 6.75 per cent in the second half of 2012. The
contribution of the oil sector to real GDP has continued to
decline. It was lower at 13.79 per cent in the first half of 2013
compared with 13.86 per cent in the corresponding period of
2012, though higher than the 12.10 per cent recorded in the
second half of 2012. The decline resulted from a number of
factors including disruptions in oil production due to facility shut
downs and pipeline vandalism; incidents of oil theft; increase in
international oil market supply due to discovery of shale oil in
the US and China (see Box 1) as well as the emergence of new
African oil exporters competing for Nigeria’s traditional export
market.

The major driver of growth in the review period remained the
non-oil sector at 7.61 per cent, though down from 7.90 per
cent in the second half of 2012, in contrast to the 1.00 per cent
The contribution
of the oil sector
to real GDP was
lower at 12.90
per cent in the
first half of 2013
compared with
13.9 per cent in
the
corresponding
period of 2012,
though higher
than the 12.59
per cent in the
second half of
2012.
In the first half of
2013, inflationary
pressures
moderated
significantly, in
response to the
sustained tight
monetary policy
stance,
complemented
by the relative
stability in the
exchange rate of
the naira.
Domestic output
growth was
modest
compared with
2012.


CBN Monetary Policy Review

contraction in the oil sector. The contribution of agriculture to
overall growth was 1.93 per cent which was marginally lower
than the 1.96 percentage points experienced in the first half of
2012. Wholesale and retail trade; and services sectors
contributed 1.86 and 3.09 percentage points to growth in the
review period compared with the 2.00 and 3.26 percentage
points in the corresponding periods of 2012. The marginal
decline in the contribution of agriculture to output growth was
attributed to security challenges, which affected farming
activities in some parts of the country. As with agriculture, the
security challenges in the country was responsible for the
negligible increase in the contribution of the wholesale and
retail trade subsector.

The index of industrial production rose to 138.69(1990=100) in
the first half of 2013 from 137.59 in the second half of 2012, and
137.25 in the corresponding period of 2012. The index of
manufacturing production increased to 110.6 (1990=100) from
106.3 in the second half of 2012 and 106.8 in the corresponding
half of 2012. Compared with the two preceding periods, this
represented an increase of 3.55 and 4.04 per cent,
respectively. Unlike the industrial and manufacturing indexes,
the index of mining production at 146.25(1990=100) was 0.48
and 0.31 per cent lower than the 146.9 and 146.7 per cent
recorded during the second half and the first half of 2012,
respectively. The average manufacturing capacity utilisation
rate increased to 58.0 per cent from 57.9 and 56.0 per cent in
the second half and the corresponding half of 2012. The
noticeable increase in the industrial index was attributed
largely
to
the
improved
electricity
supply,
favourable
performance of the value-chain initiatives of government
(such as rice and cassava), as well as improved business
confidence arising from measures to address the security
challenges in the country.

Developments in the global economy, particularly the
sustained, though weak recovery in major trading partner
economies, notably the US, UK and Japan also contributed to
the modest domestic output growth in 2013, relative to 2012.


The average
manufacturing
capacity
utilisation rate
increased to 58.0
per cent from
57.9 and 56.0 per
cent in the
second half and
the
corresponding
half of 2012.


CBN Monetary Policy Review

2.2
Trends in Inflation Rates
The Bank sustained its tight monetary policy stance during the
review period. The restrictive policy stance, base effects as well
as the waning impact of the partial withdrawal of subsidy from
the pump price of petrol in January, 2012 largely contributed
to the moderation in consumer prices in the first half of 2013. At
end-June 2013, headline inflation (year-on-year) moderated to
8.40 per cent from 12.0 and 12.90 per cent at end-December
and end-June 2012, respectively (Figure 2.1). Headline inflation
in the first half of 2013 was driven mainly by food and nonalcoholic beverages; housing; water; electricity; and transport.
Food inflation (year-on-year) continued to moderate as
observed since 2011. It was 9.60 per cent at end-June 2013,
down from 10.20 per cent at end-2011, respectively. The 4.44
percentage point drop from 4.40 to negative 0.04 per cent in
the
processed
food
component
contributed
to
the
moderation in food inflation. The decline in processed foods
prices was traced to moderation in transportation costs
following improved fuel supply as well as declining processing
costs due to improvements in electricity supply. Between
January and June, 2013, the contribution of processed food to
food inflation decreased from 3.20 to -0.04 per cent. Similarly,
the contributions of meat and yams, potatoes and other tubers
to inflation declined from 1.12 and 1.26 per cent at endJanuary, 2013 to 0.9 and 1.13 per cent in June 2013,
respectively (Table 2.3). In the same period, the contributions
of farm produce and fruits to inflation increased from 7.0 and
0.38 to 10.0 and 0.45 per cent, respectively.

Core inflation (year-on-year) decelerated to 5.5 per cent in the
first half of 2013 from 13.70 per cent at end-December 2012
and 15.2 per cent at end-June 2012. The continued decline in
core inflation indicated that the inflationary pressures from the
partial removal of subsidy on PMS at the beginning of 2012 had
abated considerably, and that the relatively stable exchange
rate regime greatly assisted in delivering low inflation during
the period.


Core inflation
(year-on-year)
decelerated to
5.5 per cent in
the first half of
2013 from 13.70
per cent at endDecember 2012
and 15.2 per
cent at endJune 2012


CBN Monetary Policy Review

Figure 2.1
Headline Inflation (June 2012 – June 2013)

Source: NBS

The core and food components of the consumer price index
increased from 141.80 and 141.20 at end-December 2012 to
145.50, and 147.50 respectively (Table 2.1). While the index of
core inflation increased by 3.7 percentage point that of food
rose by 6.3 percentage points. In effect, the food component
of inflation exerted greater pressure on headline inflation.

Table 2.1
Inflation Rate (June 2012 – June 2013)

Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
Jun
Rate (%)

Headline Inflation
Core Inflation
Food Inflation

CPI
Yon-Y

MMA
CPI
Yon-Y

MMA
CPI
Y-onY

MMA
Jun -12

Jul

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar

Apr

May

Jun

Source: National Bureau of Statistics (NBS)


CBN Monetary Policy Review

Table2.2
Quarterly Consumer Price Development
(November 2009=100)

Figure 2.2
Y-o-Y Headline, Core and Food Inflation Rates
(June 2012 - June 2013)


Source: NBS

Table 2.3
Selected CPI Components’ Contribution to
Food Inflation (Year-on-Year) Jan – Jun 2013

12-Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
Jun
Headline, core & Food Inflation

Headline
Core Inflation
Food Inflation

12 -Sep
12- Dec
13 -Mar
13-Jun

Yon-Y

MMA
Y-onY
12MMA
Y-onY
12MMA
Y-onY
12MMA
Headline

Core

Food

Source: National Bureau of Statistics (NBS)
Date
Jan-13
Feb-13
Mar-13
Apr-13
May-13
Jun-13
Food

Processed
Food

Farm
Produce


Meat

Fruits

Yams,
Potatoes &
Other Tubers


CBN Monetary Policy Review

Figure 2.3
Selected CPI Components’ Contribution to Food Inflation
(Year-on- Year) Jan – June 2013

Source: NBS

All the major components of core inflation contributed to its
decline during the first half of 2013. The contributions of
housing, water, electricity, gas and other fuels; transport;
furnishings,
household
equipment
&
maintenance;
and
education declined from 4.03, 0.99, 0.90 and 0.70 to 1.83, 0.53,
0.35 and 0.22 per cent between January and June 2013,
respectively (Table 2.4).

Table 2.4
Selected CPI Components’ Contribution to Core Inflation
(Year-on-Year) Jan – Jun 2013

Date
Jan-13
Feb-13
Mar-13
Apr-13
May-

Jun-13
Core

Housing,
Water,
Electricity,
Gas & Other
fuel

Transport

Furnishings,
Household
Equip. & HH
Maint.

Education

Source: NBS

Jan-13
Feb-13
Mar-13
Apr-13
May-13
Jun-13
Rate (%)
CPI Components Contribution to Food Inflation
Food
Processed Food
Meat
Fruits
Yams, Potatoes & Other Tuber


CBN Monetary Policy Review

Figure 2.4
Selected CPI Components’ Contribution to Core Inflation
(Year-on-Year) January – June 2013


Source: NBS

2.3
Actual and Seasonally Adjusted Headline Inflation
Except in April, seasonally adjusted inflation was higher than
the actual inflation rate in the first half of 2013, (Figure 2.5). The
development was traced to the spill-over effects of the flood in
the third and fourth quarters of 2012, which reduced food
availability and exerted upward pressure on domestic food
prices. In April, actual inflation was above the seasonally
adjusted inflation due to the spike in consumption expenditure
associated with the Muslim and Christian festivals which held
one after the other during the review period.

Figure 2.5
Actual and Seasonally Adjusted Headline Inflation
January 2013 – June 2013


Jan-13
Feb-13
Mar-13
Apr-13
May-13
Jun-13
Rate(%)
CPI Components' Contribution to Core Inflation
Core
Housing, Water, Electricity, Gas & Other fuel
Transport
Furnishings, Household Equip. & HH Maint.
Education


CBN Monetary Policy Review

2.4
Key Factors that Influenced the Domestic Price
Developments
The year-on-year headline inflation which stood at 12.0 per
cent at end-December, 2012 declined to 9.0, 8.6 and further to
8.4 per cent in January, March and June 2013, respectively.
Thus, the inflationary pressure which prevailed in the second
half of 2012, moderated in the first half of 2013. The major
factors that mitigated the inflationary pressure during the
period were demand-pull and cost-push.

2.4.1
Demand-Pull Factors
The moderation in inflation during the review period was in part
the result of the tight monetary policy stance. In particular, the
monetary policy rate and CRR were each unchanged at 12.0
per cent. The Bank also retained the foreign exchange net
open position (NOP) for DMBs at 1 per cent. To complement
the tight monetary policy stance, fiscal policy through a delay
in signing the 2013 Federal Government budget into law,
curtailed capital budget releases during the period under
review, thereby helping the overall monetary policy stance by
moderating growth in money supply.

The Fiscal Authorities also suspended regular augmentation of
current revenue receipts from the Excess Crude Account. This
helped to slowdown public sector spending as well as reduced
the availability of funds in the banking system.

The slow recovery in advanced economies, despite monetary
easing operations in the United States, the United Kingdom, the
Euro area and Japan helped to ensure that global inflation
remained subdued. The combination of subdued global
inflation and domestic exchange rate stability minimized the
effect of imported inflation on the domestic economy.


...the Central
Bank continued
rigorous liquidity
mopping up
exercises through
Open Market
Operations
(OMO), thereby
limiting credit
creation
opportunities


CBN Monetary Policy Review

Figure 2.6
Bonny Light Crude Oil Price
June 2012 – June 2013


Source: Bloomberg

2.4.2. Cost-Push Factors
Improvement in the supply of electricity and petroleum
products nation-wide contributed to reduction in production
cost in the manufacturing, wholesale and retail, agricultural
and service sectors of the economy. A number of federal
roads were rehabilitated while new ones were also initiated,
which generally reduced transport costs across the country
and improved agricultural as well as general goods supply. In
the first quarter of 2013, the government intensified security
measures including the declaration of a state of emergency in
three north eastern States. The demand by labour for public
sector wage increases was successfully contained.

The Bank’s consumer protection programme resulted in a
reduction in bank charges following the release of the new
Banking Tariff, while its foreign exchange market interventions
kept the exchange rate stable enough for producers to make
meaningful medium-to long-term production plans.

By these policy actions, economic costs have been benign,
thereby contributing to the overall moderation in inflation
during the period.


Price (US $ per barrel)
Oil Price (Bonny Light) (Jun 2012-Jun. 2013)


CBN Monetary Policy Review

2.4.3
Moderating Factors
Major factors that accounted for moderation in inflation were
the lowering of transportation and manufacturing processing
costs occasioned by improved fuel and electricity supply. From
the beginning of the year, the Federal Government continued
the process of transfer of power generation and distribution
assets to the private sector. The reform in the power sector
improved investor confidence and business outlook despite
the upward adjustment in tariff during the period. In the same
vein, there were improvements in road construction, including
reconstruction and rehabilitation of roads and bridges to
improve the road network across the country. Access to some
regions, cut off by the 2012 flood, was restored in several
industrial and agricultural production zones.

Volatility in oil prices moderated during the period and it
remained well above the budget benchmark price of US$79
per barrel. However, there were production and export
shortfalls due to oil theft and pipeline vandalism which led to
occasional sharing of moneys drawn from the Excess Crude
Account by the Federal, States and Local Governments to
meet fiscal revenue gaps. In addition, the government
continued to express commitment to its policy of reducing the
fiscal deficit in the 2013 budget. This improved investor
confidence and helped to lock-in inflationary expectations.

Given developments in the global and domestic economies
during the review period, the Monetary Policy Committee
(MPC) held three meetings, which took place in January,
March and May 2013, and retained the MPR at 12.0 per cent,
CRR at 12.0 per cent and foreign exchange Net Open Position
(NOP) at 1.0 per cent. Apart from controlling inflation, these
policy measures were aimed at sustaining the stability of the
naira exchange rate and building-up external reserves.

The credibility of monetary policy during the review period
boosted confidence in the capital market, engendered
capital inflows and strengthened foreign exchange reserves
buffer against future shocks. In addition, the decision of the
MPC to keep monetary policy rate unchanged during the
review period, not only helped all the measures work through
...the
government
continued the
process of
transfer of power
generation and
distribution to the
private sector
which has
elicited
confidence in
the business
outlook.
...credibility of
monetary policy
during the period
triggered a rally
in the capital
market, allowed
for capital
inflows and
accumulation of
foreign
exchange
reserves...


CBN Monetary Policy Review

the system, but also ensured macroeconomic stability.
Consequently, the domestic financial market remained
generally stable in the first half of 2013.


Box 1
Impact of Global Shale Oil Production on Nigeria

The US for a long time was the major importer of Nigerian crude oil,
accounting for 40 per cent of the country’s exports. However this has
changed as the Energy Intelligence Agency (EIA) of the United States
reported significant declines in oil imports from Nigeria. From January 2011
to January 2012, US crude oil imports from Nigeria fell by 54 per cent from
968,000 to 449,000 barrels per day. Apart from the overt policy of reducing
energy dependency, the US has increased domestic oil output through
new drilling techniques including hydraulic fracturing, which have
produced oil and gas from shale and tar sand. Total US oil output is
expected to reach 7.75 million barrels a day by the end of 2013 and 8.09
million in 2014. This development has made the US the world’s largest
exporter of refined fuels including gasoline and diesel. In March 2013,
according to the EIA, the US met 89 per cent of its own energy needs from
domestic sources.

