CENTRAL BANK OF NIGERIA
MONETARY
POLICY REVIEW
MONETARY
POLICY REVIEW
August 2011
August 2011
3RD EDITION
3RD EDITION
Central Bank of Nigeria
33 Tafawa Balewa Way
Central Business District
P.M.B. 0187
Garki, Abuja
Phone: +234(0)946236011
Fax: +234(0)946236012
Website
©2011 Central Bank of Nigeria
: www.cbn.gov.ng
E-mail:
ISSN: 2141-6281
iii
Mandate
Vision
Mission Statement
Ensure monetary and price stability
Issue legal tender currency in Nigeria
Promote a sound financial system in Nigeria
Maintain external reserves to safeguard the international
value of the legal tender currency
Act as banker and provide economic and financial
advice to the Federal Government
To be one of the most efficient and effective of the
world's central banks in promoting and sustaining
economic development.
To be proactive in providing a stable framework for the economic
development of Nigeria through the effective, efficient and
transparent implementation of monetary and exchange
rate policy and management of the financial system.
Core Values

Meritocracy
Leadership
Learning
Customer - Focus
Central Bank of Nigeria
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
Foreword

ix
Chapter 1


Chapter 2
International Economic Developments
..
..

Chapter 3
Monetary Policy


Chapter 4
Domestic Financial Markets


Chapter 5
Domestic Price Developments and the Real Economy

Chapter 6
Economic Outlook


Table 2.1
ECOWAS: Real GDP Growth (%)
..
..
..

Table 2.2
ECOWAS: Inflation Rate


Table 2.3
ECOWAS: Budget Deficit (including grants) (% of GDP)

Table 2.4
ECOWAS: Trend in Interest Rates (%) ..
..
..

Table 2.5
ECOWAS: Current Account and Balance of Payments
Position (% of GDP) 19 ..


Table 3.1
Decisions of the Monetary Policy Committee
(July to December 2010)


Table 3.2
Changes in CBN Key Interest Rates (%)
..
..

Table 3.3
CBN Intervention for Agriculture, SME and
Infrastructure Initiatives


Table 3.4
Nigerian Treasury Bills Auction (N'million)
..
..

Table 3.5
CBN Standing Lending Facility (N'billion)
..
..

Table 3.6
Standing Deposit Facility (N'billion)
..
..
..

Table 3.7
Reserve Averaging Framework
..
..
..

Table 3.8
Cumulative Interbank Market Guarantee* (N'billion) ..

Table 3.9
OMO Sales in the First Half of 2011(N'million) ..
..

Table 3.10
Eligible Bank Assets of the DMBs Purchased
by AMCON


Table 3.11
Monetary Aggregates


Table 3.12
Reserve Money Actual and Benchmark
..
..

Table 4.1
Weighted Average Money Market Interest Rates
(per cent)


Table 4.2
Monthly Exchange Rates (N/US$)
..
..
..

Table 4.3
End-Month Exchange Rate Movements at Various
Segments of the Market ..


Table 4.4
Nominal and Real Effective Exchange Rate Indices ..

Table 4.5
Total Foreign Exchange Demand and Supply
..

Table 4.6
CBN Monthly Foreign Exchange Flows
..
..

Table 4.7
NSE All Share Index (MC) and Market
Capitalization (MC)


Table 5.1
Measures of Consumer Prices
..
..
..

Table 5.2
Inflation Rate


Table 5.3
Food Inflation ..


vi
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Page
Table 5.4
Relative Contribution to Headline Inflation
..
..

Table 5.5
Relative Contribution to Core Inflation
..
..

Table 6.1
World Economic Outlook


Table 6.2
Outlook for Key Macroeconomic/Monetary Indicators

Figure 3.1 Developments in Interbank Interest Rates
..
..

Figure 3.2
Relationship between Call Rate and OBB
..
..

Figure 3.3
Risk Premium


Figure 3.4
Excess Reserves and Interest Rate in the
First Half of 2011


Figure 3.5
Omo sales in the First Half of 2011
..
..
..

Figure 3.6
Sectoral Distribution of NPLs Acquired by AMCON
at End of June 2011


Figure 3.7
Performance of M1, M2 and RM
(2010 and 2011)


Figure 3.8
Performance of M1, M2 and RM in the First Half
of 2011 and the Corresponding Period of 2010
..

Figure 3.9
Reserve Money Benchmark & Actual
(June 2010 - June 2011)


Figure 3.10
Reserve Money Target and Actual
(Jan - June 2011)


Figure 3.11
The Performance of Credit (NDC,Cg, Cp)
( 2010 and 2011)


Figure 3.12
Performance of Credit (NDC,Cg, Cp) in the First
Half of 2011 and the Corresponding Period of 2010
..

Figure 4.1
Trends in Money Market Rates
..
..
..

Figure 4.2
Naira End-Period Exchange Rate
..
..
..

Figure 4.3
Real and Nominal Exchange Rate Indices
..
..

Figure 4.4
Demand and Supply of Foreign Exchange
..
..

Figure 4.5
Foreign Exchange Inflow and Outflow
..
..

Figure 4.6
Nigerian Stock Exchange ASI and MC
..
..

Figure 4.7
Share Price Volatility


Figure 4.8
NSE Market Capitalization by Sector as at
end-June, 2010


Figure 4.9
NSE Market Capitalization by Sector as at
end Dec 2010 ..


Figure 4.10
NSE Market Capitalization by Sector as at
end-June, 2011


Figure 4.11
FGN Bonds Market Growth


Figure 4.12
FGN Bonds Maturity Profile


Figure 4.13
Nigeria international Bonds Yield Line ..
..
..

Figure 4.14
FGN Bonds Yield Curves 25th Jun 10 vs
24th Dec 10 vs 24th Jun 2011 ..
..
..
..

Figure 5.1
Headline, Core and Food Inflation (Y-Y)
..
..

List of Figures
vii
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Page
Figure 5.2
Year-on-Year Headline Inflation: Selected Items
..

Figure 5.3
Actual Seasonal Adjusted Headline Inflation
..

Box 3.1
Reserve Averaging Framework
..
..
..

Box 5.2
Federal Government Fiscal Operations
..
..

Communiqué No. 74 of January 24-25, 2011 ..
..
..
..

Communiqué No. 75 of March 21-22, 2011


Communiqué No. 76 of May 23 - 24, 2011


List of Boxes
Appendices


CBN Monetary Policy Review

CHAPTER 1
OVERVIEW

During the first half of 2011, monetary policy continued to focus
on maintaining price stability while sustaining the efforts to
bring about stability and soundness of the banking system on a
permanent basis. As a direct consequence of lax fiscal policy
and monetary easing in the preceding year, inflationary
pressures were high by the turn of 2010. The inflationary
overhang was exasperated by increased public and private
spending related to the April general elections, increased
liquidity owing to purchases of troubled assets of DMBs by the
Asset Management Corporation of Nigeria (AMCON), and
growing concerns about the international economic and
financial environment together with the rising global food and
energy prices. Monetary policy in the period under review
aimed at providing a balanced response to the varied
challenges.
Liquidity
management
operations
were,
accordingly carefully structured to meet the growing financial
needs without losing sight of the need to sustain price stability
and financial stability.

The overall environment of monetary policy in the first half of
2011 was characterized by high
inflationary pressures.
Monetary policy responded to a number of other equally
significant challenges. Finding and managing an appropriate
mix of instruments to ensure price stability, banking and
financial market stability and growth was a key challenge.
Despite the enormous liquidity injection in the preceding half,
monetary aggregates grew moderately but the flow of credit
to the real sector of the economy continued to be low. As the
deadline for withdrawing the Bank’s guarantee on inter-bank
placements drew close, the money market began showing
signs of stress, evidenced by rising interest rates. The year-onyear headline inflation, which was 11.80 per cent in December
2010, rose to 12.80 per cent in March but eased to 10.20 per
cent in June 2011. These challenges, combined with the
relatively uncertain global outlook, defined the monetary
policy landscape in the first half of 2011.

The primary focus
of monetary
policy in the first
half of 2011 was to
ensure price
Finding and
managing an
appropriate mix
of instruments to
ensure price and
financial system
and growth was a
key challenge.


CBN Monetary Policy Review

The CBN used the Monetary Policy Rate (MPR) to anchor shortterm interest rates, and rein-in inflation expectations in the first
half of 2011. Reserve averaging was introduced to improve
efficiency in the use of funds and the liquidity management by
the DMBs. Reserve requirements and open market operations
(OMO) supported by discount window operations (including
the Standing Facilities, repos and reverse repos), remained the
main instruments of monetary policy during the period. The
Bank engaged complementary actions including primary
market transactions in government securities, sale/purchases
of CBN bills and foreign exchange in the management of
system’s liquidity. Efforts were made to bring about effective
communication and more regular dialogues with market
players, to shape-up market sentiments and ensure traction for
monetary policy during the review period.

The Monetary Policy Committee (MPC) met thrice in the review
period - January, March and May - to review domestic
economic conditions and the attendant challenges against
the backdrop of international economic developments. The
MPR was adjusted upwards in all by 150 basis points, from 6.25
per cent to 6.50 per cent in January, 7.50 per cent in March
and 7.75 per cent in May. Besides, the committee retained
the symmetric interest rate corridor of +/-200 basis points. In
addition, upward adjustments were effected in liquidity ratio in
January by 500 basis points to 30.0 per cent from 25.0 per cent
and cash reserve requirement by 100 basis points in January
and again in May by 200 basis points. As at end -June 2011,
CRR stood at 4.00 per cent as against 1.00 per cent at the end
of 2010.


The headline inflation fell from 12.80 per cent at the end of the
first quarter to 11.3 per cent in April, and thereafter, rose to 12.4
per cent in May before dropping to 10.20 per cent at endJune 2011. The level of inflation declined by 3.90 percentage
points in the first half of 2011 compared with the level in the
corresponding
period
of
2010,
reflecting
in
part
the
effectiveness of pursuing tight monetary policy.

Activities in the financial markets in the first half of 2011 were
influenced, largely, actions to further calm the markets and to
....effective
communication
and regular
dialogues with
market players
helped
significantly to
shape market
....decline in
inflation rate
.........was mainly
the result traced
to tight monetary
policy.


CBN Monetary Policy Review

improve their resilience in meeting with the external and
domestic pressures arising mainly from developments in the
global economy). On the external front, sovereign debts had
emerged to become an important source of concern as fiscal
sustainability and solvency indicators deteriorated in some
advanced economies, in particular in some euro area
countries, prompting speculations about the possibility of
defaults.

On the domestic front, market concerns about the condition
of some intervened deposit money banks fuelled unease
among participants while anxiety about the outcome of the
April 2011 general elections led to bearish trends in stock
prices. Credit to the private sector remained lower than
envisaged while demand for foreign exchange rose, putting
pressure on the exchange rate. As part of the measures to
dampen the pressure, the Central Bank of Nigeria (CBN)
extended the interbank guarantee from May 2010 to end-June
2011, and further to December, 2011. (This measure, combined
with the continued actions of AMCON and other regulatory
actions helped to calm the financial markets)

The overall outlook for the second half of the year is somewhat
mixed. While growth impulses appear to be robust, there are
far too many uncertainties, partly emanating from the
developments in the rest of the world. Current forecasts
suggest that headline inflation could moderate with continued
tightness in the stance of monetary policy. However, the yearon-year inflation rate may still remain at around the border of
double digits. Liquidity management would continue to be
challenging in view of the likely increase in government
spending on infrastructure, salaries and wages, and further
mop-up of troubled assets of the DMBs by AMCON, and the
uncertain market behaviour of major participants. The good
news is that the second half of the year would see the
conclusion of bank consolidation.


....credit to the
private sector
remained lower
than envisaged
and the demand
for forex rose
putting pressure
on the exchange
rate.
...liquidity
management
would remain
challenging in
view of the likely
increases in
government
spending on


CBN Monetary Policy Review

CBN Monetary Policy Review

CHAPTER 2
INTERNATIONAL ECONOMIC DEVELOPMENTS

2.1 The Global Economy
Provisional data indicate that the global economy grew at an
annualized rate of 4.3 per cent in the first quarter of 2011,
compared with 5.9 per cent recorded in the corresponding
period of 2010 and the overall growth of 5.1 per cent for that
year. Projections suggested a further drop in global output
growth in the second half of 2011. The decline in global growth
in the first half was largely attributed to the devastating effect
of the Japanese earthquake and tsunami and the attendant
supply disruptions which weighed heavily on global industrial
production, the political crisis in the Middle East and North
Africa (MENA) region and the sovereign debt crisis in the Euro
Area.

Growth in the advanced economies is projected to average
2.4 per cent during 2011–12, representing a modest decline
from an average of about 3.0 per cent recorded in 2010.
Growth is expected to be weaker than previously projected in
2011, especially for the United States and Japan, but could be
partly offset by strong economic activities in core Euro area
economies. The Japanese economy is forecast to rebound
from the earthquake/tsunami in 2012 to offset the weaker
growth in the United States.

At 2.5 per cent, annualized, growth weakened in the United
States partly due to transitory factors including higher
commodity prices, adverse weather conditions and supply
chain disruptions from the Japanese earthquake on U.S.
manufacturing. Preliminary estimates for the UK in the first
quarter of 2011 indicate a growth rate of 0.5 per cent, while in
Japan; it was estimated to have declined by 0.9 per cent over
the last quarter1. In contrast, growth in the Euro Area was
strengthened by robust investment in Germany and France. In
the
emerging
and
developing
economies,
growth

1 US Bureau of Economic Activity
...global economy
grew at an
annualized rate of
4.3 per cent
compared with
5.9 per cent in the
corresponding
period of 2010....
Growth is
expected to be
weaker than
previously
projected in 2011,
especially for the
United States and
Japan...
Growth
weakened in the
United States due
to transitory
factors including
higher commodity
prices, adverse
weather
conditions,,,


CBN Monetary Policy Review

accelerated as projected, but with considerable variation
across regions.

Output growth in emerging and developing economies is
expected to average 6.5 per cent during 2011–12, compared
with 7.5 per cent in 20102. Generally, growth prospects vary
across regions. For instance, growth in emerging Asia will
decelerate only slightly from the very high levels of last year.
Disruptions to regional production networks due to supply
constraints from Japan appear contained, although some
sectors,
especially
automobiles
and
electronics,
could
experience strains through the summer.

The Latin American economies would be bolstered by
commodity exports and domestic demand but the pace will
ease in some economies where policies have been tightening
more aggressively. Growth in emerging Europe is now
projected to be higher than previously expected in 2011,
followed by a softening in 2012, driven in part by a sharp
domestic demand cycle in Turkey. Activity is projected to
continue strengthening in Sub-Saharan Africa, with domestic
demand
remaining
robust
and
commodity
exporters
benefiting from elevated prices. Economic prospects in the
MENA remain clouded by political and social unrest, although
the outlook has improved for some oil and mineral exporters.

Global inflation picked from the 3.5 per cent in the last quarter
of 2010 to 4.0 per cent in the first quarter of 2011, and was
projected to rise further in the second quarter. Inflation
accelerated mainly due to sharp increases in international
commodity and oil prices occasioned in part by the negative
impact of the political crises in the oil-producing MENA region.
In the emerging and developing economies, inflation pressures
were increasingly broad-based, reflecting higher share of
expenditure on food and energy as well as rising aggregate
demand pressure. Core inflation emerged as a major problem
across a number of economies, especially in Latin America.
However, among the advanced economies, core inflation

2 IMF World Economic Outlook (WEO), April 2011 and June 2011
Update
Output growth in
emerging and
developing
economies is
expected to
average 6.5 per
cent during 201112, compared
with 7.5 per cent
in 2010.
In the emerging
and developing
economies,
inflation pressures
were increasingly
broad- based...


CBN Monetary Policy Review

remained subdued in the United States and Japan but rose
moderately in the Euro area.

The global financial markets remained volatile during the first
half of 2011, reflecting market concerns about sovereign debt
risks in the Euro area, the recent softening in economic activity
and persistent housing market weakness in the United States.
The signals were mainly from rising sovereign credit default
swap spreads in certain euro area economies, bearish global
stock prices, and falling long-term bond yields in the major
advanced economies. In addition, there were indications of
insufficient pace of progress on banking system reform, notably
in Europe, as well as risks related to re-leveraging in various
market segments3.

In the emerging and developing economies, the financial
environment remained largely accommodative, although with
greater variation across countries. In these countries, capital
inflows were erratic
probably
reflecting
the
increased
downside risks to the global economy and domestic policy
concerns such as inflation. Some of the larger economies
appeared to be witnessing rapid credit expansion, propelled
by accommodative macroeconomic conditions and buoyant
capital flows.

2.2
Regional/ Country Specific Developments
2.2.1
Economic Community of West African States (ECOWAS)
2.2.1.1 Output
ECOWAS countries recovered fast from the global financial
crisis. At 6.5 per cent, output expanded above the African
average growth rate of 4.5 per cent in 2010 (Table 2.1). Gaps
between actual production and potential output began to
close in almost all Member States. With the exception of Cote
d’Ivoire which recorded less than 3.0 per cent against 3.8 per
cent recorded in 2009, all other countries in the region
recorded higher growth rates in 2010. Niger and Guinea which
had obtained negative growth rates of 0.9 and 0.3 per cent,
respectively, returned to the path of economic growth with 7.5
and 1.9 per cent respectively in 2010. Nigeria and Ghana

3 IMF June 2011 Global Financial Stability Report (GFSR)
In the emerging
and developing
economies, the
financial
environment
remained largely
accommodative...
ECOWAS
countries
recovered fast
from the global
financial
Gaps between
actual production
and potential
output began to
close in almost all
Member States.


CBN Monetary Policy Review

recorded the highest growth rates of 7.9 and 6.6 per cent,
respectively.

Estimates suggest that economic growth would remain strong
in many ECOWAS countries in 2011, thus offsetting the
declining growth in a few others on the overall output growth
in the sub-region. The anticipated improvement in growth
performance is largely attributed to rising commodity prices.
The region, however, continues to be plagued by deficits in
infrastructure and weak institutions.

Table 2.1
ECOWAS: Real GDP Growth (%)

AFRICA

ECOWAS

UEMOA

Benin

Burkina Faso

Côte d'Ivoire

Guinea Bissau

Mali

Niger

Senegal

Togo

WAMZ

Gambia

Ghana

Guinea

Liberia*

Nigeria

Sierra Leone

Other (Cape Verde)


Sources: WAMA, June 2011
..economic
growth would
remain strong in
many ECOWAS
countries in 2011,


CBN Monetary Policy Review

2.2.1.2 Inflation
Economic activity in ECOWAS during the period was within an
environment of downward trending inflation occasioned by
rising food and energy prices. Annual average inflation in
ECOWAS stood at 9.9 per cent in 2010. In the first half of 2011,
inflation trended downwards in some of the countries including
Nigeria. Rates were generally lower among the UEMOA (Table
2.2).

Table 2.2
ECOWAS: Inflation Rate

2011*
Africa

ECOWAS

UEMOA

Benin

Burkina Faso

Côte D'lvoire

Guinea Bissau

Mali

Niger

Senegal

Togo

WAMZ

Gambia

Ghana

Guinea

Liberia

Nigeria

Sierra Leone

Other (Cape Verde)


Estimates
Source: WAMA, June 2011
2.2.1.3. Public Finance and Debt
The ECOWAS budget deficit (including grants) widened from
3.2 per cent of GDP in 2009 to 3.9 per cent in 2010. Expenditure
and net lending accounted for 23.9 per cent in 2010. The
expansion in expenditure stemmed mainly from capital outlays
which increased in most of the countries as a result of
infrastructure development and implementation of poverty
Annual average
inflation in
ECOWAS stood at
9.9 per cent in
2010.
Overall ECOWAS
deficit was
estimated in 2011
at 3.6 per cent of
GDP compared
with 3.9 per cent
in 2010.


CBN Monetary Policy Review

reduction
strategies.
The
upward
trend
in
recurrent
expenditure was largely linked to rising wage bills. Revenues
and grants accounted for 20 per cent of GDP in 2010.
Provisional data point to some fiscal consolidation in 2011.
Overall ECOWAS deficit was estimated in 2011 at 3.6 per cent
of GDP compared with 3.9 per cent in 2010. UEMOA countries
were expected to return a lower deficit-to-GDP ratio in the
current year (Table 2.3).

Table 2.3
ECOWAS: Budget Deficit (including grants)
(% of GDP)

Africa

ECOWAS

UEMOA

Benin

Burkina Faso

Côte D’Ivoire

Guinea Bissau

Mali

Niger

Senegal

Togo

WAMZ

Gambia

Ghana

Guinea

Liberia

Nigeria

Sierra Leone

Cape-Verde


Sources: WAMA, June 2011

The public debt position of ECOWAS countries improved due
mainly to debt relief extended to some countries under the
HIPC initiative. Thus, the overall level of outstanding debt
declined from 19.3 per cent in 2009 to 17.4 per cent in 2010,


CBN Monetary Policy Review

and was expected to improve further in 2011. Current
estimates suggest that the debt ratio could crash in the WAMZ
from 17.5 per cent in 2010 to 7.6 per cent in 2011. The
prospects were not too bright for the UEMOA countries.
Given the rising cost of external debt, domestic debt has
become an alternative source of financing the budget deficit.
Consequently, the domestic debt of most ECOWAS countries
as a percentage of GDP is upward trending.

2.2.1.4
Monetary Policy Measures
The slowdown in credit in the ECOWAS economies in 2010
informed most central banks in the sub-region to relax
monetary policy. In the first half of 2011, however, a number of
central banks in the sub-region adjusted their monetary policy
stance to reflect changes in economic and liquidity conditions
once the risks of the second-round effects of the global
financial meltdown had crystallized. During the crises, most
central banks lowered their refinancing rate and injected
liquidity into their economies in addition to official guarantees
on money market transactions.
The public debt
position of
ECOWAS
countries
improved due
mainly to debt
relief extended to
some countries
under the HIPC
initiative
....a number of central
banks in the sub- region
adjusted their monetary
policy stance to reflect
changes in economic
and liquidity conditions...


CBN Monetary Policy Review

Table 2.4
ECOWAS: Trend in Interest Rates (%)
Zones
Interest Rate

2010*
CFA
Savings

Lending
Free
Free
Free
Free
Free
Treasury bills

Policy rate

Escudo
Savings

Lending

Treasury bills

Policy rate

Dalasi
Savings

Lending

Treasury bills

Policy rate

Cedi
Savings

Lending

Treasury bills

Policy rate

GNF
Savings

Lending
Free
Free
Free
Free
Free
Treasury bills

Policy rate

Dollars
Lib
Savings

Lending

Treasury bills

Key rate

Naira
Savings

Lending

Treasury bills

Policy rate

Leone
Savings

Lending

Treasury bills

Policy rate


20.01

Estimates
Source: WAMA, June 2011


CBN Monetary Policy Review

2.2.1.5 External Sector
The global economy commenced the path to recovery in
2010 following the devastating financial and economic crises,
with sub-Sahara African countries performing particularly well.
Consequently, the current account balance of most countries
was expected to improve steadily. However, in ECOWAS, the
current account position of member countries deteriorated as
it dropped from 7.0 per cent of GDP in 2009 to 0.1 per cent of
GDP in 2010. The decline was traceable to deterioration in
balance of trade, income and current transfers which
diminished as a result of declining budget support and
migrant-worker remittances. The UEMOA countries were
particularly hit in 2010 (Table 2.5).

Projections as indicated by WAMA showed that the current
account position of most ECOWAS countries could improve in
2011 following improved commodity prices and exports.


....in ECOWAS, the
current account
position of
member countries
deteriorated as it
dropped from 7.0
per cent of GDP in
2009 to 0.1 per
cent of GDP in
2010.


CBN Monetary Policy Review

Table 2.5
ECOWAS: Current Account and Balance of Payments
Position (% of GDP)

** Projections
Sources: WAMA, June 2011

Nominal exchange rates depreciated in all ECOWAS countries
except the CFA and the escudo. At the sub-regional level,
foreign reserves were below the end- 2009 level in 2010. The
WAMZ countries, in particular, on the aggregate, witnessed a
significant decline in reserves, linked to the depletion in
Nigeria’s external reserves.

2.2.2
Sub-Saharan Africa
The Sub-Sahara African region continued to show resilience in
the face of sluggish global recovery from the economic and
financial crisis. The region has maintained an impressive growth

2011**

2011**
Africa

ECOWAS

UEMOA

Benin

Burkina Faso

Côte D’Ivoire

Guinea Bissau

Mali

Niger

Senegal

Togo

WAMZ

Gambia

n.a

n.a
Ghana

n.a

n.a
Guinea

n.a

Liberia

Nigeria

n.a

n.a
Sierra Leone

n.a

n.a
Cape Verde

n.a

n.a
...Sub-Saharan
Africa was
projected to grow
by 5.5 per cent in
2011. However,
this forecast is
laden with
considerable
uncertainty and
risks related to the
global economy,


CBN Monetary Policy Review

path overall. From 2.8 per cent in 2009, the region grew by 5.4
per cent in 2010 and currently projected to grow at 5.2 per
cent in 2011. However, this forecast is laden with considerable
uncertainty and risks related to the global economy, notably
the impact of the earthquake and nuclear crisis in Japan, the
political and social crises in the MENA region, Côte d ́Ivoire
and other flash spots in the sub-region, and their effects on
neighboring countries.

Growth in the region continues to be accompanied by
increased inflationary pressures. From 7.5 per cent average
inflation rate in 2010, the region is forecast to witness an even
higher inflation at 8.4 per cent in 2011; the main drivers being
food and fuel prices. The oil producing SSA countries,
especially Nigeria, Angola and equatorial Guinea have
continued to experience higher inflationary pressures owing
partly to rapid monetization of oil revenues. On the other hand,
the non-oil SSA countries have had much lower inflationary
pressures, thus moderating the region’s average.

2.2.3
Middle East and North Africa (MENA)
Political and social instability continues to threaten growth in
the MENA region, leaving a highly uncertain overall economic
picture. The resulting paralysis of economic and social life has
further dampened prospects of the region’s recovery from the
global economic crisis. Youth unemployment has remained a
major problem in the region, contributing to the current wave
of political unrests leading to the overthrow of governments in
Tunisia and Egypt. Labour markets have not been flexible
enough to absorb the growing supply of young workers. Given
the region’s rapidly growing population, the demographic
pressure on labour markets could continue for some time.

However, high commodity prices and increased external
demand are expected to boost production and exports in
some of the countries. Increased government spending
programmes could play a key role in fostering the recovery.

With regard to financial sector policy, assistance to financial
systems helped in containing vulnerabilities and spillovers,
especially from the Gulf Cooperation Council. In spite of such
Given the region’s
rapidly growing
population, the
demographic
pressure on labor
markets would
continue in many
countries.


CBN Monetary Policy Review

support, banks in the region have become more cautious,
following recent episodes of financial sector distress that
occurred amid sharp corrections in property markets.

2.2.4
Asia
Growth in Asia continued to out-pace other regions as broadbased recovery in most countries was supported by strong
export performance, buoyant private domestic demand, and
in some cases, rapid credit growth. During the first half of 2011,
growth moderated from cyclically high levels to more
sustainable rates. With the notable exception of Japan, output
gaps in much of the region closed rapidly, creating concerns
about
inflation
and
overheating.
Credit
growth
was
accelerating in some economies, and remained especially
high in China. Most of the increase in headline inflation in
recent months had been due to hikes in food prices, and core
inflation was on the increase, most notably India. Real estate
prices were on a double-digit rise in a number of countries.

Asia is projected to expand rapidly in 2011 driven by robust
export gains in market share with increased intra-regional
trade partially offsetting the weakness in final domestic
aggregate demand from the advanced economies. Capital
flows to Asia are likely to continue, motivated by both cyclical
and structural factors. Autonomous private consumption
growth would remain strong, supported by robust asset
valuations and improved labour market conditions. After
growing by 10.25 per cent in 2010, China’s growth was
estimated to remain robust at 9.5 per cent in 2011 with the
growth drivers shifting increasingly from public to private
demand. Consumption was expected to be supported by
rapid credit growth, improved market conditions, and
continuing policy efforts to raise household disposable income.

2.2.5
The Euro Area
The recovery in Euro area has continued to be gradual and
uneven following renewed financial turbulence in the
peripheral economies during the last quarter of 2010. The
region is projected to grow at 1.60 per cent in 2011 down from
1.80 per cent recorded in 2010. Growth in emerging Euro area
is expected to slow to 4.30 per cent in 2011 from 4.50 per cent
Growth in Asia
continued to outpace other
regions as broadbased recovery in
most countries
was supported by
strong export
performance,
buoyant private
domestic
Capital flows to
Asia are likely to
continue,
motivated by
both cyclical and
structural factors.


CBN Monetary Policy Review

in 2010, mainly as a result of declining consumption arising from
the retrenchment of fiscal stimulus and weakening export
growth occasioned by slowing external demand. There have
been considerable variations in economic prospects across
the region largely due to differences in the state of public and
private sector balance sheets. In Germany, growth is expected
to moderate from 3.60 per cent in 2010 to 2.70 per cent in
2011. On the other hand, growth in France is projected to scale
up to 1.70 per cent in 2011 from 1.40 per cent in 2010. Amongst
the advance euro zone economies, Italy and Spain appear to
be showing the weakest recovery prospects with growth
forecast for 2011 currently at 0.60 and 0.80 per cent,
respectively. Weak growth performance in both economies
may be partly a consequence of constrained export growth
and the expected fiscal consolidation, as they struggle with
protracted
fiscal
imbalances
and
severe
structural
unemployment.

Banking sector losses and the fiscal problems have combined
to widen sovereign spreads in some of the euro zone
economies in the first half of 2011, in some cases reaching
levels not experienced since the commencement of the
Economic and Monetary Union. Consequently, public debt
sustainability
remained
a
priority
for
most
euro
area
economies. Sovereigns notably; Greece, Ireland, and Portugal
which have been under severe market pressure are expected
to continue with sizable front-loaded consolidation, and
perhaps austerity measures to reduce fiscal deficits and
reassure the markets. In addition to the financial strains from
the sovereign debt crisis in the area, inflationary pressures
appear to be gaining momentum. From 1.60 per cent in 2010,
consumer prices are currently projected to rise by 2.50 per
cent. The area’s current account appears to be gaining a
boost from Germany and Netherlands especially. Both
countries are projected to close in year 2011 with a positive
current account in excess of 4.0 per cent of GDP. This is
expected to move the current account balance of the euro
area from the deficit recorded in 2010 to the positive region in
2011.


The recovery in
Euro area has
continued to be
gradual and
uneven following
renewed financial
turbulence in the
peripheral
economies during
the last quarter of

...public debt
sustainability
remained a
priority for most
euro area
economies.