Importantly, shale oil has been found in Russia, China and the Middle East.
Increasing oil supply from shale and an uncertain global growth outlook will
likely keep oil prices trading in a relatively narrow range. The boom in shale
oil has cut global dependence on OPEC oil even as global demand is
increasing.

For Nigeria, there is the additional concern of new oil finds in Africa; in
Ghana, Uganda and Chad, which will compete with Nigeria as source but
without the political upheaval and violence associated with the Niger Delta
where Nigeria’s oil is produced. As oil export is the dominant source of
public sector revenue and the country’s foreign exchange, the emergence
of shale oil and gas is a threat to the macroeconomic stability of Nigeria.
Experts say that according to current knowledge, only if crude oil price falls
below US$80/bbl will shale oil production become uneconomic. That price
is only $5.00 above the 2013 budget benchmark of oil price.

In summary, production of oil from shale by developed countries and new
crude oil producing countries, constitute downside threat to inflation,
foreign exchange stability, accretion to foreign reserves and fiscal
sustainability. Drastic decline in foreign exchange inflow will reduce
monetary growth and threaten banking system stability. What is required to
mitigate these challenges is to increase fiscal discipline, diversify the
economic and export base with policies that facilitate growth in industries
like agriculture, mining, tourism and manufacturing and increase internally
generated revenue by raising the tax base. It also calls for early
disengagement of oil revenue from direct public sector finance through a
large scale operationalisation of credible Sovereign Wealth Fund
mechanism as is the case of the Netherlands, Norway and Kuwait, for
example.


CBN Monetary Policy Review

CBN Monetary Policy Review

CHAPTER 3
MONETARY POLICY

Globally, the monetary policy environment in the first half of
2013 was easy, reflecting benign inflationary pressures linked to
slow growth and financial market weaknesses in the advanced
economies as well as lower-than-expected growth in the large
emerging and developing economies. Nonetheless, the
Monetary Policy Committee (MPC) continued with the tight
monetary policy stance that commenced in October 2011 to
rein in liquidity in the domestic money market and stabilise the
exchange rate of the naira.

3.1
The Monetary Policy Environment in the Review Period
3.1.1
International
The global economy remained subdued characterised by
uncertainty and contraction in the Euro zone and Japan,
including lower than expected growth in the large emerging
and developing economies. Although the partial resolution of
the Fiscal Cliff in the US offered some hope for gradual
economic recovery by staving off of automatic tax increases
and expenditure cuts on 1st January, 2013, the robust
prospects for energy independence of the US and the likely
downside risk for global oil prices in the medium- to long-term
might threaten fiscal sustainability in many oil-dependent
economies around the world.

3.1.2
Domestic
Developments in the domestic economy reflected some new
threats notably, the significant decline in the demand for oil,
leading to a fall in oil prices and government revenues,
pressure on the exchange rate and decline in external reserves
level. There were additional threats concerning the low level of
credit growth to the private sector and the risk to the inflation
objective from the oil price benchmark for the 2013 budget,
which was increased from US$75 to US$79.

3.2.
Highlights of Monetary Policy Measures
The monetary policy stance of the Bank remained restrictive
during the first half of 2013 with the MPR retained at 12.0 per
...Monetary
Policy
Committee
(MPC) continued
with the tight
monetary policy
stance to rein in
liquidity in the
domestic money
market and
stabilize the
exchange rate
of the naira.


CBN Monetary Policy Review

cent. The CRR which was raised at the MPC meeting of July
2012, from 8.0 to 12.0 per cent was maintained at that rate
throughout the review period. Similarly, the foreign exchange
NOP, which was reduced to 1.0 per cent from 3.0 per cent at
the same July 2012 MPC meeting, was retained. In addition,
the
mid-point
of
the
exchange
rate
remained
at
N155.00/US$1.00 with the band of +/- 3.0 per cent in order to
sustain the stability of the domestic currency, attract foreign
investments, and build-up external reserves.

The sustained tight monetary policy stance was informed by
the need to stabilise the exchange rate; mitigate inflationary
risks from increased
sub-national government spending
(through borrowing from DMBs and the capital market) and
high recurrent expenditure in the 2013 Federal Government
budget.

3.3
Decisions of the Monetary Policy Committee
Uncertainties in the international and domestic economic
environment shaped the MPC decisions in the first half of 2013.
The key challenges were the continued international financial
market fragility and threats of fiscal weakness, sluggish global
economic recovery, less than expected domestic growth
performance, inflation expectation, high unemployment and
possible speculative attack on the naira.

3.3.1
January 2013 MPC Meeting
The MPC at its January 2013 meeting faced three policy
choices. The first was an increase in the MPR to tame the
inflationary pressure observed up to December 2012 as well as
neutralise the effect of higher crude oil price benchmark for
fiscal 2013. Given the double digit rate of headline inflation
that averaged 12.24 per cent in 2012, the MPR of 12.0 per cent
was judged to be about right. The second was a reduction in
MPR in view of the declining GDP growth trajectory and the
upward trend in headline inflation. The third policy option was
to retain the current monetary policy stance to address
conflicting price signals, global uncertainties and preserve the
stability of the financial system. Other uncertainties were
increased sub-national government spending, the expected
high Federal Government expenditure in 2013 and the looming


CBN Monetary Policy Review

US debt ceiling crisis with possible impact on commodity
prices.

Given these uncertainties, the Committee decided that it was
prudent to maintain the prevailing stance and monitor
developments until the March 2013 MPC meeting. It therefore
retained the MPR at 12 per cent with symmetric corridor of +/-
200 basis points. The CRR was raised to 12.0 per cent from 8 per
cent and the MOP was reduced to 1.0 per cent from 3 per
cent, to contain excess liquidity conditions in the banking
system, and address speculative attacks on the Naira.

3.3.2
March 2013 MPC Meeting
At the March 2013 meeting, the Committee was encouraged
by signs of macroeconomic stability from both the external
and domestic environments. However, the Committee took
note of risks related to the mixed price signals reflecting base
effect of the first and second round impacts of the partial fuel
subsidy removal in January 2012, as well as the declining yield
on FGN bonds partly traced to the quantitative easing
measures in the US and the EU. The MPC again considered
three policy options. First, it examined the option of an increase
in rates in response to the uptick in headline and food inflation
as well as pressure on the exchange rate, but rejected the
option because there were no major inflationary concerns at
the time. The second option of reducing the rates in the light of
declining core inflation and GDP growth was also dropped to
avoid sending wrong signals of a premature termination of the
tightening cycle. The Committee, therefore, decided in favour
of retaining the existing tight monetary policy stance to sustain
the gains already achieved. Accordingly, the decisions were
to retain the MPR at 12.0 per cent with a corridor of +/- 200
basis points; retain the CRR at 12.0 per cent and the liquidity
ratio at 30.0 per cent with the Net Open Position at 1.0 per
cent.

3.3.3
May 2013 MPC Meeting
At the May 2013 meeting, the Committee observed the main
areas of concern to include the threat in the oil-sector notably
the uncertain oil market environment, high output leakages,
the low level of credit to the private sector and declining yields
...the Committee
was encouraged
by signs of
macroeconomic
stability from
both external
and domestic
environment.
...moderation in
all measures of
inflation on
month-on-month
basis, stable
banking system
and exchange
rate and robust
external reserves.


CBN Monetary Policy Review

on FGN bonds. The Committee, however, noted with
satisfaction the emerging and prevailing macroeconomic
stability — moderation in all measures of inflation on month-onmonth basis, stable banking system and exchange rate and
robust
external
reserves.
In
these
circumstances,
the
Committee emphasised the importance of sustaining the
declining core inflation, stable exchange rate and relative
accretion to reserves. The option of reducing the MPR,
considering the potential risk factors associated with increasing
fiscal expenditure in the short- to medium-term, was rejected
by the Committee because it that could possibly result in a
resurgence
of
inflationary
pressures.
Consequently,
the
prevailing monetary policy stance was retained to sustain the
macroeconomic gains of tight monetary policy and to
continue to rein in inflationary expectations. Accordingly, the
Committee voted to retain the MPR at 12 per cent with a
corridor of +/- 200 basis points; retained the CRR at 12 per cent
and the Liquidity Ratio at 30 per cent with the Net Open
Position at 1.0 per cent (Table 3.1).

Table 3.1
MPC Decisions, January – May, 2013

Items
January
March
May
MPR
Retain the MPR at
12%
Retain the MPR
at 12%
Retain the MPR
at 12%
MPR Corridor
Maintain +/- 200
basis points
Maintain +/- 200
basis points
Maintain +/- 200
basis points
SDF Rate
Maintain at 10%
Maintain at 10%
Maintain at 10%
SLF Rate
Maintain at 14%
Maintain at 14%
Maintain at 14%
CRR
Raise to 12% from
8%
Retain at 12%
Retain at 12%
LR
Retain at 30%
Retain at 30%
Retain at 30%
NOP
Reduce to 1%
from 3%
Retain at 1%
Retain at 1%
FX
Rate
Mid–
Point
Retain at
N155/US$1
Retain at
N155/US$1
Retain at
N155/US$1
FX Band
Maintain +/-3 per
cent band
Maintain +/-3
per cent band
Maintain +/-3
per cent band
Considering that
the potential
output gain from
monetary easing
may not be
sufficient to
overturn the long
term implications
of sending a
wrong signal....


CBN Monetary Policy Review

3.4
Monetary Policy Instruments
In furtherance of the price stability objective and the need to
create an environment conducive to local and international
investment, the MPC deployed the MPR complemented by
CRR and employed Open Market Operations (OMO) and
Discount Window Operations in the review period. The choice
was guided by the need to rein in excess liquidity, sustain the
goal of price stability and the generally favourable domestic
macroeconomic environment.

3.4.1
Monetary Policy Rate (MPR)
The MPR, the Bank’s benchmark policy rate, remained the
major signalling instrument for monetary policy complemented
by interest rate corridor (standing lending/deposit facility
rates). The Committee kept the MPR unchanged at 12.0 per
cent with a symmetric band of +/- 200 basis points during the
three regular meetings held in the first half of 2013.

3.4.2
Open Market Operations (OMO)
Open Market Operations (OMO) remained the major tool of
liquidity management in the review period. CBN Bills were the
main securities for OMO transactions during the period, with
total amount of N10,020.00 billion offered, while subscription
was N11,532.75 billion. Actual sales, however, amounted to N7,
099.54 billion in the first half of 2013, compared with N2,795.58
billion in the second half of 2012 and N1,717.35 billion in the
corresponding period of 2012. This represented an increase of
313.40 and 153.95 per cent, respectively (Table 3.2). The
increase in OMO sales was attributed to the impact of
monetisation of AMCON bonds, attractive long-dated bills.
Public subscription and sales in the review period were
remarkably higher than the corresponding period of the
preceding year due to high liquidity and attractive yields.

3.4.3
Reserve Requirements
The Bank retained the use of reserve requirements (Cash
Reserve and liquidity ratios) in the review period to
complement
OMO
and
other
instruments
of
liquidity
management. The Cash Reserve Ratio was retained at 12.0
per cent, and the Liquidity Ratio was unchanged at 30.0 per
cent in the first half of 2013. The retention of the CRR was
Increase in OMO
sales was
attributed to the
impact of
monetization of
AMCON bonds


CBN Monetary Policy Review

against the background of the relative liquidity surfeit in the
banking system.

Table 3.2
OMO Bills Auction (N million) January 2009 – December 2012

Date

%
Change
over the
Previous
Period
Jan


Feb


Mar


Apr


May


Jun


1st Half

Jul


Aug


Sep


Oct


Nov


Dec


2nd Half


153.95


Cumulative
Figure


3.5
Standing Facilities
In the first half of 2013, the DMBs and Discount Houses (DH)
actively accessed the standing facilities (lending/ deposit) to
meet their daily liquidity requirements. However, there was a
reduction in the cumulative volume of transactions at the CBN
standing lending facility (SLF) window. Requests for SLF
amounted to N5,248.70 billion compared with N7,733.53 billion
in the second half of 2012. The volume of SLF at end-June 2013
represented a decrease of 51.04 and 32.13 per cent
compared with the levels in the first half and the second half of
2012, respectively (Table 3.3). The significant decrease in the
volume of SLF transactions in the first half of 2013 was attributed
to improvement in liquidity conditions in the banking system
Requests for SLF
amounted to
N5,248.70 billion
compared with
N7,733.53 billion
in the second half
of 2012 and
N10,721.44 billion
in the
corresponding
period of 2012


CBN Monetary Policy Review

largely driven by AMCON injections, and repayments of
matured FGN bonds and CBN securities.

Table 3.3
CBN Standing Lending Facility (N'billion)
(January 2009- June 2013)

Date

% change
over
the
preceding/c
orresponding
period
Jan

Feb

Mar

Apr

May

Jun

1st
Half

Jul


Aug


Sep


Oct


Nov


Dec


2nd
Half


Total


There was, however, a significant increase in the cumulative
volume of transactions at the CBN Standing Deposit Facility
(SDF) window in the review period. The cumulative volume of
SDF stood at N17, 484.789 billion in the first half of 2013,
compared with N9, 885.25 billion in the second half of 2012
and N3,727.96 billion in the corresponding period of 2012. The
level of SDF as at end-June 2013 represented 369.02 and
165.17 per cent increases over the levels in the corresponding
period of 2012 and the second half of 2012, respectively (Table
3.4). The observed increase in the use of the SDF window was a
reflection of increased system wide liquidity in the review


CBN Monetary Policy Review

period, compared with the corresponding period of 2012.
Another factor was the remuneration of part of the facility
after October 2011, when the reserve averaging scheme was
suspended in favour of daily maintenance of CRR.

Table 3.4
CBN Standing Deposit Facility (N billion)
(January 2009- June 2013)

Date

% change
over
the
preceding
/correspon
ding
period
Jan

Feb

Mar

Apr
-
6,853.06
49.65

2,817.00
(53.83)
May
-
1,735.45

1,242.50
1,718.53
(38.99)
Jun

1st
Half

Jul

4,055.52
-
294.95


Aug


Sep


Oct


Nov


Dec


2nd
Half


Total


3.6
Foreign Exchange Intervention
Intervention in the foreign exchange market remained a major
policy tool employed by the Bank in sustaining the stability of
the Naira. In the first half of 2013, the total supply of foreign
exchange by the Bank was US$12,974.65 million compared
with US$10,756.78 million and US$14,184.24 million in the second
half and the corresponding period of 2012, respectively (Table
3.5). There was an increase in total supply compared with the
.
Decline in
demand
reflected more
stringent
documentation
and close
monitoring of the
foreign
exchange
market


CBN Monetary Policy Review

level in the preceding half-year, but a decrease relative to the
corresponding period of 2012. The decline in supply reflected
more stringent documentation and close monitoring of the
foreign exchange market by the Bank in the review period.
These
measures
were
complemented
by
increased
autonomous foreign exchange inflows (Box 2) due to
favourable crude oil price as well as increased private capital
inflow attracted by the relatively high rate of returns on the
domestic, vis-à-vis, the global financial markets.