CBN Monetary Policy Review

2.2.6
United States of America (USA)
The recovery of the U.S. economy slowed in the first half of
2011, prompting downward revisions in growth forecasts.
Currently, the economy’s real GDP is forecast to grow at 1.50
per cent in 2011 down from 3.0 per cent recorded in 2010.
During the first half 2011, output growth in the United States
was slower than expected due to weak consumer demand
which declined from 2.1 per cent in the first quarter to 0.1 per
cent in June 2011. Other factors at play included higher
commodity prices, bad weather, and the effects on
manufacturing of supply chain disruptions due to the
Japanese earthquake. The deterioration in global financial
conditions derived mainly from increased market concerns
and apprehensions over sovereign risks in the euro area and
persistent housing market weakness led to a prolonged
softening in economic activity in the U.S.

Consumer prices in the U.S have, in general, trended upward
despite the slowdown in economic activity. This is in part
traceable to the prolonged fiscal and monetary expansion
following the housing and financial crisis. Currently, year-end
headline inflation is forecast to rise in 2011 to 3.0 per cent from
1.6 per cent in 2010.

The trade position of the country continues to be a major
source of weakness. The overall current account position
remained negative during the period under review, and has
been projected at -3.1 per cent for 2011. This weakness could
persist unless there is significant improvement in the country’s
major trading partners especially the euro area.


..burst of growth in
the U.S economy
in late 2009 which
slowed in early
2010, picked
again in the
second half of


CBN Monetary Policy Review

CHAPTER 3
MONETARY POLICY

3.1
Introduction
The Central Bank of Nigeria (CBN) achieved significant
progress in the restoration of stability in the financial sector by
end-December 2010. In the first half of 2011, the thrust of
monetary policy was the promotion of price stability, in
contrast to the liquidity- enhancing measures up to the third
quarter of 2010 aimed at achieving financial stability.
Domestic inflation remained high in the first half of 2011;
partially on account of the rise in international oil and other
commodity prices, and partly on account of the high spending
prompted largely by the compulsions of the general elections
and to an extent the lagged effect of the measures taken to
increase the liquidity of the financial system, during the crisis
period of 2009 and also the AMCON operations related to
banking system stability.

3.2
Monetary Policy Measures
To address the persistent inflationary pressures, the monetary
policy stance has been tightened since September 2010. The
stance was reflected in the rise of the policy rate, the MPR,
from 6.25 per cent at the end of 2010 to 7.50 per cent by June
2011, and rise in the liquidity ratios (LR and CRR).

3.3
Activities of the Monetary Policy Committee (MPC)
The MPC held 3 regular meetings during the period under
review. The Committee reviewed trends in domestic and
global economic conditions and the challenges facing
monetary policy in an ever-changing financial environment.

3.3.1 Decisions of the MPC
At its first meeting in 2011 held January 24 - 25, the MPC noted
significant downside risks to inflation arising mainly from
prospects
of
increased
liquidity
injections
from
high
government spending in the run up to the April 2011 general
elections. In addition, purchases by AMCON as well as rising
global energy and food prices (and the expected passthrough to the domestic economy) constituted other sources
...persistent
inflationary
pressures in the first
half of 2011 led to
the continuation of
the tight monetary
policy stance
In the first half of
2011, the thrust of
monetary policy
was the
promotion of
price stability, in
contrast to the
liquidity
enhancing
measures up to
the third quarter
of 2010
The MPC
observed that
economic growth
was
fundamentally
constrained by
structural
deficiencies....


CBN Monetary Policy Review

of downside risks to inflation. The Committee also expressed
serious concerns about the low savings deposit rates (of about
1.0 per cent) and its implications for financial intermediation
and the mobilization of critical long-term funds for real sector
investment. The MPC observed that economic growth was
fundamentally constrained by structural deficiencies as the
economy was largely import-dependent, leading to a
continued depletion in external reserves (Table 3.1). To meet
these challenges, the MPC decided to tighten the monetary
policy with emphasis predominantly on quantitative measure.

Table 3.1
Decisions of the Monetary Policy Committee (July to
December 2010)

Decision

MPR
Adjustment
Standing
Facility
Adjustment
January
24-25,
2011 (Communiqué
No. 74)
- Raised the MPR by 25 basis points
from 6.25 per cent to 6.50 per cent
- Maintained the symmetric corridor of
+/- 200 basis points
- Raised the Cash Reserve Requirement
(CRR) Ratio by 100 basis points from
1.00 per cent to 2.00 per cent.
- Raised the Liquidity Ratio (LR) by 500
basis points from 25.00 per cent to
30.00 per cent.
Raised MPR
to 6.50 per
cent
Corridor +/- 200
basis points
March 21-22, 2011
(Communiqué No.
75)

- Increased in MPR from 6.50 per cent
to 7.50 per cent
- Retained the Symmetric Corridor at +/-
200 basis points
- Retained CRR at 2.0 per cent
- Retained the Minimum Liquidity Ratio
at 30.0 per cent
- Extended
CBN
guarantee
of
the
Interbank Market and foreign creditors
to September 30, 2011.
Raised MPR
to 7.50 per
cent.
Corridor
+/-200
basis points.


May 23-24, 2011
(Communiqué No.
76)
- An increase in the MPR from 7.50 per
cent to 8.00 per cent
- An increase in the CRR from 2.0 per
cent to 4.0 per cent
- Retained
the
symmetric
corridor
around the MPR
Raised MPR
to 7.75 per
cent
Corridor +/- 200
basis points

Source: Central Bank of Nigeria


CBN Monetary Policy Review

The MPC raised the MPR by 25 basis points from 6.25 per cent
to 6.50 per cent and raised the Cash Reserve Requirement
(CRR) by 100 basis points from 1.00 per cent to 2.00 per cent
with effect from February 2011 and raised the Liquidity Ratio
(LR) by 500 basis points from 25.00 per cent to 30.00 per cent
with effect from 1st March 2011. The interest rate corridor was
left unchanged at +/- 200 basis points in relation to the MPR.
At the March 21st and 22nd 2011 meeting, the MPC observed
that the negative impact of the political crises in the oilproducing Middle East and North Africa (MENA) region on oil
prices and the disruptions and destruction associated with the
earthquake and tsunami in Japan had added to the
uncertainty about the sustainability of the global economic
recovery and growth. The Committee, however, noted the
positive growth outlook in the domestic economy in the nearto-medium term but expressed serious concern over the
heightened risk of inflation arising from the high expenditure
outlay of the Federal Government as contained in the 2011
Appropriation Act. The Committee observed that money
market rates were generally high and that credit to the private
sector continued to be sluggish attributable partly to the
delayed passage of the 2011 federal budget and, partly, to
the ongoing banking sector reforms. To address the concerns
identified, the MPC extended the CBN guarantee on interbank
transactions and foreign credit lines by three months from June
30, 2011 to September 30. The MPR was increased by 100 basis
points from 6.50 per cent to 7.50 per cent.

At the May 23rd – 24th 2011 meeting, the MPC noted the pace
of economic recovery in some major developed economies
along with some improvements in stock market indices.
Inflationary threats persisted following sharp increases in
international oil and commodity prices. In addition, there were
serious concerns about debt sustainability in many developed
countries, particularly in the euro zone, requiring strong fiscal
adjustment with attendant risk of economic slowdown in the
medium-term. On the domestic scene there were concerns
about the high liquidity engendered by the high spending in
the run up to the April elections and by the AMCON
operations. In addition, the release of intervention funds would
have significant impact in the short run. The MPC, therefore,
The MPC
observed the
negative impact
of the political
crises in the oil –
producing Middle
East and North
Africa (MENA)
region on oil
prices...
..there were
serious concerns
about debt
sustainability in
many developed
countries,
particularly in the
euro zone,


CBN Monetary Policy Review

stressed the importance of continuing structural reforms and
infrastructure development to enhance domestic production
to reduce the import bill and its pass-through effects on
inflation. It also noted the inflationary impact of the likely
deregulation of petroleum product prices.

The MPC increased the MPR by 50 basis points from 7.50 per
cent to 8.00 per cent, maintained the symmetric corridor of +/-
200 basis points as well as Liquidity Ratio 30.0 per cent. The
CRR, however, was increased by 200 basis points from 2.00 per
cent to 4.00 per cent to reduce the liquidity impact of the
excessive spending. The Committee reaffirmed its commitment
to exchange rate stability and support for the existing fiscal
mechanisms to bolster domestic output growth and extended
the CBN guarantee on interbank transactions and guarantee
of foreign credit lines by three months from June 30, 2011 to
September 30, 2011 (Table 3.2).

Table 3.2
Changes in CBN Key Interest Rates
(%)

MPR
Standing Facility
CRR
Liquidity
Ratio


SDF
SLF


MPC Communiqué
No.74

MPC Communiqué
No.74

MPC Communiqué
No.75

MPC Communiqué
No.76


Source: Central Bank of Nigeria

3.4
Liquidity Conditions and Management
The CBN took simultaneously, measures that will help improve
growth impulses in the non-oil sector. The measures are given
in Table 3.3. They are also designed that they help deliver
financial services at affordable prices and terms to a larger
proportion of the population and to connect the unbanked
The Committee
also reaffirmed its
commitment to
exchange rate
stability ..
..banking system
liquidity had been
sufficiently
restored and
inflationary
pressures, ......preoccupied the
attention of
monetary
management.


CBN Monetary Policy Review

with mainstream financial services. A total disbursement of
N538.07 billion was made during the first half of 2011. With this,
the banking system liquidity was restored and presented
challenges for managing liquidity.

Table 3.3
CBN Intervention for Agriculture, SME and Infrastructure
Initiatives

Name of Scheme

Size of Intervention
Disbursement
(as at June
2011)
Agricultural Credit
Guarantee Scheme Fund
(ACGSF)
75.0 per cent
guarantee in respect
of DMBs loans
granted for
agricultural purposes
N44.34 billion
Agricultural Credit Support
Scheme (ACSS)
N50.0 billion
N19.43 billion
Commercial Agricultural
Credit Scheme (CACS)
N200.0 billion
N131.49
billion
Refinancing/Restructuring
Small and Medium
Enterprises (SME)
Manufacturing Fund
N200.0 billion
N199.67 billion
Small and Medium
Enterprises (SME) Credit
Guarantee Scheme
(SMECGS)
N200.0 billion
N22.75 billion
Power and Aviation
Infrastructure Fund (PAIF)
N300.0 billion
N120.39 billion
The Nigerian IncentiveBased Risk Sharing System
for Agricultural Lending
(NIRSAL)

US$500.0 million
(CBN
Management
approved the
establishment
and
implementation
of NIRSAL on
June 14, 2011)
Total
N1,450.00 billion
N538.07
billion

Source: Central Bank of Nigeria

The major tool of liquidity management in the first half of 2011
remained
Treasury
Bills
auction
through
Open
Market


CBN Monetary Policy Review

Operations, complemented by Discount Window Operations
and Statutory Reserve Requirements. Total subscription to
Nigerian Treasury Bills (NTBs) in the primary market during the
first half of 2011 was higher at N1,466.47 billion than the
subscription of N1,269.95 billion recorded in the second half of
2010 and N734.46 billion in the first half of 2010.(Table 3.4).

Table 3.4
Nigerian Treasury Bills Auction (N'million)
(January 2009-June 2011)

Date

%
Change
over the
Previous
Year
Jan
115,466.62
149,834.17
205,585.55

Feb
80,106.56
100,217.01
216,924.18

Mar
80,000.00
65,000.00
284,056.99

Apr
101,356.24
160,494.88
215,067.41

May
120,217.01
100,217.01
204,607.78

Jun
120,000.00
158,700.00
340,233.10

1st Half
617,146.43
734,463.07

1,466,475.01
99.60
Jul
125,356.17
250,912.17


Aug
105,217.01
141,157.45


Sep
91,648.64
206,567.24


Oct
170,260.38
167,012.31


Nov
120,217.01
205,930.87


Dec
162,557.83
297,909.82


2nd Half
775,257.04
1,269,489.86

15.52


Cumulative
Figure
1,392,403.47
2,003,952.93

43.92

Source: Central Bank of Nigeria
.
3.5
Standing Lending/Deposit Facilities
The volume of transactions at the CBN Standing Lending
Facility (SLF) in the first half of 2011 stood at N17,628.46 billion
compared with N3,340.46 billion recorded in the second half of
The major tool of
liquidity
management in
the second half of
2010 remained
Open Market
Operations...


CBN Monetary Policy Review

2010 and N428.7 billion in the corresponding period of 2010.
The level of SLFs at end-June 2011 represents an increase of
427.7 and 4,012.1 per cent over the level in the second half
and the corresponding period of 2010, respectively. This
reflects the increased pressure on the funding requirement in
the light of the constraints imposed by the increase in the CRR
from 1.00 per cent to 2.00 per cent in January and from 2.00
per cent to 4.00 per cent in May 2011 (Table 3.5).

Table 3.5
CBN Standing Lending Facility (N'billion)
(January 2009-December 2010)
Date

Percentage
change
over the
preceding
year
Jan
846.18
135.50
565.51

Feb
3,457.57
-
1,369.60

Mar
4,592.69
-
3,425.47

Apr
3,875.48
-
3,328.35

May
2,581.43
270.97
3,722.41

Jun
3,691.75
21.70
5,217.30

1st Half

Jul
4,675.02
55.76


Aug
3,733.78
0.00


Sep
2,287.90
73.10


Oct
1,231.61
983.44


Nov
537.58
1,374.80


Dec
1,022.60
853.50


2nd Half
13,488.49
3,340.60

680.20
Total
32,533.60
3,768.77

(88.42)

Source: Central Bank of Nigeria

The Standing Deposit Facility (SDF) in the first two months of

was
lower
than
the
amount
recorded
in
the
corresponding months of 2010. Following the introduction of
the reserve averaging mechanism and the introduction of
remuneration of the reserve balances in excess of the required
..CRR was
reviewed in
January from 1.0
to 2.0 per cent
and in May 2011
to 4.0 per cent,...

..decrease in the
standing deposit
facility was as a
result of its
discontinuation
following the
introduction of the
reserve averaging
mechanism....


CBN Monetary Policy Review

reserve from March 09, 2011, the Standing Deposit Facility
ceased to be relevant. However, all excess reserve could be
interpreted to be equivalent of balances held in the SDF since
they are remunerated at the rate that would have been
applied on balances held in SDF. From this standpoint, SDF
during the period under review amounted to N2,932.88 billion
(Table 3.6), which was lower than the amount held in the first
half of 2010 as well as the second half of 2010.

Table 3.6
Standing Deposit Facility (N'billion)
(January 2009-June 2011)

Date

2011*
% Change
over the
preceding
year
Jan
-
5,622.63
1,864.94

Feb
-
6,101.90
666.25

Mar
-
9,413.45
180.65

Apr
-
6,853.06
49.65

May
-
1,735.45
74.21

Jun
-
5,563.64
97.18

1st Half

Jul
162.00
4,055.52


Aug
1,453.38
6,849.71


Sep
1,058.75
4,224.80


Oct
3,106.30
1,117.30


Nov
1,050.59
443.78


Dec
1,797.92
1,191.78


2nd Half
8,628.94
17,882.89

83.6)


Cumulative
Figure
8,628.94
53,173.02

516.22


Source: Central Bank of Nigeria

The figures reported for the months of April, May and June are in
actual fact the excess reserves of DMBs remunerated at the SDF
rate.

..decrease in the
standing deposit
facility was as a
result of its
discontinuation
following the
introduction of the
reserve averaging
mechanism....


CBN Monetary Policy Review

The Reserve Averaging and Interbank Market Activity
During the review period, reserve averaging helped to
facilitate
improvement
in
the
day-to-day
liquidity
management.
However,
with
the
increase
in
cash
requirements the DMBs incurred additional costs by resorting to
the Standing Lending Facility frequently, especially so in the
periods when the structural liquidity was under pressure. The
DMBs therefore maintained a daily average of N81.0 billion to
meet the cash reserve requirements. The resultant cost to the
CBN arising from the remuneration of the surplus reserves of
DMBs also rose (Table 3.7)

Table 3.7
Reserve Averaging Framework
(First to Fourth Maintenance Period)
Maintenance
Total CRR
Total Reserve
Surplus Reserves
Interest Paid
Interest
Rate
Period
(N)
(N)
(N)
(N)


Source: Central Bank of Nigeria

Following the decision of the Monetary Policy Committee at its
meeting of May 23-24, to raise the CRR from 2.0 to 4.0 per cent,
the DMBs had to closely manage their portfolios to ensure that
they met the adjusted required reserves level. The increase in
the CRR had a particularly adverse impact on the intervened
banks as it further increased their reliance on overnight funding
to meet the higher cash reserve requirement. At the same
time, the non-intervened banks reduced their exposure to the
intervened banks because they also needed to meet the
higher cash reserve requirements.

..standing facilities
were supported
by the reserve
averaging
framework...
.shortfall in the
supply of
structural liquidity
........, increased
pressure on shortterm interest rates
in the interbank
market...


CBN Monetary Policy Review

Besides,
uncertainty
about
the
prospects
of
the
recapitalization of the intervened banks led to some liquid
banks to reduce their exposures to them in anticipation of the
removal of CBN guarantee on interbank placements. The
reduction in this line of credit was particularly detrimental to
the stability of the interbank market. This situation called for
further policy fine-tuning.

Box 3.1
Reserve Averaging Framework

In February 2011, the Bank announced a reserve averaging
framework in a bid to refocus its monetary policy framework to
complement the use of the monetary policy rate (MPR)
introduced in December, 2006 to anchor short-term money
market rates and other interest rates. The new reserve
averaging method which commenced effectively on March 9,
2011 had a maintenance period of 28 days unlike the hitherto
CRR maintenance period of 14 days. The extended
maintenance period provided DMBs with the leverage to have
more flexibility in keeping their reserves. The policy also
impacted positively on money market liquidity as it freed more
reserves into the market.

Thus, the bank’s standing facilities for lending and deposit were
supported by reserve averaging to ensure optimal day-to-day
liquidity management. Generally, short-term operations were
conducted by banks through the Standing Lending Facility
(SLF). The supply of structural liquidity relative to demand,
determined the interbank interest rate over a medium term. In
contrast, the effectiveness of fine-tuning operations had an
impact on the degree of short-term volatility around the
medium-term interest rate.


CBN Monetary Policy Review

The operation of the reserve averaging framework impacted
profoundly on the liquidity of the intervened banks which had
relied heavily on overnight funding to meet their funding gap,
as they required more cash balances to meet their CRR
requirements. This phenomenon was more evident given the
oligopolistic structure of the banking system when the few big
banks provided leadership in cautiously extending interbank
temporary accommodation to the intervened banks because
of their high risk perceptions. The policy, however, came with
additional costs to the DMBs as structural liquidity fell
significantly forcing the market to borrow daily substantial
funds from the SLF to meet their cash reserve requirements and
other operational needs.

The cost of liquidity was further exacerbated by liquidity drain
through CBN sales of foreign exchange. Moreover, the
increase in the CRR (from 2.0 to 4.0 per cent) in June 2011 had
a significantly adverse effect on the DMBs, thus increasing the
uncertainty about the prospects of bank recapitalization as
some highly liquid banks tightened their hold on available
liquidity lines in the interbank market in anticipation of the
removal of the CBN guarantee by end-September 2011.

Monetary Policy and the Interbank Money Market
Interbank Market Guarantee
The need to sustain confidence in the interbank market
necessitated the CBN to extend, during the review period, the
guarantee on transactions in the interbank money market,
introduced in July 2009. The guarantee was initially introduced
to restore the integrity of the money market and to mitigate
counter-party risks. Following the tight monetary policy regime
since September 2010, activities in the money market slowed.
While the CBN guarantee encouraged trading amongst the
DMBs, and helped reduce the pressure on the CBN standing
lending window, active monetary operations using OMO and
foreign exchange interventions, were used to stabilize shortterm interbank interest rates (Table 3.8). Although the
interbank guarantee was initially designed to last till 31st
December 2009, it was extended to 30th June 2011 and further
to 30th September 2011 (and 31st December 2011 for the
need to sustain
confidence in the
interbank market
necessitated the
CBN to extend ,
......the guarantee
on transactions in
the interbank
money market,...


CBN Monetary Policy Review

intervened banks that had signed Transaction Implementation
Agreement (TIA) with prospective core investors), as signal of
the central bank’s commitment to the liquidity and stability of
the financial system. The CBN’s guarantee of July 2009 also
covered deposit money bank’s exposures to foreign banks.

Table 3.8
Cumulative Interbank Market Guarantee*
(N’billion)

S/No.
Bank
Jan-11
Feb-11
Mar-11
Apr-11
May-11
Jun-11

Total


Source: Central Bank of Nigeria

Interbank Placements
The interbank money market in the first half of 2011 was very
active. Interest rates in the interbank money market were
relatively moderate during much of 2010. Short-term interest
rates started to rise with the CBN having reversed its monetary
policy stance since September 2010.


Jan
Feb
Mar
Apr
May
Jun

Per cent
Figure 3.1
Developments in Interbank Interest Rates
MPR
Interbank Call Rate
OBB
Call
OBB
MPR


Source: Central Bank of Nigeria


..gap between
the unsecured
call rate and the
secured OBB rate
narrowed


CBN Monetary Policy Review

Risk Premium at the Interbank Money Market
The risk premium, as measured by the spread between the
unsecured interbank money market rate and the risk-free rate
has generally remained low since the introduction of the
placement guarantee by the CBN in July 2009. However,
despite the guarantee, spread between the average
interbank and the OBB rates rose gradually in the first half of
2011. Specifically, the gap between the two rates rose from
0.29 percentage points in January to about approximately 2
points in June, reflecting increased risk perception by market
participants (Figures 3.2 and 3.3).


Jan-11
Feb-11
Mar-11
Apr-11
May-11
Jun-11
Per cent
Jan-11
Feb-11
Mar-11
Apr-11
May-11
Jun-11
Average Call Rate %

Average OBB Rate %

Difference btw Call Rate and
OBB rate (% pts)

Figure 3.2
Relationship Between Call Rate and OBB Rate (Jan - Jun 2011)


Source: Central Bank of Nigeria


Jan-11
Feb-11
Mar-11
Apr-11
May-11
Jun-11
Per cent
Figure 3.3
Risk Premium
Credit Risk
Risk Premium


Source: Central Bank of Nigeria


CBN Monetary Policy Review

Cost of Liquidity Management
Efficient liquidity management continued to be at the heart of
the Bank’s monetary management during the first half of 2011.
Reserve averaging as a tool for liquidity management
commenced in March 2011. With the consistent increase in
the MPR and the CRR, the level of bank reserves declined in
April before rising steadily during May and June, 2011. As bank
reserves grew, the remuneration cost also increased during the
period (Figure 3.4). The CBN incurred N1,370.0 billion on the
remuneration of excess reserves of the DMBs in the first half of
2011.


MARCH 09APRIL 05, 2011
APRIL 06-MAY
10, 2011
MAY 11-JUNE
07, 2011
JUNE 08-JULY
05, 2011
N'Billions
Figure 3.4
Excess Reserve and Interest Paid in the First Half of 2011
AVERAGE SURPLUS
INTEREST PAID

Source: Central Bank of Nigeria

It is pertinent to note that the attraction for remuneration on
reserves became strong incentive to invest excess reserves with
the CBN. The attendant implications were twofold: notably, the
growing cost of liquidity management and the shallow
interbank market as a viable source of liquidity. An additional
concern was the cost of OMO during the first half of 2011.
Besides, the DMBs frontloaded their reserve balances and
traded in other markets, thus creating the impression of tight
temporary liquidity conditions in the market. Thus, at end-June,
2011, the Bank incurred N9.47 Billion as interest payments on
treasury bills issued during the period (Table 3.9, Figure 3.5).


.With .the
consistent
increase in the
MPR and the CRR,
the level of bank
reserves
..DMBs
frontloaded their
reserve balances
and traded in
other markets,
thus creating the
impression of tight
liquidity conditions
in the market.


CBN Monetary Policy Review

Table 3.9
OMO Sales in the First Half of 2011
(N’Million)

Source: Central Bank of Nigeria
*OMO was suspended in February


N'Billion
Figure 3.5
OMO SALE IN THE FIRST HALF OF 2011
VOLUME / VALUE
INTEREST


Source: Central Bank of Nigeria

3.5.1
Banking Sector Reforms
Banking System Stability
The banking sector recorded improved performance in the first
half of 2011. At end-June 2011, 17 banks were granted
Approval-in-Principle (AIP) under the new banking model (9
International, 6 National and 2 Regional banks) of which 13
banks opted to hive-off their non-banking subsidiaries while 4
expressed interest to operate Holding Company structure in
order to retain their investments in non-banking financial
Date
Volume/Value
Interest Paid
January
140,539.22
5,856.76
February*

March
94,828.62
576.15
April
23,387.20
227.22
May
48,607.56
1,865.30
June
25,470.00
945.92
Total
332,832.58
9,471.35


CBN Monetary Policy Review

service subsidiaries. A total of 7 banks were not granted AIP
until core investors had taken over and presented credible
compliance plans. During the review period, one AIP each was
issued for Non-interest bank and another for Non-interest
banking window operations while 3 banks had completed the
Transaction
Implementation
Agreements
in
their
recapitalization plans.

The banking industry gross credit facilities of N7,167.0 billion in
December 2010 rose marginally to N7,321.85 billion in June
2011. The total deposits of N10,838.0 and N11,633 billion were
reported for December 2010 and June 2011, respectively. The
industry liquidity ratio increased from 47.46 per cent in
December 2010 to 50.25 per cent in June 2011. Similarly, the
capital adequacy ratio rose from 4.03 per cent in December
2010 to 4.24 per cent in June 2011.

The NPLs ratio of the industry improved from 15.5 per cent in
December 2010 to 10.3 per cent in June 2011, although still
above the prescribed maximum of 5.0 per cent. The unaudited
profit before tax of N162.3 billion in June 2010 inched up
marginally to N165.3 billion in June 2011. Specifically, the
financial soundness of the non-intervened banks measured in
terms of capital adequacy, liquidity and earnings improved
except the quality of the assets of 3 banks that had NPL ratio of
more than 10.0 per cent as at June, 2011.

Issuance of AMCON Bonds
The Asset Management Corporation of Nigeria (AMCON)
continued to play a critical role of distress resolution in the
Nigerian banking sector during the first half of 2011. In
December 2010, AMCON purchased a total of N1,230.0 billion
non-performing loans (NPL) of the banking system. During the
first half of 2011, AMCON issued two three-year zero coupon
consideration bonds with face value of N534.48 billion to 22
DMBs in exchange for their eligible bank assets. This brought
the total face value of bonds issued by AMCON to N1,764.48
billion in exchange for eligible bank assets valued at N2,827.0
billion at end-June 2011, representing 33.28 per cent of the
total outstanding bonds issued in the market.
...NPLs ratio of
the industry
improved from
15.5 per cent in
December 2010
to 10.3 per cent in
June 2011,.


CBN Monetary Policy Review


Capital Market
Oil & Gas Marketing
Transportation & Storage
Finance & Insurance
Government
Power & Energy
Arts, Entertainment & Recreation
Professional, Scientific & Technical Activities
Education
Administration & Support Services Activies
Oil & Gas Services
Water Supply, Sewerage, Waste Mgt &...
Billions
Figure 3.6
Sectoral Distribution of NPL's Acquired by AMCON at End of June 2011
NPL'S

Source: Central Bank of Nigeria

Table 3.10
Eligible Bank Assets of the DMBs Purchased by AMCON (Jan -
June 2011)
(N’million)

SECTOR
January February
March
April
May
June
Total
Capital Market
7,244.86
926.21


8,171.07
Construction

913.48


913.48
General
Commerce


ICT

70.00

Oil and Gas
Marketing

1,486.51


577.64

2,064.15
Real Estate


1,500.00

450.00
874.85
2824.85
Education


686.05
686.05
Manufacturing


1,603.26
1,603.26
Total


Source: Central Bank of Nigeria

AMCON Bonds and the Money Market
The N1,700.0 billion zero-coupon bonds issued by AMCON
since its inception to resolve the non-performing assets of the
DMBs attracted yields significantly below the corresponding 3year FGN bond yields. The current yield of the bond is 11.0 per
cent compared to 15.0 per cent for similar FGN bonds.


CBN Monetary Policy Review

AMCON bonds faced a number of challenges in the market
bordering largely on their features, yield, tenor, redemption
and availability. The features of AMCON bonds were not
compatible with the 2-way quote platform, thereby creating a
stalemate in its trading in the secondary market. As such,
holders of AMCON bonds were invariably compelled by the
market to hold them to maturity. The bonds were issued at
yields that were lower than their FGN equivalent, thus
conferring on them a superior status than the FGN bonds which
were trading at a higher premium in the market. The market
was, therefore, uncertain about the tenor of the bonds and
the capacity of AMCON to redeem them at maturity.
Moreover, the bonds were only available to the banks that
had non-performing loans in their portfolios. These challenges
limited the tradability of the bonds and its impact on
deepening the money market in the near to medium-term.

At the time of issue, the AMCON bonds were accorded
liquidity status and were specified as one of the liquid assets for
purposes of liquidity management. They are accordingly
included in the liquidity ratio computation. However, the bonds
could not be discounted, traded in the secondary market or
used at the interbank market because the market was not fully
aware of its key features. The bonds however, could be used
for Repo transaction at the CBN Standing Lending Facility (SLF)
window. This condition adversely affected banks profitability or
earnings ability because of the high cost and collaterised
nature of the SLF (above market rate) arising from increases in
the MPR. Nevertheless, access to the CBN SLF with AMCON
bonds, improved the liquidity of banks and enabled them to
meet their contingent cash obligations.

3.6
Performance of Monetary Aggregates
In the first half of 2011, monetary aggregates generally
underperformed relative to their targets. The growth in broad
money stock in the first half of 2011 recorded an improvement
over the corresponding and the preceding periods of 2010,
although, it was still below the target for the period. In
absolute term, the broad money grew by N651.86 billion or 5.66
per cent in the first half of 2011 compared with N680.03 billion
or 6.27 per cent in the second half of 2010. On annualized
In the first half of
2011, monetary
aggregates
generally
underperformed
relative to their
targets.
AMCON bonds
faced a number
of challenges in
the market
bordering largely
on their features,
yield, tenor,
redemption and
availability


CBN Monetary Policy Review

basis, the growth in broad money during the review period was
11.32 per cent compared with the annual target of 13.75 per
cent (Table 3.11).

Table 3.11
Monetary Aggregates


Actual
June

Target

Actual
Dec 2010
Deviation

Target

Actual
June 2011
Change
in
2010:H2
Change
in 2011:
H1
M2

M2 (%)

M1

M1(%)

RM

RM(%)

NDC

NDC(%)

CG

CG(%)

CP

CP(%)

NFA

NFA(%)


Source: Central Bank of Nigeria


CBN Monetary Policy Review


M2 (%)
M1 (%)
RM (%)
M2 (%)
M1 (%)
RM (%)

Per cent
Figure 3.7
The Performance of M1, M2 and RM (2010 and 2011)
Target
Actual


Source: Central Bank of Nigeria

The growth in narrow money was sluggish during the review
period. In absolute terms, it grew by N71.29 billion compared
with N653.28 billion in the second half of 2010, translating to an
increase of mere 1.28 per cent. On annualized basis, the
growth rate during the period was 2.56 per cent which was
significantly below the target of 15.75 per cent. The
performance
of
narrow
money,
although
very
low,
represented a significant improvement over the decline of 1.98
per cent recorded during the corresponding period of 2010
(Figure 3.8).