Table 3.5
Foreign Exchange Supply by the CBN US$ million

Year

Total
wDAS
sales
Sales
to BDC
Total
Supply
(wDAS
+
BDC)
Sales
to
wDAS
Sales
to BDC
Total
Supply
(wDAS
+ BDC)
Sales
to
wDAS
Sales
to BDC
Total
Supply
(wDAS
+ BDC)
Jan

Feb

Mar

Apr

May

Jun

1st Half

Jul

Aug

Sep

Oct

Nov

Dec

2nd Half

Total


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3.7
Performance of the Monetary Aggregates
The sluggish growth in monetary aggregates continued in the
first half of 2013 owing partly to the maintenance of tight
monetary policy by the Bank and the preference of DMBs to
Box 2
MANAGING CAPITAL FLOWS IN NIGERIA

Capital flows across borders either as foreign direct or portfolio investments.
Financial globalisation provided impetus for increased capital flows around
the world basically in search of higher returns and safe investments. Capital
flows are desired for a number of reasons including bridging investment
resource gaps, especially in capital constrained economies; providing
opportunities for returns in high interest-yielding countries and the search for
safe tax heavens for capital in flight, among others. However, massive
capital inflow can also create problems for recipient countries by creating
liquidity surge that come from excessive bank lending, excessive
investments, speculative activities that create asset bubbles, induced
inflation spirals and macroeconomic instability in the case of sudden
reversals. In response, many countries adopt countercyclical policies such
as capital controls, sterilisation, fiscal consolidation, growth balancing and
other macroeconomic policies to hedge against the negative effects of
massive inflows and the risk associated with a sudden reversal.

In Nigeria, after the global financial crisis, capital flows have resumed on a
phenomenal scale. The World Bank estimates that net capital inflow into
sub-Saharan Africa as a whole could double from $43.4 billion in 2008 to
$86.1 billion in 2015. Nigeria recorded $9.1 billion aggregate capital inflow
including foreign direct and portfolio investment in the fourth quarter of
2012, indicating an increase of 6.53 per cent and 116.84 per cent from the
levels recorded in the third quarter of 2012 and the last quarter of 2011,
respectively. In the first quarter of 2013, capital inflows into Nigeria
amounted to $1.29 billion as against $6.82 billion in the corresponding
period of 2012. A number of factors explain the huge capital flows into
Nigeria. They include relatively high return on portfolio investment, stable
macroeconomic environment, robust outlook for oil prices and output,
enlistment in the JP Morgan Bond Index and a healthy foreign reserve
buffer that continue to buoy confidence of global investors on the ability of
the economy to withstand domestic and external shocks.

In order to ensure that current capital inflow build up does not undermine
macroeconomic stability, Nigeria introduced a number of strategies. The
first is sterilisation of capital inflows with the potential to negatively impact
on domestic liquidity by the Central Bank of Nigeria. The second approach
is to control the quantum of off-shore credit lines open to DMBs and lastly a
stand-by arrangement to invoke capital controls if the need arises.
However, an attempt was made in the past to introduce capital controls
such as the introduction of a time cap on divestment and profit
repatriation but was dropped because of the mixed signal the policy sent
to international investors. More importantly, the monetary authorities keep
vigil over the growth and relative size of capital inflows (hot money) as a
percentage of total foreign reserves. This approach is intended to alert
monetary policy authorities when to introduce proactive counter cyclical
monetary policy measures to mitigate the negative impact of imminent
sudden capital outflow on the economy.


CBN Monetary Policy Review

lend to the public sector by buying treasury instruments rather
than extend credit to the private sector.

Broad money stock (M2) grew by 0.71 per cent to N15,593.26
billion as at end-June 2013 from N15,483.85 billion at endDecember 2012 (Table 3.6). This translated to an annualised
growth rate of 1.42 per cent, compared with 2.7 per cent in
the corresponding period of 2012 and the benchmark of 15.20
per cent for end-December 2013. On year-on-year basis, M2
rose by 15.65 per cent at end-June 2013, compared with 8.10
per cent in the corresponding period of 2012.

Narrow money (M1) declined by 6.49 per cent to N6,939.63
billion at end-June 2013 from N7,420.95 billion at endDecember 2012. On annualised basis, M1 dropped by 12.98
per cent at end-June 2013, compared with a decline of 5.08
per cent in the corresponding period of 2012 and the
benchmark growth of 17.44 per cent for end-December 2013.

Reserve Money (RM) declined by 12.64 per cent to N3,236.15
billion at end-June 2013 from N3,704.48 billion at endDecember 2012. The end-June 2013 RM level was 13.56 per
cent (N507.82 billion) less than the benchmark of N3,743.97
billion for the second quarter of 2013


CBN Monetary Policy Review

Table 3.6
Performance of Monetary Aggregates (H1: 2012 and 2013)

Monetary
Aggregate

Change over
Preceding
December

Bench-
mark
Actual
end-June
(H1:
2012)
Deviation
(Actual –
Benchmark)
Bench-
-mark
Actual
end- June
(H1:
2013))
Deviation
(Actual –
Benchma
rk)
H1:

H1:

M2 (N’b)
16577.5


M2 (%)

M1(N’b)
9,117.6


M1 (%)

RM (N’b)
2,726.1


RM (%)

NDC (N’b)
18,873.


NDC (%)

Cg (N’b)
-204.66
-1,133.63
-928.97


Cg (%)

Cp (N’b)
19,078.


Cp (%)

NFA (N’b)
7,654.5


NFA (%)


Figure 3.1
The Performance of M2, M1 and RM (H1: 2011 - 2013)
-15
-10
-5

M2(%)
M1(%)
RM(%)
M2(%)
M1(%)
RM(%)
M2(%)
M1(%)
RM(%)
H:2011
H1:2012
H1:2013
Benchmark
Actual


Aggregate net domestic credit (NDC) grew by 4.7 per cent to
N13,294.51 billion at end-June 2013 from N12,698.21 billion at
end-December 2012. When annualised, NDC grew by 9.4 per
The FGN
continued to be
a net creditor to
the banking
system


CBN Monetary Policy Review

cent at end-June 2013, compared with 1.74 per cent decline
in the corresponding period of 2012 and the benchmark of
23.58 per cent for end-December 2013. The low performance
was partly due to FGN’s reliance on public financing through
issuance of bonds.

Net Credit to Government (Cg) declined by 2.28 per cent to
stand at N2,397.52 billion at end-June 2013 from N2,453.56
billion at end-December 2012. When annualised, Cg dropped
by 4.56 per cent, compared with the decline of 256.52 per
cent in the corresponding period of 2012 and the indicative
benchmark of 44.22 per cent for end-December 2013. Thus,
the FGN continued to be a net creditor to the banking system
during the review period.

Figure 3.2
The Performance of NDC, Cg and Cp (H1: 2011 – 2013)


NDC(%)
Cg (%)
Cp (%)
NDC(%)
Cg (%)
Cp (%)
NDC(%)
Cg (%)
Cp (%)
H1:2011
H1:2012
H1:2013
Benchmark
Actual


Credit to the private sector (Cp) rose by 3.57 per cent to
N15,692.03 billion at end-June 2013 from N15,151.76 billion at
end-December 2012. On annualised basis, Cp grew by 7.14
per cent at end –June 2013, compared with 7.30 per cent
growth in the corresponding period of 2012 and the
benchmark of 17.52 per cent for end December, 2013.

Net foreign assets (NFA) declined by 0.30 per cent to N9,016.99
billion at end-June 2013 from N9,043.68 billion at endDecember 2012. When annualised, NFA dropped by 0.6 per
The year-on-year
growth in
Aggregate
Domestic Credit
was 1.98 per
cent, which was
far below the
benchmark of


CBN Monetary Policy Review

cent at end-June 2013, as against 10.74 per cent growth in the
corresponding period of 2012 and the benchmark of 16.78 per
cent growth for end-December 2013.


CBN Monetary Policy Review

CHAPTER 4
DOMESTIC FINANCIAL MARKETS

4.1
Money Market
The money market remained robust in the first half of 2013 with
government securities and CBN OMO bills being actively
traded. Money market activities were influenced largely by
liquidity conditions and the implementation of administrative
measures such as the prohibition of concurrent dealings in
wDAS and the Bank’s standing lending facility. Interbank
interest rates remained largely locked-in within the corridor of
+/- 200 basis points around the MPR of 12 per cent. However,
occasional spikes were observed, particularly during periods of
temporary liquidity shortfalls.

4.1.1
Developments in Short-Term Interest Rates
Stabilising short-term interest rates around the policy rate
remained a challenge for monetary management. This was
because
the
monthly
distribution
of
federally-collected
revenue among the three tiers of government created systemwide liquidity swings in short-term interest rates (Figure 4.1). The
average interbank call rate ranged from 10.39 to 12.23 per
cent, while the open buy back (OBB) rate ranged between
10.30 and 11.99 per cent in the first half of 2013.

Table 4.1
Weighted Average Money Market Interest Rates (%)
(December 2012 – June 2013)

Month
Monetary
Policy
Rate
Overnight Interest
Rates
Tenored
Interbank
Call Rate
OpenBuy-Back
NIBOR 30Day
Dec-12

Jan-13

Feb-13

Mar-13

Apr-13

May-13

Jun-13

Administrative
measures like
prohibition of
concurrent
dealings in wDAS
and the Bank’s
standing lending
facility


CBN Monetary Policy Review

Figure 4.1
Weighted Average Money Market Interest Rates (%)
(December 2012 – June 2013)


(i)
Interbank Call Interest Rate
The average (weighted) interbank call rate declined from
11.88 per cent in December 2012 to 11.59 per cent in June
2013. During the intervening months, the rate however, rose to
11.98 and 12.23 per cent, respectively in February and May,
2013. Over the entire first half of 2013, interbank rate declined
by approximately 29 basis points compared to a decrease of
304 basis points between June and December 2012. On yearon-year basis, the weighted average interbank (call) rate
declined by approximately 333 basis points (Figure 4.2).

Dec-12
Jan-13
Feb-13
Mar-13
Apr-13
May-13
Jun-13
%
Weighted Average Money Market Interest Rates
Monetary Policy Rate
Interbank Call Rate
Open-Buy-Back
NIBOR 7-Day
NIBOR 30-Day


CBN Monetary Policy Review

Figure 4.2
Daily Interbank Call Rates (%)
(December 2012 – June 2013)


Per Cent
Daily Interbank Call Rates


(ii) Open Buy-Back Rate
The average (weighted) open buy back (OBB) rate declined
from 11.73 per cent in December 2012 to 10.30 per cent in
March 2013, and further declined to 11.19 per cent in June
2013. Over the first half of 2013, the OBB rate declined by
approximately 40 basis points compared with a decline of 314
points between June and December 2012. On year-on-year
basis the average OBB rate declined by approximately 300
basis points (Figure 4.3).

Figure 4.3
Daily Open Buy Back (OBB) Rates (%)
(December 2012 – June 2013)


Per Cent
Daily OBB Rates


The general
decline in shortterm rates in the
period under
review was
primarily due to
easing liquidity
conditions partly
engendered by
OMO bills
maturities and
fiscal operations
of government


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(iii) Nigeria Interbank Offered Rate (NIBOR)
NIBOR, the traditional reference rate for tenured transactions,
remained relatively stable in the review period. The average
weighted 30-day NIBOR, which was 16.04 per cent in June 2012
moderated to 12.96 per cent in December 2012, and further to
11.0 per cent at the end of the first half of 2013 (Figure 4.1).

The general decline in short-term rates in the period under
review was primarily due to liquidity easing conditions partly
engendered by OMO bills maturities and injections through
government fiscal operations.

4.2
The Foreign Exchange Market
The
thrust
of
foreign
exchange
policy
remained
the
maintenance of a stable exchange rate of the naira. In the
period under review, the Bank’s interventions in the market was
aimed at stabilising the exchange rate around N155/US$ with a
band of +/- 3 per cent. The period witnessed increased
demand pressure which peaked in June, attributed to
seasonal factors and slowdown in capital inflow, following hints
of possible moderation of the US Fed’s third round of
Quantitative Easing. This pushed the exchange rate slightly
higher than was observed early in the period.

Figure 4.4
Daily Exchange Rate (December 2012 – June 2013)


Exch. Rate ( N/US$)
Daily Foreign Exchange Rates Naira/US$


The Bank’s
interventions in
the market was
aimed at
stabilizing the
exchange rate
around N155/US$
with a band of
+/- 3 per cent


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4.2.1
Average Exchange Rate
The wDAS spot rate appreciated mildly to an average of
N157.30/US$ in the first half of 2013 from N157.35/US$ in the
second half of 2012 and N157.65/US$ in the corresponding
period of 2012. This represented appreciation of 0.03 and 0.22
per cent respectively.

At the interbank foreign exchange market (IFEM), the naira
exchange rate averaged N158.18/US$ in the first half of 2013
compared with N158.37/US$ in the second half of 2012,
representing an appreciation of 0.12 per cent. Similarly, relative
to N159.31/US$ in the first half of 2012, the exchange rate at
the interbank market appreciated by 0.7 per cent. The rate at
the BDC segment averaged N159.66/US$ in the first half of 2013
compared with N160.49/US$ in the preceeding period and
N161.23/US$ in the first half of 2012. This represented
appreciations of 0.5 and 0.9 per cent, respectively.

The appreciation in rates across all segments of the foreign
exchange market was attributed to increased supply, more
effective official interventions and administrative measures
aimed at curtailing speculative demand (Table 4.2).

4.2.2
End-Period Exchange Rate
The naira appreciated in all segments of the foreigh exchange
market at end-June 2013. At the wDAS, the naira appreciated
by 0.012 per cent to N157.31/US$ from N157.33/US$ at endDecember
2012.
On
year-on-year
basis,
the
naira
appreciated by approximately the same magnitude (0.012 per
cent) at end-June 2013 (Table 4.3).

At the interbank segment, the naira exchange rate rose to
N162.60/US$ from N157.25/US$ at end-December 2012,
representing a depreciation of 3.2 per cent. However, relative
to the end-June 2012 level of N162.85/US$, the naira
appreciated marginally by about N0.25k. At the BDC segment,
the naira depreciated by approximately 1.9 per cent to
N162.00/US$ at end-June 2013, from N159.00/US$ at endDecember 2012. Relative to the end-June 2012 level of
N164.00/US$, the exchange rate of the naira at the BDC
segment, however, appreciated by 1.2 per cent (Figure 4.5).
...appreciation in
rates across all
the segments of
the foreign
exchange market
was attributed to
increased
supply...