M2 (%)
M1 (%)
RM (%)
Per cent
Figure 3.8
Performance of M1,M2 and RM in the First Half of 2011 and
Corresponding Period of 2010
Change in 2011:H1
Change over June 2010
Source: Central Bank of Nigeria
..growth in narrow
money was
sluggish during the
review period.


CBN Monetary Policy Review

Table 3.12
Reserve Money Actual and Benchmark

Date
Benchmark
Actual
Deviation
Jun-10
1,872.80
1,535.11
(337.69)
Jul-10
2,006.02
1,658.88
(347.14)
Aug-10
2,006.02
1,752.95
(253.07)
Sep-10
2,006.02
1,344.33
(661.69)
Oct-10
2,332.44
1,438.35
(894.09)
Nov-10
2,332.44
1,450.82
(881.62)
Dec-10
2,332.44
1,845.71
(486.74)
Jan-11
1,775.15
1,694.89
(80.26)
Feb-11
1,775.15
1,820.89
45.74
Mar-11
1,775.15
1,705.92
(69.23)
Apr-11
1,771.40
1,696.24
(75.16)
May-11
1,771.40
1,750.91
(20.49)
Jun-11
1,771.40
2,065.06
293.66

Source: Central Bank of Nigeria

Reserve money performed better during the review period. It
stood at N2, 065.06 billion at the end of June 2011, compared
with N1, 845.71 in December 2010 and N1, 535.11 in the
corresponding period of 2010, representing an increase of
11.89 and 34.52 per cent, respectively. The performance of
the reserve money during the review period was above the
benchmark of N1,771.40 billion by N293.66 billion or 16.6 per
cent (Figure 3.9). The improvement in reserve money during
the period could largely be attributed to the revision in the CRR
from 1.0 to 2.0 per cent in January and further to 4.0 per cent
in May 2011.


CBN Monetary Policy Review


N'Billions
Figure 3.9
Reserve Money Benchmark & Actual (June 2010- July. 2011)
Benchmark
Actual

Source: Central Bank of Nigeria


Jan-11
Feb-11
Mar-11
Apr-11
May-11
Jun-11
N'Billions
Figure 3.10
Reserve Money Benchmark & Actual (June 2010- July. 2011)
Benchmark
Actual

Source: Central Bank of Nigeria

In the first half of 2011, aggregate bank credit to the domestic
economy increased to N8, 908.46 billion from N8, 708.55 billion
at end-December 2010, representing an increase of N199.91
billion or 2.30 per cent. On annualized basis, the growth in bank
credit represented 4.60 per cent compared with the
prescribed annual target of 27.69 per cent. The moderation
was attributable, largely to sluggish growth in credit to the
private sector, as bank credit to Government remained
dominant.


CBN Monetary Policy Review

Credit to the private sector increased to N9, 973.21 billion in the
first half of 2011 from N9 , 830.34 billion at end December 2010,
representing an increase of N142.87billion or 1.45 per cent.
Compared with the corresponding period of 2010, however,
credit to the private sector declined by N129.61 billion or 1.28
per cent. On annualized basis, the performance represented
2.90 per cent as against programme target of 23.34 per cent
for 2011. Overall, the low growth in credit to private sector was
influenced by the general cautious approach to lending by
the DMBs.

Bank credit to government, as in private sector credit, did not
show appreciable growth during the review period. In absolute
term, credit to government grew by N57.05 billion, representing
an increase of 5.09 per cent in the review period compared
with N35.29 billion in the corresponding period of 2010. On
annualized basis, the growth in credit to the government was
10.18 per cent compared with the programme target of 29.29
per cent of 2011. Although, the fiscal deficit increased in the
first half of 2011, the financing was more from the bonds
market and drawings from the excess crude account than
from the banking sector. This development created potential
access to credit for the private sector as competition for
available funds was low. The increased growth in bank credit
to the public sector notwithstanding, government remained a
net creditor to the system during the period. Indeed, the
growth in credit reflected the draw-down of government
deposits with the banking system (Figure 3.10 and 3.11).

..the low growth
in credit to private
sector was
influenced by the
general cautious
approach to
lending by the
DMBs

Although the fiscal
deficit increased
in the first half of
2011, the
financing was
more from the
bonds market and
drawings from the
excess crude
account


CBN Monetary Policy Review


NDC
Cg
Cp
NDC
Cg
Cp

Per cent
Figure 3.11
The performance of Credit (NDC, Cg,CP) 2010 and 2011
Target
Actual

Source: Central Bank of Nigeria

The Net Foreign Assets (NFA) of the banking system decreased
by N52.93 billion or 0.81 per cent over the level at endDecember 2010 compared with the increase of N21.84 billion
or 0.34 per cent in the corresponding period. The decline was
partly due to the financing of the foreign exchange market to
sustain the stability of the exchange rate.


NDC
Cg
Cp
Per cent
Figure 3.12
Performance of Credit (NDC, Cg,Cp )in the First Half of 2011 and the
Corresponding Period of 2010
Change in 2011:H1
Change over June 2010

Source: Central Bank of Nigeria


CBN Monetary Policy Review

CHAPTER 4
DOMESTIC FINANCIAL MARKETS

4.1
Introduction
Activities of financial markets in the first half of 2011 were
influenced largely, by the need for stability and to improve
their resilience in the face of domestic developments. On the
external front, the high sovereign debts had started to become
an important source of concern in some EU countries and the
limited fiscal stance in the U.S, prompted speculations of
possible default. In the domestic markets, apprehension on
the state of health of some financial institutions fuelled anxiety
about the stability of the system. Combined with uncertainty
about the outcome of the April general elections, stock market
and other financial indicators soon started to reflect the
sentiments. At the money market, lending to the real sector
remained lower than envisaged and the demand for foreign
exchange rose putting pressure on the exchange rate.

As part of the measures to calm the markets, the Central of
Nigeria (CBN) extended the interbank guarantee from May
2010 to end-June 2011 (and to December, 2011 for the
category of intervened banks). This measure, combined with
other initiatives (like the extension of reserve maintenance
period to 28 days) and the successful conduct of the general
elections in April/May, had some calming effects on both the
markets toward the end of June, 2011.

Key interbank interest rates responded positively to the upward
adjustments to the MPR during the first half of 2011. Deposit
rates however, remained largely subdued while the lending
rates rose. Consequently, the spread between the average
lending
and
the
consolidated
deposit
rate
widened
considerably during the period.

In view of these developments, ensuring a narrower interest
rate spread became very challenging in the first half of 2011.
To this end, and in focus, the overall price and financial stability
objective, the Bank continued to promote good corporate
governance across the system and improvement in liquidity
sovereign debts
had become an
important source
of concern as
solvency
indicators
deteriorated in
some EU
countries.
... upward
adjustments to the
MPR in response to
the upward
trending inflation
rate, prompting a
rise in key interbank
interest rates.
.... ensuring a
narrower interest
rate spread
became very
challenging in the
first half of 2011.


CBN Monetary Policy Review

conditions during the period. Related key areas of attention
included coordinated regulation of the financial system,
capacity building; and fast-tracking the implementation of riskbased, consolidated and cross-border supervision.

4.2
The Money Market
The money market continued to lead other segments of the
financial markets in terms of activity in the first half of 2011. The
Nigerian Treasury Bills (NTBs) continued to serve as the key
instrument of transaction in the market. Modes of transaction
included the usual OMO, Discount Window (DW) operations,
Repurchase (repo) transactions, Reverse repo transactions,
Pledges and Open Buy Back. Sustained reform pressure
created relative stability in money market interest rates,
although concerns about the longer term overall stability of
the market still persisted.

4.2.1
Developments in Short-Term Interest Rates
Short-term interest rates generally rose during the first half of
2011 in line with the monetary policy stance. Obviously, the
placement guarantee had downplayed the counter-party risk
factor, thereby ensuring robust market activity and keeping
the rates active. A key challenge to monetary management
during the period was therefore, to contain and stabilize the
volatile and the upward trending short-term money market
interest rates. Movements in call and OBB rates, the key
measures of short-term interest rates, were largely dictated by
the level of liquidity in the market which in turn, was influenced
by the monthly Federal Accounts Allocation Committee
(FAAC) disbursements to the various tiers of government and
the release of intervention funds


Sustained reform
pressure created
relative stability in
money market
interest rates,
A key challenge
to monetary
management
during the period
was to contain
and stabilize the
volatile and the
upward trending
short-term money
market interest
rates.


CBN Monetary Policy Review

Table 4.1
Weighted Average Money Market Interest Rates (per cent)
(Jan 2010 – June 2011)


Period


Monetary
Policy Rate
Overnight Interest
NIBOR

Interbank
OpenBuy-Back

7-Day

30Day
Jan-10

Feb-10

Mar-10

Apr-10

May-10

Jun-10

Jul-10

Aug-10

Sep-10

Oct-10

Nov-10

Dec-10

Jan-11

Feb-11

Mar-11

Apr-11

May-11

Jun-11


Source: Central Bank of Nigeria


Per cent
Figure 4.1
Trend in Money Market Rates (January 2010 - June 2011
MPR
Interbank
Open-Buy-Back

Source: Central Bank of Nigeria


CBN Monetary Policy Review

(i)
Interbank Interest Rate
I During the first quarter, the weighted average interbank rate
in the call market was 9.5 per cent at end-March, 2011
compared with 1.5 per cent in the corresponding period of
2010. The rates inched further to 10.7 per cent in April 2011
and continued on this path in view of the restrictive stance of
monetary policy. Thus, interbank interest rates closed at 11.7
per cent at end-June 2011 compared with 2.73 per cent
recorded in June 2010. Market sentiments in most part of June
suggested illiquidity thus pushing the average rates to skew
towards the SLF rate.

The major challenge in the interbank money market during the
first half of 2011 was the need to address the lingering effects
of the short-term interest rates to levels that would allow for
market competitiveness. Monetary stimulus in 2010 helped to
increase the liquidity of the banking system coupled with the
extension of the interbank guarantee which eased pressure in
the money market during the period. The CBN also
encouraged banks to take-on cost-cutting measures like
shared facilities to bring down the cost of operations and thus,
lending rates.
With upward adjustments in the MPR, interbank interest rates
rose carrying with it the attendant risk of a sharp correction in
bond prices and possible losses on fixed income positions and
slowed recovery in the equities market. However, the
containment of inflation risk posed by fiscal expansion given
concerns about exchange rate stability dominated monetary
policy actions (Table 4.1)

(ii) Open Buy-back Rate
The average weighted open buy-back (OBB) interest rate,
which was 9.35 per cent in March 2011, increased to 9.59 per
cent at the end of first half of 2011. These represented
significantly elevated levels compared with the 1.28 per cent
and 1.80 per cent, recorded in the corresponding periods of
March and June 2010, respectively. Compared with the endDecember 2010 level of 6.93 per cent at end-June 2011, the
OBB rate grew by a historical height of 37.52 per cent over the

...the OBB rate
grew by a
historically height
of 37.52 per cent
over the six-month
period.
Market sentiments
in most part of
June suggested
illiquidity
...containment of
inflation risk posed
by fiscal
expansion given
concerns about
exchange rate
stability
dominated
monetary policy
actions


CBN Monetary Policy Review

six-month period. This upward trend was attributed to the rise
in the monetary policy rate (Figure 4.1).

4.2.2 The Foreign Exchange Market
Spot Rates
The spot rate at the official window of the foreign exchange
market, the CBN wholesale dutch auction sales (wDAS),
averaged N153.21/US$ in the first half of 2011 compared with
N150.61/US$ at end-December 2010 and N150.04/US$ in the
corresponding period of 2010 representing a depreciation of
1.70 and 2.07 per cent, respectively.

The interbank exchange rate averaged N154.49/US$ as at
end-June 2011 compared with N151.43/US$ at end-December
2010 and N150.75/US$ at end-June 2010, representing a
depreciation of 1.99 and 2.42 per cent, respectively. Similarly,
bureaux-de-change (BDC) rates averaged N156.95/US$ in the
first half of 2011 compared with N153.35/US$ at end-December
2010 and N152.77/US$ at end-June 2010, representing a
depreciation of 2.29 and 2.66 per cent, respectively.

The depreciation in the spot rates across all segments of the
foreign exchange market was attributed to demand pressure
occasioned by election related activities in the first half of the
year, pronounced purchases to hedge against the exchange
rate depreciation, repatriation of investment and dividends by
foreign investors and multinational corporations as well as the
importation of petroleum products and other consumables
(Table 4.2)
.. depreciation in
the spot rates
across all
segments of the
foreign exchange
market was
attributed to
demand pressure


CBN Monetary Policy Review

Table 4.2
Monthly Exchange Rates (N/US$): Jan 2010 - Jun 2011

CBN
IFEM
BDC
Jan-10
149.81
150.33
153.55
Feb-10
150.22
150.96
152.08
Mar-10
149.83
150.07
151.85
Apr-10
149.88
150.45
152.05
May-10
150.3
151.48
153.26
Jun-10
150.21
151.22
153.82
2010: H1
Average
150.04
150.75
152.77
Jul-10
150.1
150.28
152.41
Aug-10
150.26
150.7
152.23
Sep-10
151.3
152.61
153.8
Oct-10
151.22
151.78
153.98
Nov-10
150.23
150.55
153.13
Dec-10
150.55
152.63
154.57
2010: H2
Average
150.61
151.43
153.35
2010 Average
150.33
151.09
153.06
Jan-11
151.62
152.57
156.08
Feb-11
151.96
152.75
155.11
Mar-11
152.54
155.21
157.09
Apr-11
153.92
154.6
157.05
May-11
154.79
156.17
158.05
Jun-11
154.45
155.65
158.32
2011: H1
Average
153.21
154.49
156.95

Source: Central Bank of Nigeria

End-Period Exchange Rate
The exchange rate of the naira at the wDAS depreciated by
1.73 per cent from N150.66/US$ at end-December 2010 to
N153.31/US$ at end-June 2011. Over the one year period, the


CBN Monetary Policy Review

Naira depreciated by 2.17 per cent from 149.99/US$ at endJune 2010 to 153.31 at end-June 2011 (Table 4.3).

At the BDC and interbank segments of the market, the naira
depreciated by 1.89 and 0.34 per cent, respectively, or from
N156.00/US$ to N159.00/US$ and N152.00/US$ to N152.50/US$
between end-December 2010 and end-June, 2011 (Table 4.4).
Thus, the Naira depreciated by 3.46 and 1.65 per cent,
respectively, from 153.50/US$ and 150.00/US$ at end-June 2010
to 159.00/US$ and 152.52/US$ at end-June 2011, respectively.
The naira depreciated in all segments of the market due
largely to the reasons aforementioned.