CBN Monetary Policy Review

Table 4.2
Average Monthly Spot Exchange Rates (N/US$):
January 2012 – June 2013


CBN
IFEM
BDC
Jan 2012
158.39
161.31
164.62
Feb 2012
157.87
158.59
160.85
Mar 2012
157.59
157.72
159.41
Apr 2012
157.33
157.44
159.37
May 2012
157.28
158.46
159.67
Jun 2012
157.44
162.33
163.43
2012: H1
Average
157.65
159.31
161.23
Jul 2012
157.43
161.33
163.32
Aug 2012
157.38
158.97
162.24
Sep 2012
157.34
157.78
159.8
Oct 2012
157.32
157.24
159.00
Nov 2012
157.31
157.58
159.32
Dec 2012
157.32
157.33
159.26
2012: H2
Average
157.35
158.37
160.49

Average
157.5
158.84
160.86
Jan 2013
157.30
156.95
159.13
Feb 2013
157.30
157.50
158.68
Mar 2013
157.31
158.37
159.80
Apr 2013
157.31
158.20
159.81
May 2013
157.30
158.02
159.57
Jun 2013
157.31
160.02
160.98
2013: H1
Average
157.30
158.18
159.66


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Figure 4.5
End-Month Exchange Rate (January 2012 – June 2013)

Jan-12
Feb-12
Mar-12
Apr-12
May-12
Jun-12
Jul-12
Aug-12
Sep-12
Oct-12
Nov-12
Dec-12
Jan-13
Feb-13
Mar-13
Apr-13
May-13
Jun-13
US$/N
End-Month Exchange Rate of the Naira
CBN
IFEM
BDC


Table 4.3
End-Month Exchange Rates Movements, January 2012 – June 2013
(N/US$)


CBN
IFEM
BDC
Jan 2012
158.62
161.16
163.00
Feb 2012
157.46
157.75
159.00
Mar 2012
157.57
157.72
159.00
Apr 2012
157.26
157.40
159.00
May 2012
157.31
159.85
162.00
Jun 2012
157.50
162.85
164.00
Jul 2012
157.40
160.75
164.00
Aug 2012
157.36
158.17
161.00
Sep 2012
157.34
157.24
159.00
Oct 2012
157.27
157.06
159.00
Nov 2012
152.32
157.40
159.00
Dec 2012
157.33
157.25
159.00
Jan 2013
157.30
157.20
159.00
Feb 2013
157.31
158.05
158.50
Mar 2013
157.31
158.63
160.00
Apr 2013
157.31
157.90
160.00
May 2013
157.30
158.10
159.50
Jun 2013
157.31
162.60
162.00


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4.2.3
Nominal and Real Effective Exchange Rate
The
Nominal
Effective
Exchange
Rate
(NEER)
index
appreciated by 1.7 per cent to 96.41at end-June 2013 from
98.04 at end-December 2012. Relative to the end-June 2012
level of 98 per cent, the NEER appreciated by 1.6 per cent.
The Real Effective Exchange Rate (REER) index appreciated by
2.8 and 6.5 per cent to 74.49 at end-June 2013 from 76.65 at
end-December 2012, and 79.67 at end-June 2012, respectively
(Table 4.4 and Figure 4.6).

On the average, both the NEER and REER increased at endJune 2013, when compared with the level at end-December
2012, reflecting a real exchange rate appreciation relative to
the currencies of Nigeria’s major trading partners.

Table 4.4
Nominal and Real Effective Exchange Rates Indices
(January 2012 – June 2013)


NEER
REER
Jan 2012
101.69
84.38
Feb 2012
101.41
84.40
Mar 2012
100.29
82.84
Apr 2012
99.66
82.66
May 2012
97.78
80.53
Jun 2012
98.00
79.67
2012: H1 Average
99.81
82.41
Jul 2012
97.96
79.35
Aug 2012
97.90
78.89
Sep 2012
98.60
78.75
Oct 2012
98.16
77.80
Nov 2012
97.79
77.01
Dec 2012
98.04
76.65
2012: H2 Average
98.08
78.08
2012: Average
98.94
80.24
Jan 2013
98.99
77.88
Feb 2013
98.84
77.54
Mar 2013
98.62
76.56
Apr 2013
98.81
77.65
May 2013
97.23
75.53
Jun 2013
96.41
74.49
2013: H1 Average
98.15
76.60


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Figure 4.6
Nominal and Real Effective Exchange Rates Indices
(January 2012 – June 2013)

Index Points
Nominal and Real Effective Exchange Rates Indices
NEER
REER


4.2.4
Demand and Supply of Foreign Exchange
Total demand for foreign exchange at the wDAS in the review
period increased by 23.4 per cent to US$10,748.71 million from
US$8,705.60 million recorded in the second half of 2012. The
demand
for
foreign
exchange,
however,
moderated
marginally by 2.0 per cent, when compared with the
US$10,963.16 million demanded in the first half of 2012. The total
supply of foreign exchange at the wDAS in the first half of 2013
increased by 16.8 per cent to US$10,711.03 million compared
with US$9,170.00 million recorded in the second half of 2012. It,
nonetheless, moderated slightly relative to the level at endJune 2012 (Table 4.5 and Figure 4.7).

The stability in the exchange rate during the review period
reflected the effectiveness of policy measures (low Net Open
Position limit; increased Cash Reserve Requirements; restriction
on authorised dealers from accessing the CBN Standing
Lending Facility and wDAS concurrently); level of CBN market
interventions and autonomous inflows in the market.


CBN Monetary Policy Review

Table 4.5
Foreign Exchange Demand and Supply (US Dollar Million)


wDAS Demand
wDAS Supply
Jan 2012
2,134.00
1,640.65
Feb 2012
1,891.96
1,942.18
Mar 2012
1,426.45
1,452.75
Apr 2012
1,052.88
891.52
May 2012
1,681.26
1,487.00
Jun 2012
2,777.62
3,000.00
2012: H1 Total
10,964.17
10,414.10
Jul 2012
2,166.32
1,961.69
Aug 2012
1,645.41
1,842.91
Sep 2012
1,549.18
1,539.42
Oct 2012
1,112.89
1,051.00
Nov 2012
1,236.98
1,278.68
Dec 2012
993.81
990.34
2012: H2 Total
8,704.59
8,664.04
2012: Total
19,668.76
19,078.14
Jan 2013
836.39
833.50
Feb 2013
1,164.28
1,152.82
Mar 2013
1,911.29
1,901.54
Apr 2013
2,156.22
2,154.57
May 2013
2,019.20
2,318.70
Jun 2013
2,661.33
2,650.00
2013: H1 Total
10,748.71
10,711.13


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Figure 4.7
Demand and Supply of Foreign Exchange at wDAS
(January 2012 – June 2013)


4.2.5
Foreign Exchange Flows
4.2.5.1 Foreign Exchange Flows through the CBN
Gross foreign exchange inflow through the CBN declined by 9.7
per cent, to US$19,747.38 million in the first half of 2013, from
US$24,611.59 million in the second half of 2012. Relative to the
corresponding period of 2012, gross foreign exchange inflow
declined by 10.9 per cent from US$22,170.75 million. Foreign
exchange outflow rose by 18.8 per cent to US$18,813.70 million
in the first half of 2013 from US$15,835.23 million in the second
half of 2012. It, however, declined relative to the level of
US$19,355.44 million in the corresponding period of 2012 by 2.7
per cent.

During the period under review, foreign exchange flows
through the CBN resulted in a net inflow of US$933.77 million
compared with US$8,776.36 million and US$2,815.31million in the
second half and corresponding period of 2012, respectively
(Table 4.6).


...foreign
exchange
flows through
the CBN
resulted in a
net inflow of
US$933.77
million...


CBN Monetary Policy Review

Table 4.6
CBN Monthly Foreign Exchange Flows (US$ million)
(January 2012 – June 2013)


INFLOW
OUTFLOW
NET FLOW
Jan 2012
4,307.02
2,945.79
1,361.23
Feb 2012
3,546.16
3,902.26
-356.10
Mar 2012
4,266.63
2,912.41
1,354.22
Apr 2012
3,242.89
1,754.87
1,488.02
May 2012
3,627.10
3,256.98
370.12
Jun 2012
3,180.95
4,583.13
-1,402.18
2012: H1
22,170.75
19,355.44
2,815.31
Jul 2012
4,132.09
3,006.72
1,125.37
Aug 2012
5,953.41
2,796.59
3,156.82
Sep 2012
3,358.57
2,277.44
1,081.13
Oct 2012
3,576.35
1,960.37
1,615.98
Nov 2012
4,272.42
3,794.48
477.94
Dec 2012
3,318.75
1,999.63
1,319.12
2012: H2
24,611.59
15,835.23
8,776.36
2012 Total
46,782.34
35,190.67
11,591.67
Jan 2013
3,320.75
1,538.09
1,782.66
Feb 2013
3,681.07
2,103.40
1,577.67
Mar 2013
3,302.64
2,671.54
631.10
Apr 2013
3,238.83
3,369.37
-130.55
May 2013
3,095.50
3,233.67
-138.17
Jun 2013
3,108.60
5,897.63
-2,789.04
2013: H1
19,747.38
18,813.70
933.77

Figure 4.8
Foreign Exchange Flows Through the CBN (January 2012 – June 2013)


Jan-12
Feb-12
Mar-12
Apr-12
May-12
Jun-12
Jul-12
Aug-12
Sep-12
Oct-12
Nov-12
Dec-12
Jan-13
Feb-13
Mar-13
Apr-13
May-13
Jun-13
US$'Million
Foreign Exchange Flows
NET FLOW
INFLOW
OUTFLOW


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4.2.5.2 Foreign Exchange Flows through the Economy
Gross foreign exchange inflow into the economy rose to
US$72,277.13 million in the first half of 2013 from US$63,466.93
million in the second half of 2012, and US$55,548.08 million in the
first half of 2012 representing an increase of 13.8 and 30.1 per
cent, respectively. Gross foreign exchange outflow rose by
13.03 per cent to US$ 19,014.82 million from US$ 16,822.06 million
in the second half of 2012 but declined by 5.89 per cent when
compared to US$ 20,204.63 million in the corresponding period
of 2012.

During the first half of 2013, foreign exchange flows resulted in a
net inflow of US$53,262.31million compared to US$46,644.90
million in the second half of 2012 and US$35,343.45 million in the
first half of 2012 (Table 4.7).


Table 4.7
Monthly Foreign Exchange Flows through the Economy
(US$ million) (January 2012 – June 2013)

Descriptor
Total
Inflow
Inflow
(CBN)
Inflow
(Autonom
ous)
Total
Outflow
Outflow
(CBN)
Outflow
(Autono
mous)
Net Flow
Net Flow
(CBN)
Net Flow
(Autonom
ous)
Jan. 2012

Feb. 2012

Mar. 2012

Apr. 2012

May. 2012

Jun. 2012

Total H1


Jul. 2012

Aug. 2012

Sep. 2012

Oct. 2012

Nov. 2012

Dec. 2012

Total H2


Total 2012

Jan. 2013

Feb. 2013

Mar. 2013

Apr. 2013

May. 2013

Jun. 2013

Total H1


CBN Monetary Policy Review

Figure 4.9
Foreign Exchange Flows through the Economy
(January 2012 – June 2013)


Jul. 2011
Aug. 2011
Sep. 2011
Oct. 2011
Nov. 2011
Dec. 2011
Jan. 2012
Feb. 2012
Mar. 2012
Apr. 2012
May. 2012
Jun. 2012
Jul. 2012
Aug. 2012
Sep. 2012
Oct. 2012
Nov. 2012
Dec. 2012
US$'Million
Foreign Exchange Flow through the Entire Economy
Net Flow
Total Inflow
Total Outflow


4.3
Capital Market
The capital market witnessed improved performance in the first
half of 2013, compared with the second half of 2012 and the
corresponding period of 2012. This development was due
largely to improved earnings and increase in foreign portfolio
investments attracted by improved investor confidence in the
economy.

4.3.1
Equities Market
The All-Share Index (ASI) increased by 28.8 per cent to
36,164.31 at end-June 2013, from 28,078.81 at end-December
2012, and by 67.4 per cent, when compared with the level at
end-June 2012. Market Capitalisation (MC) for equities also
increased by 27.4 per cent to N11.43 trillion at end-June 2013
from N8.97 trillion at end-December 2012, and by 65.7 per cent
when compared with the N6.90 trillion recorded at end-June
2012 (Table 4.8 and Figure 4.10).

The ASI’s 67.43 per cent year-to-date increase was driven
mainly by strong performance in the banking and insurance
sectors. The Bloomberg NSE Banking Index grew by 32.28 per
cent and the Bloomberg NSE Insurance Index increased by
17.21 per cent over their end-June 2012 levels. The indices of


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two other sectors - the Bloomberg NSE Consumer Goods and
the Bloomberg Oil and Gas indices, however moderated the
favourable performance with declines of 41.97 and 0.82 per
cent, respectively, over their levels at end-June 2012.

Table 4.8
NSE All-Share Index (ASI) and Market Capitalisation (MC)
(June 2012 – June 2013)

Date
ASI
MC (Equities)
(N’ Trillion)
Jun-12
21,599.56
6.90
Jul-12
23,061.38
7.34
Aug-12
23,750.81
7.56
Sep-12
26,011.63
8.28
Oct-12
26,430.92
8.42
Nov-12
26,494.44
8.47
Dec-12
28,078.81
8.97
Jan-13
31,853.19
10.19
Feb-13
33,075.14
10.58
Mar-13
33,536.25
10.73
Apr-13
33,440.57
10.69
May-13
37,794.75
12.08
Jun-13
36,164.31
11.43
Source: NSE

Figure 4.10
NSE ASI and MC (June 2012 – June 2013)


Jun-12
Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13
All-Share Index
Market Capitalisation (N' Trillion)

Source: NSE


CBN Monetary Policy Review

Figure 4.11
NSE ASI and MC (January – June 2013)


Jan-13
Feb-13
Mar-13
Apr-13
May-13
Jun-13
ASI
NSE ASI and MC
All-Share Index
Market Capitalisation (N' Trillion)
MC

Source: NSE

4.3.1.1 Market Turnover
Aggregate stock market turnover, in the first half of 2013,
increased by 35.58 per cent. 58.34 billion shares, valued at
N591.56 billion, were traded in 763,974 deals, which compared
with 43.03 billion shares valued at N340.76 billion, in 528,468
deals in the second half of 2012. Relative to the first half of
2012, market turnover increased by 10.60 per cent with 52.75
billion shares valued at N789.34 billion, in 427,848 deals.

4.3.1.2 Sectoral Contribution to Equities Market Capitalisation
The building materials subsector was the most capitalised
sector. Its share in overall market capitalisation rose to 30.4 per
cent at the end of the first half of 2013 from 27.0 per cent at
end-December 2012. Other leading subsectors were banking;
breweries; and food, beverages and tobacco with respective
market shares of 22.5, 14.4 and 12.5 per cent, at end-June 2013
(Figure 4.12).


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Figure 4.12:
NSE Market Capitalisation by Sector as at End-June 2013


Source: NSE

4.3.2
Bonds Market
The bonds market in Nigeria consists of FGN bonds, State
Government bonds and corporate bonds. It is dominated by
FGN bonds and needs to be further developed and
deepened [see Box 3]

4.3.2.1 Federal Government (FGN) Bonds
The total transactions in FGN Bonds in the over-the-counter
(OTC) market in the first half of 2013 was 4.89 billion units
valued at N5.77 trillion in 28,840 deals, compared with 4.22
billion units valued at N4.32 trillion in 24,082 deals in the second
half of 2012 and 3.04 billion units worth N2.62 trillion in 20,357
deals recorded in the first half of 2012 (Figure 4.13). The value
of the outstanding FGN Bonds was N3.5 trillion as at June 2013.
Increase in activities in the FGN Bonds market was as a result of
the continued improvement in investors’ confidence following
various reforms in the capital market, ample liquidity in the
global financial environment following the implementation of
unconventional monetary policy in various jurisdictions as well
Breweries
14.4%
Banking
22.5%
Food & Beverages
12.5%
Conglomerates
1.3%
Insurance
1.4%
Oil and Gas
2.0%
Building Materials
30.4%
Other Sectors
15.4%


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as the high yields of FGN Bonds compared to the yields of
other sovereign debt, especially, in the advanced economies.

Figure 4.13
Volume and Value of FGN Bonds Traded in the OTC
Market (H2:2011 – H1:2013)

2011:H2
2012:H1
2012: H2
2013:H1
Volume (Billions)
Value (N'Trillions)
Billions
Trillions

Source: NSE

4.3.2.2 FGN Eurobond
The Federal Government of Nigeria’s Eurobond continued to
be traded on the London Stock Exchange (LSE) in the first half
of 2013. During the period, the US Federal Reserve’s comments
on the possibility of moderating its quantitative easing 3
programme led the markets to anticipate an earlier-thanexpected end to the monetary stimulus, thereby prompting
asset re-pricing in financial markets. Consequently, interest
rates and yields on dollar-denominated assets rose with the
yield on the FGN Eurobond increasing to 5.83 per cent at endJune 2013 from 4.04 and 4.02 per cent at end-December and
end-June 2012, respectively (Figure 4.14).


CBN Monetary Policy Review

Figure 4.14
Yields on Nigeria’s 10-Year U.S. Dollar-denominated Bond
(June 1, 2012 – June 28, 2013)


1-Jun-12
22-Jun-12
13-Jul-12
3-Aug-12
24-Aug-12
14-Sep-12
5-Oct-12
26-Oct-12
16-Nov-12
7-Dec-12
28-Dec-12
18-Jan-13
8-Feb-13
1-Mar-13
22-Mar-13
12-Apr-13
3-May-13
24-May-13
14-Jun-13
Yields (%)

Source: Bloomberg

4.3.2.3 Yields on Federal Government Bonds
The yield curve of FGN bonds at end-June 2013 shifted
upwards by 135 basis points compared with the position at
end-December 2012, but shifted downward by 149 basis
points when compared with the level at end-June 2012 (Figure
4.15). The development reflected improvements in inflation
expectations arising from the sustained tight monetary policy
stance
of
the
CBN
and
the
stable
macroeconomic
environment.

Figure 4.15
FGN Bonds Yield Curves:
End-June 2012 vs. End-December 2012 vs. End-June 2013


Annual Yields (%)
Term to Maturity (Years)
FGN Bond Yield Curves Jun 29, 2012 vs Dec 31, 2012 vs Jun 28, 2013
End-December, 2012
End-June, 2013
End-June, 2012


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4.3.2.4 State/Local Government Bonds
The total value of state/local government bonds issued in the
first half of 2013 was N406.94 billion compared with N341.0
billion in the second half of 2012.

4.3.2.5 Corporate Bonds
In the first half of 2013, the value of outstanding corporate
bonds was N1.40 trillion, same as recorded in the second half
of 2012.


Box 3
Deepening the Bonds Market: Policy Issues

Capital Markets the world over has been dominated in terms of value by
the Bonds Market leaving the more exciting Equities Market to become
second. Although, these two broad categories of the Capital Market have
grown in importance, the direct significance of the bonds market to the
developmental needs of an emerging market economy like Nigeria
cannot be over-emphasised. Thus, the growing need for cheaper longterm financing necessitates the existence of a bonds’ market that is deep
enough to cater for corporates, sub-national and the federal governments
alike.

Bond markets provide greater investment opportunities for both retail
investors and financial institutions and help to deepen financial markets.
This is particularly the case if international investors are attracted. From a
macroeconomic policy perspective, the lack of a bond market places
constraint on the financing of fiscal deficits, while performance of the
market provide useful signals of macroeconomic policy. Domestic debt is
also needed for monetary policy purposes, including for sterilising inflows of
foreign exchange. Bond markets also help to influence interest rates across
the various maturity spectra and promote a more efficient pricing of risk. By
providing an alternative source of financing, bonds reduce concentration
of inter-mediation in banks. Credit transactions of banks can be hedged in
the bond market, giving banks the ability to lend for longer terms.

Various and continuing attempts have been made to develop and
deepen the Nigerian Bond Market. In 1946, the Local Loan Ordinance was
promulgated under which the government floated the first three hundred
thousand (N300,000.00) naira, 3 per cent Government stock 1956/61 Stock
to finance the 1946-1956 10-year development plan. Later, the
government issued the first N2 million Federation of Nigeria Development
loan stock in May 1959. The enactment of the Lagos Stock Exchange Act
of 1960 enabled the incorporation of the Lagos Stock Exchange on
September 15, 1960 as a private limited liability company limited by
Guarantee. In 1962, and ad-hoc consultative and advisory body, the
Capital Issues Committee, was established and located in the Central Bank
of Nigeria (CBN). Its function was to consider applications to raise capital
from the capital market and recommend the timing of approved issues to
avoid overstretching the market’s capacity. In 1977, the Lagos Stock
Exchange became the Nigerian Stock Exchange under the Indigenisation


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Decree. The first sub-national government to issue a bond was Bendel
State in 1978; it issued a N20 million 7%, revenue bond to finance the state
housing development programme. Many more States have issued bonds in
recent times. The Federal Government discontinued bond issuance in 1987
but resumed in 2003 through the Debt Management Office (DMO) which
was established in year 2000. By issuing short-term maturity notes, the
government has created an Over-the-Counter (OTC) bond market.

Nevertheless, the market remains underdeveloped and shallow, offering
mostly short term instruments. In addition, bond market capitalisation
remains low, while corporate bonds market is very thin. It is therefore
imperative to simultaneously develop the market width, market depth and
market infrastructure, in order to attract investors through competition
among market participants and openness to both domestic and foreign
players. Such conditions ensure that market prices for risk are properly
reflected and provide fair returns.

Some of the initiatives to deepen the bond market include the creation of
Primary Dealers/Market Makers (PDMMs) by the Debt Management Office
in 2006. Its goal is to increase liquidity in FGN Bonds over a two-way quote
system. In August 2006, a Primary Dealership/Market Maker (PDMM)
network was established. There are currently 19 PDMMs. PDMMs play an
active role in the issuance, sale and marketing of all government bonds.
Also in 2006, the Bond Market Steering Committee (BMSC), comprising
major public and private sector stakeholders was established to make for
regular interaction among key stakeholders. The BMSC is mandated to
ensure speedy development of the market by coordinating all necessary
activities.

The Central Bank of Nigeria (CBN) took the lead in developing a
comprehensive vision for the financial sector in 2006, which resulted in the
Financial System Strategy 2020 (FSS2020). FSS2020 remains the most
developed of the sector strategies cascading from the broader Vision 2020
and the one that is at the most advanced stage of implementation. The
strategy was predicated on Nigeria's goal of becoming one of the top 20
economies in the world by the year 2020, and to successfully develop the
financial sector, such that Nigeria would be the choice destination in West
Africa for financial products and services as well as the gate-way for
channeling investments to other parts of the continent.

On March 2, 2010, the CBN granted liquid asset status to eligible State
government bonds to promote investments in these securities, encourage
the regular issuance of the bonds by State governments, stimulate primary
and secondary market activities in them, and thereby facilitate the
development of the Nigerian Bonds Market. The initiative has eased
transfer of ownership of the bonds issued and enhanced movement in the
market by way of their being traded in an open market, while
engendering best practices in debt management in the States.

In addition, The Nigerian Stock Exchange on the 1st of February, 2013
launched an initiative on retail bond market. The retail bond market is a
follow up on the Over the Counter (OTC) Market and its aim is to
encourage trading activities in the primary market which will allow retail
investors into the fixed income market since prices at the OTC market are
high. The NSE also identified Fixed Income Market Makers (FIMM), a
platform that allows debt market participants to trade NSE-listed debt
instruments issued by the federal and state governments or corporations
on a transparent order book with firm orders. Overall, the aim is to provide
liquidity and transparency in the market.


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The Federal Government issued a five hundred million (US$500.00m) US
dollar 10-year Eurobond in 2011 which 2.5 times oversubscribed and
another issue of one billion (US$1bn) US dollars is in the offing. First Bank Plc
and GT Bank have received approvals to issue foreign currency
denominated bonds and convertible bonds respectively. More issuances of
debt instruments in the International Capital Market (ICM) are in the
pipeline. They include the US$100million Nigerian Diaspora Bond and the
N80 billion federal government bonds in the form of Global Depository
Notes (GDN), which had been approved. The International Finance
Corporation (IFC) issued a $50million naira-denominated bond in February
2013 as part of its local-currency bond programme of about $1 billion. It is
the hope of IFC that this would contribute to the expansion and deepening
of the Nigerian Bonds Market.

To sustain the efforts at improving the bonds market and make it more
attractive to investors, inflation should be kept low so as to ensure a positive
real interest rate which in turn will boost yields and returns. Financial and
macroeconomic stability is also essential to limit risk and build more
confidence in investors. The bonds market should be transparent,
accessible and liquid. These are very important prerequisites for the market
to be aligned with the strategy of developing the country through
financing.

The FGN Bonds Market Capitalisation was N4,663.70 billion and US$29.95
billion, as at June 17, 2013. As at end June 2013, the face value of FGN
bonds was N4,032.90 billion.


CBN Monetary Policy Review

CHAPTER 5
ECONOMIC OUTLOOK

5.1
Overview
Global output growth in the first half of 2013 remained weak on
account of three factors: (i) less-than-expected growth in
major emerging market economies; (ii) worse-than-expected
recession in the Euro Area; and (iii) limited economic
expansion in the United States of America caused by fiscal
restraint. Compared with the annualised growth rate of 2.50
per cent recorded in the second quarter of 2012, global
growth in the first quarter of 2013 rose by 2.75 per cent. The risks
of recession in the Eurozone persisted alongside slow growth in
China. The IMF (WEO, July 2013 Update) suggested that
supportive macroeconomic policy was required to achieve
stronger global growth.

5.2
Output Growth

5.2.1
Global Output and Outlook
Overall, global economic growth was projected to remain at
3.1 per cent in 2013 as in 2012. Real global output growth in the
first half of 2013 was estimated to be 1.79 per cent, down from
2.50 per cent recorded in the second half of 2012. Provisional
data from the IMF (World Economic Outlook (WEO) July, 2013)
indicated that the annual output growth for 2013 in the
advanced economies would be 1.2 per cent; in emerging
markets and developing economies (EMDEs), 5.0 per cent and
in sub-Saharan Africa, 5.1 per cent (Table 5.1). Notably, growth
forecasts for Japan and UK were projected at 2.0 and 0.9 per
cent in July 2013, respectively, up from 1.5 and 0.7 per cent,
respectively in April 2013.

However, growth in advanced economies was 0.97 per cent in
the first half of 2013, down from 1.4 per cent in the
corresponding period of 2012 and was expected to increase
to 1.60 per cent in the second half of 2013. In emerging
markets and developing economies, growth was 5.47 per cent
in the first half of 2013 as against 5.68 per cent in the same
period in 2012 and is projected to increase to 5.70 per cent in
the second half of 2013. Emerging economies suffered
IMF emphasized
the need for a
good policy mix,
... that would
provide some
breathing space
for boosting
growth and
creating jobs


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slowdown in exports to advanced economies, as well as weak
domestic consumption and investment. During the 2013 Spring
Meetings, the IMF emphasised the need for a good policy mix,
including
fiscal
consolidation,
structural
reforms
and
accommodative monetary policy that would provide space
for boosting growth and creating jobs.

The downside risks to global growth prospects persist. While the
risks of recession in Europe remained, additional risks have
emerged. The first of the additional risks is slowing growth in
China’s economy characterised by high but increasingly
unproductive
investment,
rising
credit
risk
and
low
consumption. The second risk has to do with the possible
impact
of
Japan’s
Abenomics
-
which
required
the
sustainability of fiscal stimulus, aggressive monetary easing and
structural reforms without undermining investors’ confidence.
The third risk is the possibility of tighter financial conditions when
the anticipated exit from quantitative easing by the United
States commences, which could lead to capital flow reversals.
Global growth projection was expected to rise to 2.43 per cent
in the second half of the year driven by improvement in the
growth momentum in developed economies. As noted by the
IMF, a stronger outlook for global growth in the second half of
2013 would require additional policy actions, combined with
credible plans for reaching medium-term fiscal adjustment
plans and reforms to restore weak banks’ balance sheets and
credit channels in major advanced economies, especially in
Europe. Many emerging market and developing economies
face a tradeoff between macroeconomic policies to
strengthen growth and those to contain capital outflows
arising from the possibility of the US ending quantitative easing.

Economic growth in Sub-Saharan Africa is expected to be
boosted in the second half of 2013, as factors such as floods
and drought which constrained growth in 2012 were unlikely to
reoccur. Also, the gradual normalisation of activity in some
post-conflict countries as well as massive investments in
infrastructure would support food production. However, the
downside risk to growth prospects could arise from adverse
climatic developments, uncertainty in the Euro zone, foreign
capital flow reversals and lower commodity prices.
massive
investments in
infrastructure
would support
food production


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Growth prospects in the Middle East and North Africa (MENA)
remain weak with some economies experiencing difficult
political and economic transitions.