Jan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10
Jul-10
Aug-10
Sep-10
Oct-10
Nov-10
Dec-10
Jan-11
Feb-11
Mar-11
Apr-11
May-11
Jun-11
Per cent
Figure 4.2
Naira End-Period Exchange Rate (Jan 2010 - June 2011)
w/DAS
Inter-bank
BDC


Source: Central Bank of Nigeria


CBN Monetary Policy Review

Table 4.3
End-Month Exchange Rate Movements at Various Segments of
the Market
(Naira per US dollars)

CBN
IFEM
BDC
Jan-10
149.81
150.33
153.55
Feb-10
150.22
150.96
152.08
Mar-10
149.83
150.07
151.85
Apr-10
149.88
150.45
152.05
May-10
150.3
151.48
153.26
Jun-10
150.21
151.22
153.82
2010: H1
Average
150.04
150.75
152.77
Jul-10
150.1
150.28
152.41
Aug-10
150.26
150.7
152.23
Sep-10
151.3
152.61
153.8
Oct-10
151.22
151.78
153.98
Nov-10
150.23
150.55
153.13
Dec-10
150.55
152.63
154.57
2010: H2
Average
150.61
151.43
153.35
2010 Average
150.33
151.09
153.06
Jan-11
151.62
152.57
156.08
Feb-11
151.96
152.75
155.11
Mar-11
152.54
155.21
157.09
Apr-11
153.92
154.6
157.05
May-11
154.79
156.17
158.05
Jun-11
154.45
155.65
158.32
2011: H1
Average
153.21
154.49
156.95

Source: Central Bank of Nigeria


CBN Monetary Policy Review

Nominal and Real Effective Exchange Rates (NEER)
The Nominal Effective Exchange Rate (NEER) index rose by 5.65
to 102.85 recorded at end-June 2011 from the level of 97.20 at
end-December 2010. Also, the Real Effective Exchange Rate
(REER) index rose by 6.27 to 98.48 at end-June 2011, from 92.21
at end-December 2010. On annual basis, the NEER and REER
increased by 7.09 and 7.70 per cent, respectively over their
levels in 2010 (Table 4.4 and Figure 4.3).

Table 4.4
Nominal and Real Effective Exchange Rate Indices, Jan 2010
to Mar 2011
Source: Central Bank of Nigeria

REER
NEER
Jan-10
97.05
94.97
Feb-10
96.41
92.89
Mar-10
97.18
95.28
Apr-10
97.03
94.07
May-10
94.21
91.89
Jun-10
95.76
90.78
2010:H1 Average
96.27
93.31
Jul-10
95.93
91.4
Aug-10
94.94
89.36
Sep-10
97.65
91.06
Oct-10
98.62
92.42
Nov-10
96.89
91.35
Dec-10
97.2
92.21
2010:H2 Average
96.87
91.3
Jan-11
97.79
95.36
Feb-11
98.44
97.34
Mar-11
97.59
94.86
Apr-11
101.95
97.33
May-11
100.96
96.79
Jun-11
102.85
98.48
2011:H1 Average
97.94
95.85
On annual basis,
the NEER and
REER increased by
7.09 and 7.70 per
cent, respectively
over their levels in
2010.


CBN Monetary Policy Review


Per cent
Figure 4.3
Real and Nominal Effective Exchange Rate Indices ( Jan 2010 - Jun 2011)
NEER
REER
Source: Central Bank of Nigeria

Demand and Supply of Foreign Exchange
In the first half of 2011, the demand for foreign exchange at
the wDAS increased by 13.25 per cent to US$17,405.43 million
from US$15,369.35 million recorded in the second half of 2010.
Compared with the corresponding period of 2010, the
demand for foreign exchange rose by 20.73 per cent, from
US$14,416.43 million demanded in the first half of 2010 to
US$17,405.43 million in the first half of 2011.
The total volume of foreign exchange supplied at the wDAS
amounted to US$15,174.95 million in the first half of 2011, from
US$12,990.23 million recorded in the second half of 2010. This
shows an increase of 16.82 per cent. On an annual basis, the
total foreign exchange supplied increased by 24.61 per cent,
from the US$12,177.66 million recorded in the first half of 2010 to
US$15,174.95 million supplied in the second half of 2011 (Table
4.5).
The CBN responded to persistent demand pressure in the
foreign exchange market by matching supply with genuine
demand for foreign exchange. To reduce the impact of the
demand pressure on the level of foreign reserves and to
protect the market participant from rate volatility, the foreign
exchange wDAS forward market was introduced on 23rd
March 2011.
..CBN responded
to persistent
demand pressure
in the foreign
market by
matching supply
with genuine
demand for
foreign exchange


CBN Monetary Policy Review

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


WDAS Demand
WDAS Sales
Jan-10
2,199.15
1,522.05
Feb-10
2,110.77
1,874.35
Mar-10
2,081.23
1,742.79
Apr-10
2,068.61
1,693.52
May-10
3,214.82
2,761.13
Jun-10
2,741.85
2,583.82
2010: H1 Total
14,416.43
12,177.66
Jul-10
1,795.82
1,612.49
Aug-10
2,789.10
1,948.52
Sep-10
4,392.27
3,626.87
Oct-10
2,503.67
2,375.75
Nov-10
1,853.37
1,576.60
Dec-10
2,035.12
1,850.00
2010: H2
Total
15,369.35
12,990.23
2010 Total
29,785.78
25,167.89
Jan-11
2,800.42
2,000.00
Feb-11
2,041.09
1,794.85
Mar-11
3,612.36
3,274.38
Apr-11
2,780.41
2,385.58
May-11
2,845.62
2,825.19
Jun-11
3,325.53
2,894.95
2011:H1 Total
17,405.43
15,174.95

Source: Central Bank of Nigeria


CBN Monetary Policy Review


Jan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10
Jul-10
Aug-10
Sep-10
Oct-10
Nov-10
Dec-10
Jan-11
Feb-11
Mar-11
Apr-11
May-11
Jun-11
US $ millions
Figure 4.4
Demand and Supply of Foreign Exchange, Jan 2010 - Jun 2011
Fx Demand
Fx Supply

Source: Central Bank of Nigeria

Foreign Exchange Inflow and Outflow
Inflow
Gross foreign exchange inflow of US$19,574.33 million was
recorded in the first half of 2011, compared with US$12,892.08
million and US$14,894.96 million in the corresponding period of
2010 and the second half of 2010, representing an increase of
50.78 and 31.68 per cent, respectively (Figure 4.4).

Outflow
Foreign exchange outflow in the first half of 2011 was
US$20,530.92 million compared with the total outflow of
US$17,027.91 million in the first half of 2010 and US$20,891.28
million in the second half of 2010, The high volume of foreign
exchange outflow was mainly due to the financing of imports
of goods and services, and repatriation of proceeds of
investment
and
dividends
by
foreign
investors
and
multinational companies. However, the net flow was US$956.6
million in the first half of 2011, much lower than the net outflow
of US4045.83 million in the corresponding period of 2010 and
the US$6,026.24 million in the second half of 2010 (Table 4.6)


.. high volume of
foreign exchange
outflow was
mainly due to the
financing of
imports of goods
and services, and
repatriation of
proceeds of
investment


CBN Monetary Policy Review

Table 4.6
CBN Monthly Foreign Exchange Flows
(US $ Million)


INFLOW
OUTFLOW
NET FLOW
Jan-10
2,302.51
2,197.05
105.46
Feb-10
2,369.22
2,860.35
-491.13
Mar-10
1,849.40
2,512.78
-663.38
Apr-10
2,016.92
2,481.53
-464.61
May-10
2,381.63
3,590.39
-1,208.76
Jun-10
2,062.40
3,385.81
-1,323.41
2010: H1
12,982.08
17,027.91
-4,045.83
Jul-10
2,289.00
3,282.56
-993.56
Aug-10
2,564.49
3,061.05
-496.56
Sep-10
2,701.52
5,078.74
-2,377.22
Oct-10
2,339.28
3,463.47
-1,124.19
Nov-10
2,209.35
2,169.84
39.51
Dec-10
2,761.40
3,835.62
-1,074.22
2010: H2
14,865.04
20,891.28
-6,026.24
Total
27,847.12
37,919.19
-10,072.07
Jan-11
3,435.55
2,805.78
629.77
Feb-11
3,164.68
2,768.68

Mar-11
4,119.17
3,985.95
133.22
Apr-11
2,495.61
3,439.70
-944.1
May-11
2,896.12
3,657.16
-761.04
Jun-11
3,463.20
3,873.65
-410.45
2011: H1
19,574.33
20,530.92
-956.6

Source: Central Bank of Nigeria


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US$ Million
Figure 4.5
Foreign Exchange Inflow and Outflow: Jan 2010 - June 2011
Inflow
Outflow

Source: Central Bank of Nigeria

4.3
Capital Market
The Nigerian stock market in the first half of 2011 continued to
be bearish reminiscent of the trends throughout the preceding
year. The market was characterized by low liquidity and mixed
performance of the quoted companies. Strong signs of liquidity
preference owning to the April general election had moved
the traditional investors away from the market. Capital
outflows attributed mainly to pre and post-election security
challenges further dented the quantum of liquidity required for
growth of the market. The release of improved end-of- theyear financial results by some quoted companies, especially
the deposit money banks (DMBs), did not have insignificant
impact on the market as investor confidence had significantly
been eroded by them.

Market Turnover
Aggregate stock market turnover during the first half of 2011
was 49.52 billion shares valued at N372.7 billion exchanged in
733,762 deals. In the comparable period of 2010, the market
recorded a turnover of 54.83 billion shares valued at N436.97
billion exchanged in 1,174,481 deals. In the second half of
2010, the stock market recorded a turnover of 38.55 billion
shares valued at N360.6 billion.

4.3.1
Equities Market
The All-Share Index (ASI) rose marginally by 0.8 per cent to
24,980.20 at end-June, 2011, from its level of 24,770.52 at end-
.. Nigerian stock
market in the first
half of 2011
continued to be


CBN Monetary Policy Review

Dec, 2010, compared with the 21.9 per cent increase in the first
half of 2010. On a year-on-year basis, the ASI decreased by 1.6
per
cent
over
the
level
at
end-June,
2010.
Market
Capitalization (MC) increased by 1.0 per cent to N7.99 trillion
at end-June, 2011 from the level of N7.91 trillion at end-Dec
2010, compared with the increase of 23.6 per cent in the first
half of 2010 and 29.5 per cent, over the end-June, 2010 level.

Table 4.7
NSE All Share Index (MC) and Market Capitalization (MC)
January 2010 - June, 2011

Date
All Share Index
(ASI)
Market
Capitalization
(Equities)
(N’ Trillion)*
Dec -9
20,827.17
4.99
Jan-10
22,594.90
5.44
Feb-10
22,985.00
5.53
Mar-10
25,966.25
6.28
Apr-10
26,453.20
6.39
May-10
26,183.21
6.36
Jun-10
25,384.14
6.17
Jul-10
25,844.18
6.32
Aug-10
24,268.24
5.94
Sep-10
23,050.59
5.65
Oct-10
25,042.16
7.98
Nov-10
24,764.65
7.91
Dec-10
24,770.52
7.91
Jan-11
26,830.67
8.58
Feb-11
26,016.84
8.32
Mar-11
24,621.21
7.87
Apr-11
25,041.68

May-11
25,866.62
8.27
Jun-11
24,980.20
7.99

Source: Central Bank of Nigeria
... All-Share Index
(ASI) rose
marginally by 0.8
per cent .......at
end-June, 2011,


CBN Monetary Policy Review


Index
N'Ttillion
Figure 4.6
Nigerian Stock Exchnage ASI and MC
All Share Index (ASI)
Market Capitalization (N’ Trillion)

Source: Central Bank of Nigeria

The sluggish performance of the equities market was traceable
to the withdrawal of funds by foreign investors who were
concerned about political-risk in the run-up to the April 2011
general elections, high level of uncertainty over getting the
right strategic partners for the intervened banks and the
lackluster earnings of listed companies, including relatively
attractive
yields
in
the
fixed
income
market
(which
encouraged portfolio switching from equities to the fixed
income securities). By the end of the first half, the equities
market was fully priced from the earnings point of view. As
such, a substantial appreciation in equity prices in the second
half would depend mainly on significant improvement in
earnings or sentiments.

Per cent
Figure 4.7
Share Price Volatility, January 2010 - June 2011
Share Price Volatility

Source: Nigerian Stock Exchange
..sluggish
performance of
the equities
market was
traceable to the
withdrawal of
funds by foreign
investors who
were concerned
about politicalrisk...


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Sectoral Contribution to Market Capitalization
In the first half of the year, the banking sector was the most
active
sector.
The
sector’s
share
of
overall
market
capitalization fell to 30.0 per cent as at end-June, 2011, down
from 38.0 and 36.0 per cent at end-June, 2010 and endDecember
of
2010,
respectively.
The
sector
recorded
transactions of 26.6 billion shares valued at N228.2 billion
traded in 412,233 deals. As a result, the sector accounted for
54.0 per cent of the volume of equities traded (in contrast to
the 53.1 per cent recorded in the second half of 2010), 67.0 per
cent of the value of equities traded and 60.0 per cent of the
number of trades executed. The sector was followed by the
conglomerates sector with a traded volume of 7.56 billion
shares valued at N20.01 billion in 27,931 trades. The two sectors
accounted for 34.14 billion shares valued at N248.2 billion
traded in 440,164 deals. The drop in the dominance of
banking sector shares is attributable mainly to portfolio
switching and a limited recovery from the trends in the
preceeding year.

The shares of other sectors too dropped, except that of
Building Materials, whose percentage share rose from 6.0 to
28.0 per cent, from their levels at the end of June, 2010. The
exceptional performance of the Building Materials sub-sector
was attributable to the listing of 15.5 billion shares of Dangote
Cement at N135 apiece, on the floor of the Nigerian Stock
Exchange in October, 2010 (Figures 4.8, 4.9 and 4.10). At endJune 2011, Dangote Cement Plc remained the most
capitalized listed company with market capitalization of
N2.013 trillion, accounting for 25.0 per cent of the equity
market capitalization.


.. drop in
dominance of the
banking sector
was attributable
to portfolio


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Breweries
12%
Banking
38%
Foods Bev. and
Tobacco
13%
Conglomerates
4%
Insurance
3%
Petroleum
Marketing
6%
Foreign Listing
2%
Building Materials
6%
Other Sectors
16%
Figure 4.8
NSE Market Capitalization by Sector as at end-June, 2010


Source: Nigerian Stock Exchange

Breweries
11%
Banking
36%
Foods Bev. and
Tobacco
11%
Conglomerates
4%
Insurance
2%
Petroleum
Marketing
4%
Foreign Listing
2%
Building Materials
26%
Other Sectors
4%
Figure 4.9
NSE Market Capitalisation by Sector as at end Dec 2010

Source: Nigerian Stock Exchange


CBN Monetary Policy Review

Breweries
13%
Banking
30%
Foods Bev. &
Tobacco
12%
Conglomerates
4%
Insurance
2%
Petroleum
Marketing
4%
Foreign Listing
2%
Building Materials
28%
Other Sectors
5%
Figure 4.10
NSE Market Capitalisation by Sector as at end-June, 2011

Source: Nigerian Stock Exchange

4.3.2 Bond Market
The bond market witnessed significant growth and activity
during the first half of 2011. Growth in the market was driven
largely by previously initiated reforms that encouraged longterm investments and the need for alternative sources of funds
outside the banking system. Consequently, the value of
transactions in the bonds market reached N15,000 billion at
end-December 2010. By end-June 2011, total market value
bonds was about N5.8 trillion naira

Federal Government Bonds
Nigeria’s sovereign bonds (debt) have been in existence since
the 1970s. However, the purposes for which funds were
mobilized in the market were left ambiguous till 2003, when the
Federal government entered the market actively to mobilize
funds for long-term capital projects for furthering long-term
growth. The bonds issued till 2003 had been illiquid and
redeemable only upon maturity by the CBN. The bonds market
is largely dominated by FGN Bonds accounted for 95.0 per
cent of outstanding total domestic bonds with face value of
N4,000 billion at end-December 2010. All the bonds issued thus
far, had a minimum tenor of 2 years. In the last 3 years, the
FGN bonds market recorded a cumulative gain of 49.0 per
cent, compared with the stock market’s loss of 38.0 per cent
over the same period. Yet, the bond market did not
Despite the
stability in the
bond prices, the
bond market did
not outperform
the equities
market in terms of
growth in market
capitalization


CBN Monetary Policy Review

outperform the equities market in terms of growth in market
capitalization. The market also lagged behind other markets,
both in terms of market depth and product diversity.