Table 5.1
Global Output and outlook, 2011 – 2014

Source: IMF World Economic Outlook Update, July 2013

5.2.2 Domestic Output Growth and Outlook
Overall domestic growth rate for 2013 was projected at 6.91
per cent up from 6.58 per cent in 2012. Provisional data from
the NBS indicated output growth of 6.64 per cent in the first
half of 2013 compared with 6.37 per cent in the first half of 2012
with a projection of 7.10 per cent in the second half of 2013.

A. World Output


World Output

Advanced Economies

USA

Euro Area

Japan

UK

Canada

Other Advanced Economies

Emerging & Developing
Economies

Central and Eastern Europe

Commonwealth of
Independent States

Developing Asia

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


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The relatively robust growth outlook despite the sluggish global
economic performance reflects the favourable weather
conditions for agricultural production, positive outcome in
banking sector reforms, power sector reforms, ongoing efforts
at restoring security in the North East, as well as various
initiatives of government to stimulate the real economy. Key
risks to the growth outlook include slow economic recovery in
major trading partner-countries; the effect of shale oil
production in the US and decline in U.S. crude oil imports and
lower oil output and exports due to production losses.

5.3
Inflation Trend

5.3.1
Global Inflation and Outlook
Global inflation fell to 3.38 per cent in the first half of 2013 from
3.98 per cent in the corresponding period in 2012, and was
projected to continue slowing as food and fuel supply
developments would contain any upward pressure on prices
of major commodities, despite the expected acceleration in
global economic activity. In the advanced economies,
inflation averaged 1.33 per cent in the first half of 2013 as
against 2.11 per cent in the corresponding period of 2012, and
is projected at 1.5 in 2013. In the emerging and developing
countries, consumer price inflation was projected at 6.54 per
cent in the first half of 2013 up from 6.34 per cent in the
corresponding period of 2012 and is projected to ease to 6.0
per cent in 2013. Similarly, Sub-Saharan Africa recorded
average inflation rate of 8.36 per cent in June 2013 as against
12.23 per cent in June 2012. Moderation in non-oil commodity
prices,
good
agricultural
harvests
and
appropriate
macroeconomic policy mix are expected to reduce inflation in
2013 to below 8 per cent. Overall, the outlook for global
inflation in the second half of 2013 is for further moderation.

5.3.2 Domestic Inflation Outlook
Inflationary pressure during the first and second half of 2012 at
an average of 12.52 and 11.97 per cent, respectively,
moderated in the first half of 2013 to an average of 8.93 per
cent. Also, both core and food inflation decreased
significantly to 5.5 and 9.6 per cent in June 2013, compared
with 15.2 and 12.0 per cent in June 2012.
..risks to the
growth outlook
include slow
economic
recovery in major
trading partnercountries; the
effect of shale oil
production in the
US and decline in
U.S. crude oil
imports...


CBN Monetary Policy Review

Staff projections suggest that headline inflation rate would lie
between 8.32-9.96 and 6.72-11.16 per cent in September and
December 2013, respectively. At a higher confidence level,
headline inflation could lie between 9.08-9.20 and 8.77-9.11
per cent in September and December 2013, respectively. The
expected moderation in inflation would be driven by growth in
output and the use of appropriate monetary policy tools. The
major upside risk to these projections is the possibility of
elevated fiscal actions towards year-end, pressure on the
exchange rate as a result of hedging by corporates against
uncertainties in the 2014 fiscal year.

5.4
Outlook for Monetary Policy in 2013
Nigeria’s monetary policy environment in the first half of 2013
was stable; inflation moderated throughout the period, fuel
supply remained steady, and agricultural production reflected
favourable
outcome
of
macroeconomic
policies.
The
maintenance of macroeconomic stability resulted from the
continuation of tight monetary policy, which was informed by
the need to stabilise the exchange rate and mitigate the risk
emanating from higher benchmark oil price in the 2013
Budget.

Given the salutary outcome of the current monetary policy
stance, the outlook for the second half of 2013 would be for
continuation of existing policies to sustain the moderation in
the general price level.


...expected
moderation in
inflation would be
driven by growth
in output and the
use of
appropriate
monetary policy
stance.
...outlook for the
second half of
2013 would be for
continuation of
existing policies to
sustain the
moderation in the
general price
level.


CBN Monetary Policy Review

Fancharts for Headline and Core Inflation

Figure 5.1: Fan Chart for Headline Inflation (%)


Figure 5.2: Fan Chart for Non-Food Inflation (%)


Source: Research Department, CBN

Mar-12
Jun-12
Sep-12
Dec-12
Mar-13
Jun-13
Sep-13
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Dec-15

Central path


CBN Monetary Policy Review

APPENDICES
Communique of the Monetary Policy Committee
(January – June 2013)

Central Bank of Nigeria Communiqué No. 87 of the Monetary Policy
Committee Meeting of Monday, January 21, 2013

The Monetary Policy Committee (MPC) met on, January 21, 2013 with ten (10) out
of the twelve (12) members in attendance. The Committee reviewed the
domestic economic conditions in 2012 and the challenges therefrom against the
backdrop of the international financial and economic environment in order to
chart the course of monetary policy in 2013.

The International Economic Situation
The Committee noted that global economic growth remained largely uneven and
subdued in most economies in 2012. Latest data from the IMF indicate that global
output was weaker than previously forecast due to continued contraction in the
Euro zone and Japan as well as the less than anticipated growth in Brazil and
India. The fragility in the global economy was further compounded by the
uncertainties surrounding resolution of the “fiscal cliff” and debt ceiling challenges
in the US and the difficulties associated with China’s attempts to “rebalance” its
growth.

These developments adversely affected private sector confidence, worsened the
unemployment situation and further tightened financing conditions in both the
periphery and core economies. In the euro area, economic and financial
conditions remained severely weak. Although the European Central Bank (ECB)
attempted, through its intervention scheme, to halt the downward trend in
economic activities in the zone, the effort did not record much success. Overall,
global output was estimated to have expanded by 3.2 per cent in 2012 against
the earlier projection of 3.3 per cent made in the October 2012 IMF World
Economic Outlook.

Growth in the advanced economies was estimated at 1.3 per cent in 2012 and
projected at 1.5 per cent in 2013, reflecting an upward revision of 0.2 percentage
point, respectively, from the initial estimates. The Committee noted that the
decline in global investment was mainly traced to the fiscal standoff in the US and
its implications for the paltry expansion in output of 2.0 per cent in Q3, 2012.


CBN Monetary Policy Review

Emerging European economies, which had previously shown signs of strong
rebound from the credit crisis, have now been hit hard by slow exports growth and
a halt to real GDP growth. On the whole, the Committee is of the view that while
the decisions of the ECB considerably reduced the probability of a Eurozone-wide
financial crisis, the condition of country-level financial systems remained difficult
and could constitute significant challenge to output expansion in 2013.

Latest data from the Asian economies suggest that a gradual recovery may be
underway. China's economy, which had previously recorded a slowdown over
seven consecutive quarters to Q3, 2012, witnessed improved economic activity in
Q4, 2012. Recent fiscal and monetary easing operations have increased
investment in infrastructure with signals of further spending into 2013. The
Indonesian economy, after recovery from the severe flooding in 2011, continued
to show resilience against the global slowdown as investment and strong domestic
demand contributed more to growth. It is expected that these twin drivers of
growth would further sustain output expansion in 2013, although recent reports
indicate that severe flooding has once again hit the economy during January
2013. The sub-optimal performance of the Japanese and Indian economies,
however, was a major drag on recovery in the region. The Indian economy was
hampered by slow approvals for new projects, deterioration in business sentiment
largely due to the rising current account deficit, uncertainty over the selling of
government stakes in state owned enterprises, fiscal deficits, depreciation of the
Rupee and a high debt burden, as well as slow implementation of structural
reforms. Japan’s drawback was largely due to a combination of declining exports
and sluggish domestic demand. There are, however, expectations that the growth
decline would bottom-out in 2013 as anticipated rebound in major trading partner
economies like China and the US would translate to a recovery in the demand for
Japanese goods and services.

The Middle East and North Africa (MENA) region continued to record mixed
performance, evidenced by the divergence between the economies of oilexporting and oil-importing countries. Oil-importing countries experienced
subdued economic performance with an estimated growth of 2.0 per cent in 2012
while the oil-exporting countries grew at an average rate of 6.6 per cent. Growth
in oil-exporting countries was driven largely by high oil output and prices coupled
with the early post-conflict recovery of Libya. Growth for the entire region in 2013
has been projected at 3.75 per cent, which is 1.35 percentage points below the
estimate for 2012. The Committee noted that the challenges confronting these
countries is how to strengthen the resilience of their fragile economies against
major oil price shocks through diversification and expansion of the private sector.


CBN Monetary Policy Review

Economic conditions in sub-Saharan Africa remained generally robust despite the
sluggish growth in the global economy. Prudent policies and improved
fundamentals in most countries provided additional impetus for increased
economic activity in the region. The Committee noted that the main risks to the
outlook for the region come from their trading partners including the possible
intensification of the financial stress in the euro zone and a sharp fiscal adjustment
in the US.

In light of the uncertainty about the direction of fiscal policy in the US, particularly
with regard to the yet to be resolved issue of debt ceiling, and the persisting euro
zone financial and economic crises, the Committee was of the view that the
global economic environment was still fragile and highly vulnerable to a further
contraction, although the downside risks appeared to be less severe relative to
conditions in the last two years.

Domestic Economic and Financial Developments Output
The National Bureau of Statistics (NBS) estimated real Gross Domestic Product
(GDP) growth rate at 6.61 per cent for 2012, which is lower than the level recorded
in 2011 by 0.84 per cent. The estimated real GDP growth rate at 7.09 per cent in
the fourth quarter of 2012 was higher than the 6.48 per cent in the third quarter but
lower than the 7.68 per cent recorded in the corresponding period of 2011. The
non-oil sector remained the major driver of growth recording 8.23 per cent
increase in contrast to the oil sector, which contracted by 0.17 per cent during the
period. The Committee expressed concern about the continued decline in the
contribution of the oil sector to growth due to lower production relative to the
corresponding period of 2011 and enjoined the Federal Government to fast track
the passage of the Petroleum Industry Bill to halt the trend.

The relatively robust growth projections despite the slowing global economy
reflected the relatively favourable performance of wholesale and retail trade; the
services sectors; outcome of banking sector reforms; and initiatives by government
to stimulate the real economy. Despite the developments in the international oil
market where the US is now the second largest oil producer, the Committee
observed that the growth projection remained promising, anchored on the recent
improvements in power supply. The Committee noted with satisfaction the Federal
Government’s efforts to sustain the current initiatives to boost power generation,
particularly the progress made in reforming the power sector.

The Committee, however, observed that the severe flooding in several parts of the
country in 2012, which damaged housing, agricultural and oil assets, could pose
downside risks to growth and feed into food supply deficits and inflation in the


CBN Monetary Policy Review

near term. Also, the continuing security challenges as well as delays in reform of
the oil sector could undermine investor-confidence and output growth in the nearterm.

Prices
The Committee observed that, on the average, inflationary pressure was elevated
in 2012. The year–on–year average headline inflation rate in 2012 stood at 12.24
per cent, while the average core and food inflation year-on-year stood at 13.87
and 11.32 per cent, respectively. The major drivers of headline inflation in
December 2012 included food and non-alcoholic beverages, housing, water,
electricity and transport. The pickup in food inflation in the later part of 2012 was
accounted for by imported food items and food shortages due to the impact of
flood on farmlands along the major agricultural belt of the country. However, the
Committee was of the view that the pass-through effects of imported food
inflation to domestic prices may have been subdued owing to the relatively stable
exchange rate during the period under review.

Monetary, Credit and Financial Markets Developments
Broad money supply (M2) grew by 13.72 per cent in December 2012 over the level
at end-December 2011. Aggregate domestic credit (net) grew by 1.98 per cent in
December 2012, which was substantially below the benchmark of 52.17 per cent
for the year. Credit to Government contracted between September and
December 2012; occasioned by the sustenance of government as a net creditor
to the banking system, reflecting more prudent fiscal measures, including the
introduction of the Treasury Single Account.

Interest rates in all segments of the money market moderated between 19th
November 2012 and 3rd January, 2013. This reflected in increased liquidity in the
banking system including the release of statutory revenue to subnational
governments, absence of repo transaction during the review period, repayments
of matured CBN Bills and banks’ desire to maintain optimum liquidity position on
their balance sheets at the end of their common financial year. The interbank call
and OBB rates, which opened at 13.99 and 13.95 per cent on November 19, 2012,
closed at 10.32 and 10.45 per cent, respectively, on January 3, 2013. The average
interbank call and OBB rates for the period were 11.09 and 11.03 per cent,
respectively. The average prime lending rate increased slightly to 16.54 per cent in
December 2012 from 16.48 and 16. 51 per cent in October and November 2012,
respectively. In contrast, the average maximum lending rate fell marginally to
24.61 per cent in December 2012 from 24.65 and 24.70 per cent, respectively, in
October and November, respectively while the weighted average savings and
term deposits rate decreased to 5.50 per cent in December from 5.57 per cent in


CBN Monetary Policy Review

the preceding month. The Committee, therefore, encouraged the Bank to fast
track the financial inclusion strategy to improve financial intermediation and the
effectiveness of the transmission mechanism of monetary policy and to adopt
ways of moderating the high spread between deposit and lending rates.

The Committee observed that the rally in the Nigerian capital market continued as
equities market indicators trended upwards in the review period. The All-Share
Index (ASI) increased by 35.45 per cent from 20,730.63 to 28,078.80 between
December 30, 2011 and December 31, 2012. Market Capitalization (MC) also
increased, by 37.38 per cent, from N6.53 trillion to N8.97 trillion during the same
period. The positive performance of the ASI and MC was due to the sustained
increase in the demand for blue-chip stocks particularly in the banking and
consumer goods sectors following improvements in earnings and growing investorconfidence. The Committee, however, noted that the significant factor
responsible for the recovery was strong portfolio flows and cautioned that the
capital market remained structurally vulnerable to external shocks until its funding
basis was changed.

External Sector Developments
At the Wholesale Dutch Auction System (wDAS), the exchange rate opened at
N157.31/US$ on November 20, 2012 and closed at N157.33/US$ on December 31,
2012 representing a depreciation of N0.02 or 0.01 per cent. The average wDAS
exchange rate during the period was N157.32/US$. At the BDC segment of the
foreign exchange market, the selling rate opened at N160.00/US$ on November
20, 2012 and closed at N159.50/US$ on December 31, 2012, representing an
appreciation of N0.50 or 0.31 per cent for the period.