Mar-11 Jun-11
N'Billions
Figure 4.11
FGN Bond Market Growth
FGN Bonds

Source: Debt Management Office, 2011.

FGN bond issuance during the first half of 2011 fell from the
levels recorded in the preceding year in view of government’s
effort to initiate fiscal consolidation and diversify its sources of
funding away from the domestic market. However, the Debt
Management Office (DMO) was set to re-open the 10-year
bond during the second half of 2011 as per its issuance
calendar in order to promote liquidity for the mid and long
dated securities.

Total transactions in FGN Bonds through the Over-the-Counter
(OTC) market in the first half of 2011 was 5 billion units valued at
N4.44 trillion in 37,053 deals. During the same period in 2010,
total transactions on FGN Bonds through the OTC were 8.1
billion units valued at N9.7 trillion in 88,398 deals, while in the
second half of 2010; a turnover of 5.6 billion units worth N5.6
trillion in 48,682 deals was recorded.


CBN Monetary Policy Review


N'Billions
Figure 4.12
FGN Bonds Maturity Profile (2011-2030)
FGN Bonds Maturity Profile

Source: Debt Management Office, 2011

Sovereign Bonds
Nigeria is among many emerging economies that have issued
bonds in the international bond market; this is done to diversify
funding sources from the domestic market. A US$500 million
five-year Eurobond was issued in 2010 as part of measures to
fund the 2010 budget deficit. Analysis of recent issuances in
the international market by countries of similar rating, and
following an assessment of the risks inherent in the Nigerian
economy at present, indicated that the required yield for
successful international offering may be more expensive than
those obtainable locally.


Per cent
Figure 4.13
Nigeria International Bond Yield Line (January - June, 2011)
Nigeria International Bond Yield Line

Source: Bloomberg, June 30, 2011.


CBN Monetary Policy Review

Yields on Federal Government Bonds
The yield on FGN bonds for June 24, 2011 shifted upwards by
540 basis points compared with that of June 25, 2010. The yield
curve for June 24, 2011 also shifted upward by 298 basis points
compared with that of December 24, 2010 (Figure 4.13). This
upward shift implies higher yield across the various maturities
reflecting higher risk across board.


Annual Yields (%)
Term to Maturity (Years)
Figure 4.14
FGN Bonds yield curves 25th Jun 10 vs 24th Dec 10 vs 24th Jun 11
June 25,
Dec 24,
June 24,


Source: Data obtained from Financial Markets Dealers Association

State Government Bonds
The re-emergence of the bond market since 2003 offered subnational governments an option for financing their budget
deficits as well as investing in numerous long term capital
projects at comparatively low cost. State government or
municipal bonds were in recent times issued for the purpose of
financing their infrastructure needs. By end-June 2011, eight
states had raised a total of N245.5 billion from the market, with
more of such issuances scheduled for the later part of 2011.
The States are Lagos (Series 1, N50.0billion; Series 2,
N57.0billion), Ebonyi (N16.5billion), Benue (N13.0billion), Kwara
(N17.0billion), Bayelsa (N50.0billion), Kaduna (N8.5billion), Imo
(N18.5billion) and Niger (N9.0billion and N6.0billion). The
proposal of N28.0, N15.0, N20.0, N50.0, N25.0 and N25.0 billion
bond offer from Ogun, Abia, Bauchi, Delta, Ekiti and Zamfara
State were still awaiting approval. State bonds constitute 5.48
per cent of total bonds market value at end-June 2011.) .
.. yields on longtenored FGN
bonds remained
below the endDecember 2010
inflation level of
11.8 per cent....
.. By end-June
2011, eight states
had raised a total
of N245.5 billion
from the market ...


CBN Monetary Policy Review

Bond Market Outlook
On the domestic side, borrowing from the bond market by subnational governments is set to dominate the market in the very
near future. Between 2009 and 2010 alone, about eight states
issued bonds. Already, States like Lagos are bracing up for
another offer while others like Abia, Bauchi, Delta, Ekiti, Ogun
and Zamfara are gearing up to make their debut. The rising
share of state government bonds since 2009 may be partly
explained by the need to improve infrastructure especially in
the transport and power sectors. Going forward, the cost of
issuing state government bonds may likely become more
expensive, as market sentiment may set in when investors
express cautious optimism in taking up some of these bonds.
Thus, a more thorough evaluation and scrutiny of the credibility
of the bond issuer would be the main determinant in the
future, as well as determine demand in this market, especially,
attractive yields on treasury bills and their lower duration risk,
coupled with the current bond yield in the market and the
outlook for a tighter monetary policy will require higher
premium on any new issuances to make them attractive. On
the foreign side, the quest to diversify funding away from
domestic sources would make this source still attractive

Corporate Bonds
Corporate bonds accounted for a mere 5.6 per cent of total
new issuances between January 2010 and June 2011. The
banking sector (GTBank, UBA, First Bank, Access Bank and
Diamond Bank) provided the lead in corporate bond offerings
seeking to raise N1,800.0 billion over the next few years. In
particular, the GTBank recently concluded a N13,165.0 billion
(US$90 million) bond placement, being Nigeria’s first corporate
issue in many years.


The total amount of corporate bonds issued was over N2,000.0
billion, as against N87.17 billion (US$581.0 million) in 2010. It is
expected to increase to N3,000.0 billion (US$1.28 billion) by
end-December 2011. The expected growth in corporate bonds
issuance in 2011 is likely to be driven by considerations such as
the successes recorded in the Federal and State Government
bonds, government's desire to reinforce the corporate bond
low volume of
corporate bonds
in the economy
reflects the
inability of
corporate
organizations to
issue bonds or
debentures,
secured by their .
.. The challenges
remain
fundamentally the
need for price
discovery, use of
repos to facilitate
funding and
liquidity..
.. financing needs
by states and
local
governments
could quadruple
over the next
decade


CBN Monetary Policy Review

market through the granting of tax waivers and revision of
guidelines on pension funds to accommodate corporate
bonds, among other measures. Nonetheless, there are
challenges relating to the need for price discovery, the use of
repos to facilitate funding and liquidity, using derivatives to
manage portfolio exposure to risks, product innovation and
diversity and the development of a robust trading platform,
among others. The lack of a secondary market trading
platform for most State and corporate bonds also poses a
severe challenge.
.
4.3.3 Commodities’ Market
Trading in the commodities’ market consists of direct physical
trading and derivatives trading where participants could
undertake multi-commodity trades. Globally, the volume of
commodities’ contracts traded on exchanges increased by a
fifth in 2010 to around 2.5 billion million contracts valued at
nearly $380bn. In particular, trading on exchanges in China
and India has been gaining importance in recent years due to
their emergence as significant consumers of commodities.
China alone accounted for more than 60 per cent of
exchange-traded commodities in 2010. Commodity assets
under management more than doubled with the bulk of funds
going into precious metals and energy products. The growth in
prices of many commodities in 2010 contributed to the
increase
in
the
value
of
commodities’
funds
under
management during the review period.
In terms of size, commodities’ trading in Nigeria is still relatively
small. Exchange traded commodities have seen an upturn in
the volume of trading since the start of the Abuja Security
Commodity Exchange (ASCE). This was largely a result of the
growing attraction of commodities as an asset class and a
proliferation of investment options which has made it easier to
access this market. During the review period, trading in such
agricultural commodities like cowpea, sesame seeds, sorghum,
cotton, ginger, palm produce and cassava was undertaken.
Again, the emergence of the non-interest banking system in
Nigeria would further boost activities at the exchange by
creating trading platform for trading in solid minerals and
agricultural commodities in the form of Murabahah to


CBN Monetary Policy Review

organized Tawarruq to address the lack of money market
instruments to facilitate liquidity management and investment
purposes under non-interest banking. It is expected that the
volumes can be higher during syndication and sukuk issues.
4.3.4 Derivatives Market
During the review period, the Bank issued out guidelines for
trading in foreign exchange derivatives. The objective was to
provide a platform for market players in Nigeria to be
competitive with their peers elsewhere, consistent with the
aspiration of the Vision 2020 . The Guidelines first issued in
January 2011, were revised in March to accommodate some
new challenges that emerged. Although no derivatives were
currently being traded outside the OTC framework, the
ongoing reforms in the Nigerian banking sector exposed
players to the enormous untapped potential in the market,
particularly in derivatives trading. The reforms are expected to
position Nigeria as a destination for discerning investors
interested in derivatives trading in view of the need to tap into
the higher returns on investment available in the market and
the need for diversification of risks.
However, some critical regulatory and operational challenges
remain to be tackled to achieve that purpose. The main issues
concern the need to build capacity in derivatives trading so as
to have an excellent pool of human resources, developing the
legal instruments for the market and the need to develop an
Exchange for trading Futures since Forwards could be traded
on Over the Counter (OTC) basis. More importantly, was the
need to firmly establish the underlying market. The fast growing
Abuja Commodities Exchange could be the entity to support
the development of the derivatives market in Nigeria for the
country to strictly become a regional financial centre.
New Listings and De-listings
The NSE delisted 11 equities in the first half of 2011 and 4
matured FGN stocks. Overall, 5 corporate bonds, which
included the N1,675,294,718,000 zero coupon 2013 Series 1
bonds (Tranches 1-3), being part of a N3,000.0 billion debt
issuance programme in favour of AMCON were admitted.
Although no
derivatives were
currently being
traded outside
the OTC
framework, the
ongoing reforms in
the Nigeria
banking sector
exposed players
to the enormous
untapped
potentials in the
market...


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There were 11 supplementary listings and no transactions on
sub-national bonds in the review period.


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Chapter 5
DOMESTIC PRICE DEVELOPMENTS AND THE REAL
ECONOMY

5.1
Introduction
Price stability was the key thrust of monetary policy in the first
half of 2011. Inflationary pressures, which started to build up in
the second half of 2010 continued during the review period.
Headline inflation trended upwards during the period driven
mainly by increased government spending and liquidity
injections by the AMCON. In addition, the global rise in food
and energy prices and the hang-on effects of months of
monetary easing stoked inflationary pressure in 2011.
5.2
Domestic Economic Activity
Domestic output growth was generally impressive in the first
half of 2011 despite the sluggish global economic recovery.
Real GDP growth was 7.3 per cent in the first half of 2011,
higher than the 7.69 per cent in the corresponding period of
2010. Overall, real GDP growth was estimated by National
Bureau of Statistics at 8.71 per cent for fiscal 2011. The
impressive growth recorded during the review period reflected
continued favourable conditions for high oil exports and
agricultural
output,
complemented
by
a
stable
macroeconomic environment.

The non-oil sector remained the major driver of growth in the
first half of 2011. Consequently, agriculture and services
contributed 2.2 and 2.45 per cent, respectively, to the
observed growth. The index of manufacturing production,
estimated at 98.88 (1990=100) rose by 6.5 per cent in the first
half of 2011, compared with the 5.2 per cent achieved in the
corresponding period of 2010. The improved performance of
the manufacturing subsector was largely attributed to
enhanced business confidence and higher credit delivery
traced to the various intervention schemes by the CBN. The
aggregate index of industrial production recorded some
improvements during the first half of 2011. The index of
industrial production at 128.8 (1990=100) rose by 3.0 per cent
when compared with the level in the corresponding period of
.. aggregate
index of industrial
production
recorded some
improvements
during the first half
of 2011.
Headline inflation
trended upwards
during the
period...
Domestic output
growth was
generally
impressive in the
first half of 2011
despite the
sluggish global
economic
recovery.


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2010. The increase in output relative to the first half of 2010 was
attributed to improvement in activities in all the subsectors
including manufacturing, mining and electricity consumption
which rose by 1.7, 2.4, and 5.9, respectively, notwithstanding,
the continuing challenges to output growth , infrastructural
bottlenecks and security concerns.
5.3
Trends inflation in the First Half of 2011
Pressures on domestic prices which were a major threat in the
second half of 2010 continued throughout the first half of 2011.
The year-on-year headline inflation which bottomed-out at
11.8 per cent at end-December 2010, rose to 12.8 per cent in
March 2011 but declined to 10.2 per cent in June, 2011. The
inflation outcome showed significant improvement compared
with the 14.90 per cent recorded in the corresponding period
of 2010. Food inflation declined from 12.2 per cent in March
2011 to 9.2 per cent in June. Similarly, core inflation fell from
12.1 in January 2011 to 11.5 per cent in June 2011.

The 12-month moving average (headline) inflation rate which
stood at 13.7 per cent in December 2010 declined to 12.3 per
cent in June 2011. Similarly, the 12-month moving average
food inflation declined from 14.70 per cent in December 2010
to 12.70 per cent in June 2011. The downward movement in
inflation rate in June 2011 derived mainly from the tight
monetary stance of the CBN.


Inflationary
pressures........cont
inued throughout
the first half of
2011.


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Table 5.1
Measures of Consumer Prices
(July 2008 - June 2011)


Headline
Inflation
Core Inflation
Food Inflation
Date
Y-Y
12- MMA
Y-Y
12- MMA
Y-Y
12- MMA
Jul-08

Dec-08

Jul-09

Dec-09

Jul-10

Dec-10

Jun-11


Source: National Bureau of Statistics (NBS)

Table 5.2
Inflation Rate

Date
Headline Inflation
Core Inflation
Food Inflation

CPI
Y-Y
12MMA
CPI
Y-Y
12MMA
CPI
Y-Y
12MMA
Dec-10

Jan-11

Feb-11

Mar-11

Apr-11

May-


Jun-11


Source: National Bureau of Statistics (NBS)
.


CBN Monetary Policy Review

Source: National Bureau of Statistics

The breakdown of the CPI index indicates that housing, water,
electricity/gas and other fuel, contributed most to the overall
change in prices in the first half of 2011. Specifically, the index
declined from 5.9 per cent in April 2011 to 5.8 and 5.2 per cent
in May and June 2011, respectively. The 1.4 per cent
contribution of transport to core inflation was largely
accounted for by motor cars (0.5 percentage point);
passenger transport by road (0.4 percentage point); fuels and
lubricants for personal transport equipment (0.4 percentage
point) the index for food and non-alcoholic beverages rose by
9.06 percentage points in June 2010 compared with 4.8 per
cent in December 2010. Overall, the all items CPI grew by 5.3
per cent in the second half of 2011.

Per cent
Figure 5.2
Year-on-Year Headline Inflation: Selected Items 2010
Headline Inflation
F & E
Transport


Source: National Bureau of Statistics
Overall, the all
items CPI grew by
5.3 per cent in the
second half of

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5.4
Actual and Seasonally Adjusted Headline Inflation
Analysis of inflation developments in the first half of 2011
indicated evidence of seasonality which played a key role in
dampening inflationary pressures in the early and later parts of
the review period. The release of grains from the strategic
reserves during the period (off-farm produce because of the
agricultural planting season) may have combined with other
policy factors to dampen food prices. Thus, holding seasonal
factors constant would have resulted in higher headline
inflation during the period. Notwithstanding the effects of
seasonal factors, inflation remained elevated during most part
of the first half of 2011.