At the interbank segment, the selling rate opened at N157.95/US$ on November
20, 2012 and closed at N156.25/US$ on December 31, 2012, representing an
appreciation of N1.70 or 1.08 per cent. Overall, the relative stability recorded in
the foreign exchange market could be attributed to the combined effects of
improved supply of foreign exchange by the oil companies and enhanced
capital inflows from portfolio investors during the period under review. Also, oil
revenue increased at an average of 2.73 per cent monthly throughout 2012. In the
first eleven months of 2012, oil receipts totaled US$40.087 billion.

The Committee noted with satisfaction that the premium between wDAS and the
interbank rate narrowed towards the end of the review period. However, the
premium between the wDAS and BDCs widened towards the end of the review
period from N1.682/US$ to N2.172/US$ suggesting the need to sustain and further
complement existing measures to discourage speculative activities in the foreign


CBN Monetary Policy Review

exchange market. In general, the Committee noted that decisions at previous
MPC meetings were yielding the desired results.

The Committee expressed satisfaction with the sustained accretion to external
reserves which stood at US$43.849 billion as at December 31, 2012, representing an
increase of US$1.682 billion or about 3.98 per cent from the level of US$42.167
billion at end-October 2012. Relative to the end-December 2011 level of US$32.915
billion, the external reserves at the end of December 2012, had risen by US$10.934
billion or 33.21 per cent. The increase in the level of foreign reserves was driven
mainly by proceeds from crude oil and gas exports and crude-oil related taxes as
well as reduced funding of the wDAS on account of the huge inflow of foreign
portfolio investments, which was about 77.0 per cent of total inflows through the
CBN. The foreign reserves level could finance about 9 months of imports.

The Committee’s Considerations
The Committee observed that the performance of the global economy remained
largely subdued and was characterized by uncertainty and contraction in the
Euro zone and Japan, as well as lower than expected growth in the large
emerging and developing economies. The Committee notes with caution that the
partial resolution of the Fiscal Cliff in the US offers some hope for gradual global
economic recovery as indicated by the rebound of many global financial markets
in the wake of the staving off of automatic tax increases and expenditures cuts on
1st January, 2013. The Committee further observed that the robust prospects for
energy independence of the US could pose downside risk for global oil prices in
the medium- to long-term which could threaten fiscal sustainability in many oil-
dependent economies around the world.

The Committee noted that in spite of the slow progress made in the resolution of
the Euro zone crises, the prospect of a deepening recession in the near term has
not been completely averted. Developments in the domestic economy in the
past three months highlighted some new pressure points to macroeconomic
stability. The Committee was of the view that shocks to the economy could come
from significant fall in the demand for oil, leading to a fall in oil prices and
government revenues, weaker exchange rate, rising inflationary pressures and
depletion in external reserves. The Committee also noted the drop in headline
inflation in December 2012, although it also recognized that core inflation had
risen; driven mainly by cost-push factors even in the face of sluggish growth in the
monetary aggregates.

With regard to the budget of the Federal Government, the Committee cautioned
against complacency over government revenues; despite the high level of oil


CBN Monetary Policy Review

prices. The Committee noted uncertainty in global demand and supply of crude
oil, and weak performance of non-oil and VAT revenues. The Committee,
however, noted with satisfaction the efforts the Federal Government aimed at
keeping deficits within the threshold prescribed by the Fiscal Responsibility Act and
advocated sustenance of the effort. On expenditure, the Committee noted that
there was still the need to continue to drive down recurrent expenditure in favor of
capital expenditure in view of the infrastructure deficit that continued to constrain
growth performance. The Committee noted that the oil price benchmark for the
2013 budget which was increased from US$75 to US$79 may pose downside risk to
the inflation objective and, therefore, constituted a pressure point for the low
inflation objective and effective monetary policy in 2013. The Committee
reaffirmed its commitment to respond appropriately if public spending in 2013
ultimately adds to inflationary pressures.

In view of these developments, the Committee was faced with three choices:
(i)
An increase in the MPR in response to the higher oil price benchmark for
fiscal 2013;

(ii)
A reduction in MPR in view of the declining GDP growth trajectory and
headline inflation; and

(iii)
Retaining the current monetary policy stance in view of the conflicting
price signals, global uncertainties and the need to preserve the stability of
the system.

The Committee’s Decisions
Given the stability achieved in the last twelve months with average year-on-year
headline inflation rate at 12.24 per cent, in 2012, the MPR of 12 per cent was
considered to be just about right. The Committee considered the calls for a
reduction in the MPR because of the benign inflation outlook other things being
equal. However, this may be undermined by the increased sub-national
government spending and Federal Government high expenditure in 2013, the
higher benchmark oil price in the 2013 budget and the US debt ceiling with
possible impact on commodity prices.

In view of the foregoing, the Committee decided that it was prudent to hold and
monitor developments between now and the next meeting of the MPC. The
Committee, therefore, decided by a majority vote of 8:2 to maintain the current
policy stance i.e., to retain the MPR at 12.0 per cent with a corridor of +/- 200 basis
points around the midpoint; retain the CRR at 12.0 per cent; and to retain the


CBN Monetary Policy Review

Liquidity Ratio at 30.0 per cent. Two members voted for a reduction of the MPR by
25 basis points.

Thank you.

Sanusi Lamido Sanusi, CON
Governor
Central Bank of Nigeria
January 21, 2013


CBN Monetary Policy Review

Central Bank of Nigeria Communiqué No. 88 of the Monetary Policy
Committee Meeting of Monday and Tuesday, March 18 and 19, 2013

The Monetary Policy Committee met on March 18 and 19, 2013 with all the 12
members in attendance. The Committee reviewed the conditions and challenges
that confronted the domestic economy in the first quarter of 2013 against the
backdrop of current international economic and financial developments with a
view to reassessing the monetary policy options in the short- to medium-term.

International Economic Developments
At the outset, the Committee observed that global growth remained subdued
throughout 2012 due to the softer than expected level of activities in the euro
area and the slipping of Japan into recession during the second half of the year.
Weak and fragmented growth was also recorded across major economies and
regions including the US. The emerging market economies, however, showed a fair
degree of resilience. The growth outlook, however, appears promising. The IMF
January 2013 WEO Update, projected a global output growth of 3.5 per cent in
2013 compared with the 3.2 per cent achieved in 2012.

In the Advanced Economies, output was estimated at 1.4 per cent for 2013
compared with the 1.3 per cent achieved in 2012. Recession is expected to
continue in the euro area although the magnitude of the contraction, estimated
at 0.2 per cent in 2013, represents an improvement over the 0.4 per cent
contraction in 2012. A slowdown in growth is also expected in the US in 2013, as
output is projected to decline by 2.0 per cent from 2.3 per cent in 2012, owing
largely to the short term effects of its fiscal consolidation regime as well as the
weaknesses in the labor and housing markets.

The emerging Asian economies were projected to post a gradual recovery that
would propel global output growth in 2013. China, which previously recorded a
slowdown over seven consecutive quarters to Q3 2012, witnessed improved
activity in Q4 2012; confirming that an upswing in growth was underway. The
recent fiscal and monetary easing operations of the Peoples Bank of China led to
increased tempo of investment in infrastructure with indications of further public
spending in fiscal 2013. Thus, the economy is expected to grow strongly in 2013
amid gradual improvements in the external environment. Japan returned to
growth in the fourth quarter of 2012, raising hopes of an end to the 15-year
deflation. The major setback in the region is expected from India, with real GDP
growth of 5.4 per cent in 2012 on account of the poor performance of the
manufacturing, agriculture and service sectors.


CBN Monetary Policy Review

The Committee noted that growth in Sub-Saharan Africa was still robust, although
real output growth dropped to 4.8 per cent in 2012 from 5.3 per cent in 2011. The
performance of Sub-Saharan Africa during 2013 would partly depend on
developments in the euro area as well as the extent of recovery in China. With
policy buffers weaker than they were prior to the 2008 crisis, the ability of
governments to implement countercyclical fiscal policy may be constrained.

Domestic Economic and Financial Developments Output
The Committee was satisfied with the relatively robust output growth projections
for 2013 despite the slowing global economy, on the back of favorable conditions
for increased agricultural production, the outcome of banking sector reforms, as
well as other initiatives by government to stimulate the real economy. The National
Bureau of Statistics (NBS) reported that the real GDP growth rate declined from
7.43 per cent in 2011 to 6.58 per cent in 2012. The decline was partly driven by the
oil sector which contracted by 0.91 per cent. The major driver of overall growth,
therefore, remained the non-oil sector, with agriculture; wholesale and retail trade;
and services contributing 1.37, 2.19 and 2.10 percentage points, respectively.

The Committee was concerned that the declining contribution of the oil sector to
growth, which became apparent in the second half of 2011, continued in Q4
2012. Crude oil production, including condensates and natural gas liquids,
decreased by 37,000 barrels per day (bpd) in February 2013 to 2.054m bpd
compared with the level of 2.072m bpd attained in December 2012. Oil theft in
the Niger-Delta remained a source of concern. The Committee was also
concerned that the decline in the growth rate of agricultural output which started
in the 4th quarter of 2011 continued up to the end of 2012. The Committee was of
the view that although the GDP growth projection remained high, there were a
number of risk factors that were likely to affect output performance. These include
perception of increased levels of corruption and impunity in the country, insecurity
particularly in the northern part of the country, as well as mixed signals from power
and petroleum sector reforms.

Prices
Headline inflation which had decreased to a four-year low of 9.0 per cent in
January 2013 inched up to 9.5 per cent in February, driven largely by the food
component. Food inflation, which was 10.1 per cent in January 2013, increased by
0.87 percentage point in February due mainly to increases in the prices of farm
produce and imported food items. Core inflation, however, moderated slightly
between January and February 2013. The Committee noted that the sharp drop in
inflation in early 2013 compared with early 2012 is largely a result of the base
effect of the partial removal of fuel subsidy in January 2012. With the tapering off


CBN Monetary Policy Review

of the first and second round effects of the increase, the prudent monetary policy
stance and stable exchange rates are yielding lower headline inflation figures.

Monetary, Credit and Financial Market Developments
Broad money supply (M2) grew by 2.86 per cent in February 2013 over the level at
end-December 2012, which annualizes to 17.16 per cent. Aggregate domestic
credit (net) grew by 10.17 per cent over the same period (an annualized rate of
61.02 per cent). The significant growth in net credit in the period was due to the
huge increase in credit to government (net), which rose by 108.18 per cent.
Interest rates in the interbank money market declined between January 21 and
March 14, 2013 owing to liquidity surfeit in the banking system. The interbank call
and the OBB rates, which opened at 10.35 and 10.33 per cent on January 21,
closed at 10.29 and 10.28 per cent, respectively, on March 15, 2013. The average
interbank call and OBB rates for the period were 11.38 and 11.23 per cent,
respectively. The average prime lending rate inched up slightly from 16.54 per
cent in December 2012 to 16.56 in February 2013, while the maximum lending rate
more or less remained flat at 24.60 per cent during the period. The weighted
average deposit rate, however, increased from 3.77 to 5.37 per cent during the
review period.

The Committee noted the upswing in activities in the capital market, as equities
market indicators all trended upwards in the review period. The All-Share Index
(ASI) increased by 17.3 per cent from 28,078.81 on December 31, 2012 to 32,
950.08 on March 15, 2013 while Market Capitalization (MC) rose by 17.5 per cent,
from N8.97 trillion to N10.54 trillion. The Committee, however, observed that the
improved performance was largely induced by the substantial portfolio inflows, as
foreign investors took advantage of the favourable domestic environment
brought about by the high yield on government debt instruments, and stability in
the naira exchange rate.

External Sector Developments
At the Wholesale Dutch Auction System (wDAS), interbank and the BDC segments
of the foreign exchange market, the exchange rate opened at N157.29/US$,
N157.10/US$, and N159.00/US$ on 22nd January 2013 and closed at N157.32/US$,
N158.65/US$, and N160.00/US$, respectively, on March 15, 2013. The average
wDAS, interbank and BDC exchange rate during the period was N157.30/US$,
N157.65/US$, and N158.94/US$, respectively. The Committee noted the slight
depreciation in the exchange rate at the wDAS and interbank segments of the
foreign exchange market. The BDC segment, however, appreciated during the
period due to the low patronage by speculators on account of the improved
supply of foreign exchange by oil companies, increased inflow from portfolio


CBN Monetary Policy Review

investors, and the effect of the prohibition of the simultaneous access to the CBN
window (Repo and Standing Lending Facility) and wDAS transactions by DMBs.

The Committee expressed satisfaction with the significant accretion to external
reserves which stood at US$49.38 billion as at March 14, 2013, representing an
increase of US$ 5.5 billion or 12.68 per cent over the level of US$43.83 billion at endDecember 2012. The increase in reserves was driven largely by the proceeds from
crude oil and gas sales and crude oil-related taxes, as well as reduced funding of
the wDAS. The reserves level could finance over 13 months of imports. The
Committee urged the Bank to continue the monitoring of portfolio and foreign
direct investment flows, while being conscious of the risks to financial stability of a
rapid outflow of hot money.

The Committee’s Considerations
The Committee was pleased with the prevailing macroeconomic stability despite
shocks from both external and domestic environments; a development which
informed the tightening stance of monetary policy since the third quarter of 2010.
Having achieved a reasonable degree of moderation in the rate of inflation, there
were compelling arguments to consider easing monetary policy, at least from the
perspective of stimulating growth in the real sector. Given the slowdown in overall
GDP and agricultural GDP growth, inability of the SMEs to borrow at the current
lending rates and crowding out effects may require monetary easing. The
Committee carefully weighed the option of relaxing monetary policy against the
likely risks in the near- to medium-term, noting that reversing the current stance of
monetary policy was not likely to produce a neutral outcome, as it may signal the
preference for a higher inflation rate on the part of the CBN.

At 9.0 and 9.5 per cent in January and February, respectively, the price data,
which largely reflected the base effect of the first and second round impact of the
fuel subsidy removal in January 2012, sends a clear signal that there was still an
upside risk to inflation in the near-to-medium term. Furthermore, yields on FGN
bonds have been declining steadily, signalling the impact of increased inflows
while equity prices have been trending upwards. Quantitative easing, especially in
the US and the EU is already creating a potential new round of asset bubbles
globally. The Committee was of the view that the growth in the domestic capital
market was driven largely by the huge capital flows. The principal risk of stability in
the medium-to-long-term can be addressed through diligent implementation of
sound policies of fiscal consolidation and structural reforms. Without these, the
economy will not be able to attract long term foreign capital inflow that makes
the gains of monetary policy sustainable and insulate the economy from the risks


CBN Monetary Policy Review

associated with external shocks and capital flow reversals. Monetary policy will,
therefore, seek to preserve the current gains of macroeconomic stability.

The Committee also noted the wide spread between deposits and lending rates,
which it attributed to the inefficiencies in the market requiring institutional and
structural reforms that would enforce behavioural change on the market,
consistent with the long term needs of the economy. The Committee was of the
view that sustainable low lending rates, could be achieved if the necessary
infrastructure such as stable power and good roads, amongst others, were put in
place. The Committee noted that the present infrastructural condition has always
provided an incentive for asymmetric response on the part of the banks to the
policy rate in a manner that was not always beneficial to the small and medium
scale customers. With respect to the price level, the Committee observed that the
rising pressure in February after a significant moderation in January, was indicative
of the fact that there were some underlying factors that could constitute a threat
to inflation in the medium term.

The Committee noted the 2013 Federal Government Budget of N4.9 trillion, passed
by the National Assembly and signed into law by the President, represents an
increase of about 5 per cent. Furthermore, the budget, predicated on an oil
benchmark price of US$79/barrel as against US$75/barrel, proposed by the
Executive, potentially slows down the pace of fiscal consolidation with implications
for accretion to the Excess Crude Account and gross external reserves. In addition,
the Committee observed that the foreign exchange market has started
experiencing pressure in March 2013, mainly reflecting compression of yields in the
fixed income credit as well as outflows to pay dividends by multinational
corporations. However, the Committee noted that the exchange rate has
remained within the target range and also that the current monetary conditions
are conducive to further tightening using Open Market Operations without
recourse to an increase in the MPR.

In view of these developments, the Committee was faced with three choices:
(i)
An increase in rates in response to the uptick in headline and food
inflation; and pressure on exchange rates;

(ii)
A reduction in rates in view of declining core inflation and GDP growth;

(iii)
Retaining current monetary policy stance to sustain the gains of monetary
policy while utilizing the existing space in the corridor to influence yields
and exchange rates in the short term.


CBN Monetary Policy Review

The Committee’s Decisions
The Committee considered and rejected option 1 as being potentially
unnecessary since there are no major inflationary concerns at this time. While
acknowledging the merit of the arguments in favour of option 2, it was also
rejected because it could send wrong signals of a premature termination of an
appropriately tight monetary stance. The Committee, therefore, decided by a
majority vote of 9:3 to accept option 3 and maintain the current policy stance i.e.
to retain the MPR at 12 per cent with a corridor of +/- 200 basis points around the
midpoint; retain the Cash Reserve Requirement at 12 per cent and Liquidity Ratio
at 30 per cent with the Net Open Position at 1 per cent.

Thank you.

Sanusi Lamido Sanusi, CON
Governor
Central Bank of Nigeria
March 19, 2013


CBN Monetary Policy Review

Central Bank of Nigeria Communiqué No. 89 of the Monetary Policy
Committee Meeting of Monday and Tuesday, May 20 and 21, 2013

The Monetary Policy Committee met on May 20 and 21, 2013 with 10 out of the 11
members in attendance. The Committee reviewed the conditions and challenges
that confronted the domestic economy in the first five months of 2013, and
reassessed the short-to-medium term monetary policy options in the light of the
fragile global economic and financial environment. The Committee noted that
one of the members, Professor Sam Olofin has left the Board of the Central Bank
and, therefore, ceases to be a member of the MPC. The Committee recognized
his tremendous contributions to its deliberations over the years and thanked him
for his services.

International Economic Developments
Global economic recovery continues to be fragile due to suppressed growth and
weakness in key financial markets, including the euro area and Japan. However,
the emerging market economies and Sub-Sahara African (SSA) countries
continued to show resilience. Global growth outlook remains subdued but
promising. It is forecast to average 3.2 per cent in 2013. In the advanced
economies, output is estimated to grow by 1.2 per cent in 2013 compared with 1.3
per cent in 2012. In the US, budget deficit figures are better than projections due
to automatic spending cuts and improved revenues boosted by dividend
payments to the Treasury from mortgage banks bailed out during the crisis.
Unemployment figures are also improving. Although the European Central Bank
has commenced a wave of monetary easing, the euro area is expected to
remain in recession with output contracting by 0.3 per cent compared with a
contraction of 0.6 per cent in 2012. The EU made steady progress in establishing a
Banking Union, pursuing a 2 three-pronged initiative of the Single Supervisory
Mechanism; Deposit Guarantee System; and a Recovery and Resolution Scheme.
The development has been adjudged as an important step towards recovery. The
regime of quantitative easing commenced by the Bank of Japan holds prospects
for Japanese recovery arising from a weaker Yen and improved competitiveness
of Japanese exports. However, the downside risk lies in Japan‟s demographics
whose key feature is a low propensity to consume, given its large population of
pensioners-about 30 per cent. With slowing growth momentum in the emerging
markets, global output is forecast to remain around the 2012 level.

The emerging and developing economies as a group are forecast to grow by 5.3
per cent in 2013, with SSA growing at 5.6 per cent. These economies have
continued to face the challenge of adjusting macroeconomic policy to


CBN Monetary Policy Review

compensate for the weak external environment, particularly shocks induced by
developments in the advanced economies. The IMF suggests that with the
prospects of improvements in the global economy, policy recalibration in a
number of emerging market economies should address risks from sustained rapid
credit expansion and high asset prices. Growth in these economies has somewhat
moderated compared with last year. The strong GDP growth rate of 7.7 per cent
recorded in the first quarter of 2013 for China was countered by weaker rates in
the other economies.

Domestic Economic and Financial Developments Output
The National Bureau of Statistics (NBS) forecasts real GDP growth rate of 6.72 per
cent for Q2, 2013, an improvement over the Q1 estimate of 6.58 per cent. The
major driver of overall growth remains the non-oil sector led by services;
agriculture; and wholesale and retail trade. The Committee noted that the
relatively robust output growth projection for 2013 was hinged on expected
favourable conditions for increased agricultural production and other policy
initiatives aimed at stimulating the economy. However, the Committee noted with
caution, the high GDP growth projection in view of the extant risk factors such as
widespread insecurity, weak infrastructure and probable flooding from the
projected heavy rains in some parts of the country. In addition, the state of
emergency in the North East and the accompanying military operations in that
axis have the potential to adversely affect economic activities generally, including
agricultural production and food prices, as well as consumer demand. The
Committee also noted that although most sectors of the economy showed
improved growth performance in Q1 of 2013 when compared with Q1 2012, this
was
not
the
case
with
respect
to
the
key
sectors
like
agriculture,
telecommunications and distributive trade. Concern was also expressed over
short-term prospects in the oil sector, mainly around possible reduction in oil prices
and continuing leakages in oil production due to bunkering and other illegal
activities.

Prices
Headline inflation increased from 8.6 per cent in March to 9.1 per cent in April,
remaining within the target range for the fourth consecutive month. Food inflation
was 10.0 per cent year-on-year in April compared with 9.5 per cent in March, while
core inflation declined further to 6.9 per cent from 7.2 per cent in March. On a
month-on-month basis, inflation showed broad-based moderation across almost
all components with the exception of imported food which may be largely a
reflection of the new tariff regime.


CBN Monetary Policy Review

The inflation outlook remains relatively benign with projections of headline inflation
remaining in the single digit range for the next six months. This result reflects a
combination of base effect and the success of tight monetary policy leading to
muted growth in the monetary aggregates and exchange rate stability. The
principal risks to the outlook remain fiscal spending and possible pressures on the
exchange rate from any attrition to reserves caused by declining revenues as a
result of output leakages.

Monetary, Credit and Financial Market Developments
Broad money supply (M2) grew by 4.44 per cent in April 2013 over the level at endDecember 2012. When annualised, M2 grew by 13.3 per cent, compared with the
contraction of 0.03 per cent in the corresponding period of 2012. The growth in M2
was slightly below the growth benchmark of 15.2 per cent for 2013. Aggregate
domestic credit (net) grew by 17.46 per cent in April 2013 which annualized to a
growth rate of 52.38 per cent over the end-December 2012 level, compared with
the contraction of 6.12 per cent recorded in the corresponding period of 2012.

Interest rates in the interbank money market moved in tandem with the level of
liquidity in the banking system. The average inter-bank call and OBB rates which
opened at 10.21 and 10.23 per cent on March 19 closed at 10.86 and 10.91 per
cent, respectively, on May 16, 2013. The average maximum lending rate rose
marginally to 24.53 per cent in April, 2013 from 24.49 per cent in March, 2013.
Similarly, the average prime lending rate, rose to 16.65 per cent in April 2013, from
16.61 per cent in March.

The Committee noted the continued recovery in the Nigerian capital market as
equities market indicators were positive in the review period. The All-Share Index
(ASI) increased by 31.4 per cent from 28,078.81 on December 31, 2012 to 36,907.81
on May 17, 2013. Market Capitalization (MC) also increased by 31.5 per cent from
N8.97 trillion to N11.80 trillion during the same period. Improved earnings,
increased capital inflow and portfolio investments as well as investor confidence in
the economy contributed to the up-swing in stock prices. The Committee also
noted the reported increase in the share of domestic players in the capital market,
thus reducing the risk of major shocks due to slowdown in foreign participation.

External Sector Developments
At the Wholesale Dutch Auction System (wDAS), interbank and the BDC segments
of the foreign exchange market, the exchange rate opened at N157.32/US$,
N158.70/US$, and N160.00/US$ on 20th March 2013 and closed at N157.30/US$,
N158.33/US$, and N159.50/US$, respectively, on May 18, 2013. In all three
segments, the naira exchange rate appreciated in the review period. This


CBN Monetary Policy Review

development reflected the effects of improved supply of foreign exchange to the
market. Both the average and monthly premia for the review period remained
insignificant, indicating the effectiveness of current policy measures.

The Committee also expressed satisfaction with the significant accretion to
external reserves which stood at US$49.13 billion as at May 16, 2013. This represents
an increase of US$5.3 billion or 12.1 per cent above the level of US$43.83 billion at
end-December 2012. This level of reserves could finance approximately 13 months
of import.

The Committee’s Considerations
The Committee was pleased with the prevailing macroeconomic stabilitymoderation in all measures of inflation on month-on-month basis; stable banking
system and exchange rate and robust external reserves. It commended the
agreement reached between the CBN and AMCON on the settlement of
outstanding AMCON obligations to all private sector investors by December 2014
and to repay the N3.6 trillion debts held by the CBN under a new refinancing and
restructuring arrangement within a period not exceeding ten years at single-digit
interest rate.

The Committee noted that the repayments and refinancing arrangements would
have no adverse monetary policy implications; but rather increase confidence in
the financial system. Also, under this arrangement, it is unlikely that banks will be
required to contribute more than 0.5 per cent of their Balance Sheets annually to
the sinking fund. By October 2014, the CBN will be the sole creditor to AMCON,
holding bonds guaranteed by the Federal Government of Nigeria. The Federal
Government will therefore have no contingent liability to any party other than the
CBN, and the Bank will recover its debt from AMCON recoveries and contributions
to the Sinking Fund by the banks. Since the CBN supervises and regulates the
banks and AMCON, this exposure is considered a fair risk.

The Committee was concerned about the threat posed by developments in the
oil sector arising from uncertain oil market environment, high output leakages
arising from oil theft which has negatively affected the oil sector’s contribution to
GDP and the prospects for declining output if the state of affairs continues. The
Committee observed that the accretion to reserves resulted principally from
increased portfolio capital inflows. The Committee noted the potential effect of
this development on exchange rates, reserves and the capital account in the
event of capital flow reversal, and thus stressed the need to maintain stability and
retain confidence of investors in the consistency of monetary policy.


CBN Monetary Policy Review

The Committee also expressed concern over the low level of credit growth to the
private sector and traced this to the crowding out effect of high growth in credit
to the public sector. The Committee noted the N1.02 trillion increase in claims on
government and the N1.11 trillion drawdown on savings between January and
April 2013 and particularly the monetization of US$1 billion in April 2013, being
proceeds of the Excess Crude Account. The combined effect of new borrowings
and reduced savings was an increase in net credit to the central government of
over N2 trillion in the first four months of 2013. The evidence points to an increase in
the rate of government expenditure in 2013 when compared with 2012. In
addition, the recent military action in the North-East will result in additional
spending. Although the Government has announced that there will be no
supplementary budget, the Coordinating Minister for the Economy and Honorable
Minister of Finance has already announced that there will be a drawdown on a
Contingency Vote embedded in the 2013 Budget to cover emergencies. Overall,
the Committee is of the view that government spending will constitute a major risk
to the inflation and exchange rate outlook, thus advising prudence in monetary
policy action at this time.

The Committee further noted that in spite of increased borrowings, yields on FGN
bonds have been declining steadily, signaling the impact of increased inflows
while equity prices have been trending upwards. The evidence does not,
therefore, support claims of monetary policy being too tight. The Committee was
of the view that the principal risks to long-term stability can be addressed through
diligent implementation of sound policies of fiscal consolidation and efficient
sectoral policies underpinned by structural reforms. These are required to attract
long term foreign capital inflow that would make the gains of monetary policy
sustainable, and also support credit extension to the private sector players.

Consequently, the Committee weighed the following options:
(i)
A reduction in rates in view of declining core inflation, stable exchange
rates and relative reserve accretion. Against the backdrop of sustained
pressure to ease the stance of monetary policy, the Committee
considered the imperative of signaling its sensitivity to the concerns
expressed about high lending rates in the economy;


CBN Monetary Policy Review

(ii)
Retaining current monetary policy stance to sustain the macroeconomic
gains of tight monetary policy and to continue to rein-in inflationary
expectations.

The Committee’s Decisions
The Committee considered and acknowledged the merits of option 1 but rejected
it as being premature in view of the potential risk factors in the horizon posed by
recent developments which would necessitate increased fiscal expenditure in the
short-to-medium term, resulting in a resurgence of inflationary pressures. The
Committee considered and decided by a majority of 7 votes to hold and 3 votes
to reduce the MPR by 50 basis points. Thus, by a majority vote of 7 members to 3,
the MPC voted to maintain the current policy stance i.e. retain the MPR at 12 per
cent with a corridor of +/-200 basis points around the MPR; retain the Cash Reserve
Requirement at 12 per cent and Liquidity Ratio at 30 per cent; with the Net Open
Position at 1.0 per cent.

In the final analysis, the Committee was convinced that in view of the successes
achieved in all fronts - banking stability, low inflation, exchange rate stability,
strong reserve buffers and recovery in the equities market, there is no reason at this
point to change a policy that has worked so well.

Thank you.

Sanusi Lamido Sanusi, CON
Governor
Central Bank of Nigeria
May 21, 2013