Dec-10
Jan-11
Feb-11
Mar-11
Apr-11
May-11
Jun-11
Per cent
Figure 5.3
Actual Seasonal Adjusted Headline Inflation (Dec.2010 - Jun 2011)
Inflation S A
Inflation

Source: National Bureau of Statistics

5.5
Factors Responsible for Inflationary Pressures
5.5.1
Domestic Aggregate Demand
Growth in domestic aggregate demand was a major factor
that contributed to the upward price movements in the review
period. Although broad money supply grew by 5.66 per cent
in the first half of 2011 (when annualized, it is 11.32 per cent
against the target growth of 13.75 per cent for fiscal 2011), it
was 12.28 per cent above the level in the first half of 2010.
Credit to the private sector at 1.45 per cent was 27.33
percentage points below the indicative target of 28.78 per
cent for year 2011 while credit to government grew by 5.09 per
cent. Thus, government expenditure on petroleum subsidy,
local contractor bills, funding of the April 2011 elections,
Notwithstanding
the effects of
seasonal factors,
inflation remained
elevated during
most part of the
first half of 2011
Growth in
domestic
aggregate
demand was a
major factor that
contributed to the
upward price
movements in the
review period.


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exerted further inflationary pressures on the economy. In
addition, rising food and energy prices, especially in an import
dependent economy like Nigeria, may have translated to
significant pass-through to higher prices of imports.

5.5.2 Government Fiscal Operations
The 2011 budget was ambitious in that the fiscal deficit was
planned to be higher. The consequential increase in
expenditure placed increased pressure on domestic prices.
The attendant borrowing to cover the budget deficit
constituted
a
major
pressure
point
for
upward
price
developments.
The
fiscal
operations
of
the
Federal
Government in the first half of 2011 resulted in an overall deficit
of
N581.64
billion
which
was
higher
than
the

proportionate budget deficit of N568.21 billion by N13.43 billion
or 2.36 per cent. The deficit for the period was to be financed
through borrowing from special account worth N95.00 billion
and domestic borrowing, with the issuance of FGN Bonds
worth N426 billion.


..borrowing to
cover the budget
deficit constituted
a major pressure
point for upward
price
developments


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Box 5.2
Federal Government Fiscal Operations in the First Half of 2011

The fiscal operations of the Federal Government in the first half
of 2011, showed that the actual Federal Government retained
revenue for January - June, 2011 stood at N1214.74 billion
indicating a shortfall of N459.36 billion or 27.44 per cent, when
compared with the 2011 proportionate budget estimate of
N1,395.08 billion (Table 6) (Please cross-check). The major
sources of Federal Government revenue were: FGN share of
the Federation Account Allocation Committee (FAAC) N812.44
billion or 82.49 per cent, FGN Independent Revenue N113.97
billion or 11.57 per cent, FGN share of VAT N41.28 billion or 4.18
per cent and 2010 Unspent Balance of N19.89 billion or 2.01 per
cent. The revenue shortfall in the period was due to the poor
performance
of
the
Federal
Government
independent
revenue collection.

The total expenditure of the Federal Government for the
period January - June 2011 amounted to N1, 796.38 billion
which was below the 2011 proportionate budget of N2, 315.68
billion by N445.93 billion or 19.89 per cent. The breakdown of
the expenditure showed the following: Recurrent (non-debt)
Expenditure (N985.04 billion), Capital Expenditure (N189.63
billion), Statutory Transfer (N108.54 billion) and Debt Service
(N229.98 billion). In addition, the sum of N108.92 billion, being
the extended 2010 capital budget was expended during the
period.

Thus, the fiscal operations of the Federal government during
January – June, 2011, resulted in a deficit of N581.64 billion,
which was higher than the 2011 proportionate budget deficit
of N568.21 billion by N13.43 billion or 2.36 per cent. The deficit
for the period is expected to be financed through borrowing
from special account worth N95.00 billion and domestic
borrowing, with the issuance of FGN Bonds worth N426 billion
by the Debt Management Office (DMO).


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5.5.3
Aggregate Supply Constraints

Supply gaps in agriculture in some parts of the country were
accounted for by social tensions, floods and planting season
related issues which created food shortages that were
augmented by the release of grains from the strategic
reserves. In addition, raw material constraints reflected in
increased demand pressure in the foreign exchange market,
which impacted negatively on the exchange rate of the naira.
Given the often strong pass-through effect from exchange rate
to inflation, the supply constraints and dependence on imports
given higher global food, energy and commodity prices,
combined to increase the upward pressure on domestic
prices.

5.5.4
Exchange Rate Developments
The naira/dollar exchange rate remained relatively stable
around N153.31/US$ in the first half of 2011. The premium
between the official and the BDC rates widened to N5.69 or
3.58 per cent compared with N3.41 or 2.22 per cent in the first
half of 2011, as the interbank and other segments of the
market came under severe demand strain, thus inducing
upward pressure on the official exchange rate. Stabilizing the
exchange rate impacted on the level of external reserves
which dropped while the rising price level was contained. The
relatively stable exchange rate impacted positively on the
anti-inflation efforts by helping to lock-in exchange rateinduced inflation expectations. Although the matching of
supply with demand for foreign exchange at the WDAS
impacted negatively on external reserves, it nevertheless
helped in moderating the growth of liquidity in the banking
system, which complemented the tight monetary policy
stance of the CBN in the drive to tame inflation.


..raw materials
constraints
reflected in
increased
demand pressure
in the foreign
exchange
Relatively stable
exchange rate
impacted
positively on the
anti-inflation
efforts...


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Table 5.3
FOOD INFLATION
RELATIVE CONTRIBUTION OF FOOD INFLATION COMPONENTS
Year-on-Year (Food)
Year-On-Year

Month-on-Month

Weights
Apr'11
May'11
Jun'11

Apr'11
May'11
Jun'11
Food


0.70
-0.30
1.30
Processed Food


1.20
-0.80
0.60
Meat


0.06
-0.03
0.14
Fish & Sea Food


0.09
-0.03
0.15
Milk,Cheese & Eggs


0.01
-0.05
0.11
Oil & Fats


0.08
-0.02
0.12
Sugar,Jam,Honey,E.T.C


0.00
-0.04
0.11
Bread Unsliced 500g


0.07
0.10
-0.15
Cabin Biscuit:Local
Manufacture 800g Pack


0.00
0.00
-0.01
Cassava Flour,Sold Loose


0.00
-0.01
-0.03
Corn Flakes 350g


0.00
0.00
0.00
Corn Flakes 2kg


-0.01
0.02
0.02
Custard 300g


0.00
0.01
0.02
Eko(Agidi/Kafa)


0.03
-0.02
0.47
Fritters(Puff-Puff)


-0.02
0.01
0.03
Gari White,Sold Loose


0.47
-0.14
0.06
Gari, Yellow,Sold Loose


1.37
-0.88
0.28
Plantain Flour


-0.97
0.05
0.09
Pop Corn


0.00
0.00
0.00
Sausage Beef (Gala)


0.00
0.00
0.00
Semovita 2kg


0.00
0.00
0.00
Yam Flour,Sold Loose


-0.16
0.21
-0.79
Farm Produce


-0.50
0.50
0.70
Fruits


0.03
-0.04
0.11
Vegetables


0.06
-0.02
0.16
Yam, Potato & Other
Tubers


0.09
0.03
0.14
Maize Grain White Sold
Loose


0.09
0.05
0.02
Millet (Jero or Maiwa)Sold


0.10
0.12
0.28


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Loose
Rice Agric Sold Loose


-0.54
0.01
-0.03
Rice Local Sold Loose


-0.16
0.17
-0.08
Rice/Imported High Quality
Sold Loose


-0.02
0.00
-0.01
Borghum (Guinea Corn)
White or Brown,Sold
Loose


-0.12
0.17
0.13


11.60
12.20
9.20

0.70
-0.30
1.30


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CHAPTER 6
ECONOMIC OUTLOOK
6.1 Overview
Global economic recovery slowed in the first half of 2011 due
to a number of unfavorable developments, especially fiscal
deterioration in some euro zone countries. In addition, global
output growth was moderated by the earthquake and
tsunami in Japan and the attendant supply chain disruptions.
Some emerging market economies faced various crises such
as structural fiscal challenges in Brazil, concerns about real
estate bubble in China and mounting inflationary threat in
India. Rising food and commodity prices further moderated
global output, though, but this development strengthened
output growth in countries in Sub-Saharan Africa.

The observed level of growth in global output during the
review period was driven largely by output expansion in the
emerging and developing economies. There were however
important
risk
factors
which
included
financial
sector
imbalances and fiscal sustainability in many advanced
economies, rising volatility in energy and commodity prices
and the widespread social and political unrests in the MENA
region. These developments continue to threaten global
financial and economic stability and growth in the rest of 2011.
On the domestic front, the positive effects of the various
reforms in the financial sector complemented by targeted
expenditure on power, agriculture, and manufacturing sectors
could enhance growth prospects for the rest of the year and
the medium-term.
6.2
Global Output
Growth in global output in the first half of 2011 moderated to
4.3 per cent from 4.7 per cent in the second half of 2010. The
decline was caused by the devastating earthquake and
tsunami,
and
nuclear
plant
disaster
in
Japan
which
constrained
industrial
production,
greater-than-projected
weakness in US growth, sustained sovereign debt crisis in the
euro area as well as rising food and commodity prices and
political and social unrest in the MENA region. Growth in
Rising food and
commodity prices
further moderated
global output,
Growth in global
output in the first
half of 2011
moderated to 4.3
per cent from 4.7
per cent recorded
in the second half
of 2010.
On the domestic
front, the positive
effects of the
various reforms
...could enhance
growth prospects
for the rest of the
year


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global output was projected to be sustained at 4.3 per cent in
2011 (Table 6.1).

Growth in the advanced economies in the first half of 2011
moderated to 2.2 per cent from the earlier projection of about
2.7 per cent. In the US, real GDP grew at an average of 2.3 per
cent in the first half of 2011 and was expected to improve to
2.5 per cent in the second half, buoyed by strong growth in
household domestic demand and expected decline in the
unemployment rate. This outlook was expected to change if
the prolonged deterioration in the US labor market conditions
and the Euro debt crisis persisted.

Growth in the emerging and developing economies averaged
6.5 per cent in the first half of 2011 and was projected to
improve to an average of 6.6 per cent in the second half of
2011,
due
largely
to
improved
demand
for
primary
commodities by the emerging market economies in Asia.

Growth in Sub-Saharan Africa was projected to continue
strengthening, with robust domestic demand and commodity
exporters benefiting from rising prices. With the assumption that
economic normality could return to some of the currently
troubled countries, Sub-Sahara Africa ́s average growth is
expected to rise to 5.8 per cent in 2012 from the projected
level of 5.2 per cent in 2011. In the MENA region, economic
activities remained clouded by political and social unrest.
However, there was improvement in the outlook of some oil
and mineral producing states in the region. In the first half of
2011, growth in the MENA region as well as Sub-Saharan Africa
averaged 4.2 and 5.5 per cent, respectively.

In developing Asia, growth decelerated slightly from 9.6 per
cent in the second half of 2010 to 8.4 per cent in the first half of
2011. Likewise, in Latin America and the Caribbean countries,
output growth decelerated from 6.1 per cent in the second
half of 2010 to 4.6 per cent in the first half of 2011 (Table 6.1).
Both regions were expected to maintain the growth path for
the rest of 2011.
Overall, the outlook for the second half of 2011 suggested that
the
advanced,
emerging
and
developing
economies,
...outlook for the
second half of 2011
suggested that the
advanced, emerging
and developing
economies..... would
witness sustained
economic recovery;
Growth in the
advanced
economies in the
first half of 2011
moderated to 2.2
per cent from the
earlier projection
of about 2.7 per
cent.
Growth in SubSaharan Africa
was projected to
continue
strengthening,


CBN Monetary Policy Review

especially
Sub-Saharan
Africa,
would
witness
sustained
recovery; while the MENA economies could experience a
further slowdown in the rest 0f 2011.
6.3
Global Inflation
Global inflation accelerated in the first half of 2011, due to the
more-than-expected increases in commodity prices. In the
advanced economies, inflation averaged 2.6 per cent and
was projected to remain within that level to the rest of the
year. Inflation in the US averaged 2.4 per cent in the first half of


Table 6.1
World Economic Outlook

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


Sources: IMF World Economic Outlook, April 2011, IMF World
Economic Update, June 2011


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2011 while in Sub-Saharan Africa, strong domestic demand
and exchange rate pressures increased upward pressure on
prices. The situation was expected to persist for the rest of the
year.
6.4
Global Commodity and Energy Prices
World crude oil prices averaged US$116.90 per barrel in the first
half of 2011, representing an increase of 46.50 per cent over
the average price of US$79.80 per barrel observed in the
second half of 2010. Oil prices were projected to remain within
the US$100 per barrel region to the rest of 2011, due largely to
anticipated rebound in Japan, sluggish supply response and
political crises in the MENA countries.

6.5
Outlook for the Domestic Economy
6.5.1
Domestic Output Growth
The overall growth outlook for the domestic economy is
optimistic. Output growth in the first half of 2011 was estimated
at 7.72 per cent and projected to rise to 8.71 per cent for the
rest of 2011. This was premised on full oil production activities in
the Niger Delta, rising oil prices, implementation of Federal
Government’s Road-map on Power Reforms, increased
agricultural production due to interventions in the agriculture
sector (such as the Nigerian Incentive-Based Risk Sharing
System for Agricultural Lending), improved infrastructure and
other initiatives in the first half of 2011.

The non-oil sector was expected to drive growth while the
major risk to output was the possibility that slow growth in the
US and the euro area and falling domestic aggregate
demand in those countries could affect Nigeria’s export of
crude oil and prospects of higher oil exports.


Global inflation
accelerated in
the first half of
2011,..... .situation
was expected to
persist to the rest
of the year.
.growth outlook
for the domestic
economy is
optimistic


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Table 6.2
Outlook for Key Macroeconomic/Monetary Indicators


2010* Actual, 2011**CBN Staff Estimates.
Source: Central Bank of Nigeria

6.5.2
Inflation
Inflationary pressures persisted throughout the first half of 2011
resulting in an end period level of 10.2 per cent. Current
forecasts suggest that inflation may trend downward in the
second
half
of

due
to
expected
favourable
macroeconomic factors including good prospects for early
and rich harvests to dampen core food inflation. There are
however, risks to inflation in the event of drastic changes in the
current environment. For example, the anticipated fiscal
developments, which include the implementation of the new
minimum wage, the unwinding of the quantitative easing
initiatives introduced since 2009, higher electricity tariffs and
the prospects for the removal of petroleum subsidy could be
challenging for liquidity management for the rest of 2011.

6.5.3 The Foreign Exchange Market
The foreign exchange market witnessed sustained demand
pressure, resulting in the depreciation of the naira in all
segments of the market. The surge in demand for foreign
exchange was mainly on account of foreign portfolio

2010*
2011**
Inflation
11.8
12.0
Real GDP
7.84
8.84
M2 Growth (per
cent)
6.70
13.75
Income Velocity
2.6
2.8
Reserve Money
(N’billion)
1,803.91
1,936.0
Credit to Govt. (per
cent)
67.83
29.29
Credit to Private
Sector (per cent)
-4.92
23.34
Inflation pressures
persisted
throughout the
first half of
2011...... forecasts
suggested that
the downward
trend would
continue in the
second half of

High oil exports
and prices were
expected to result
in external
reserves buildup in
the second half of
2011.


CBN Monetary Policy Review

divestment and rising import demand, especially towards the
April general elections. High oil exports and prices were
however expected to act as prohibition in external reserves
buildup in the second half of 2011.

6.5.4. The Capital Market
Market indices which closed in the first half of 2011 positively,
suggest an upward movement in the second half of 2011. This
outlook however, is predicated on a number of factors:
positive investor sentiments in the aftermath of a successful
general election, reform measures introduced by the Securities
and Exchange Commission (SEC), a new management team
at the Nigerian Stock Exchange and the cleaning up of the
balance sheets of the DMBs by AMCON,

6.5.5
The Money Market
Money market interest rates rose and fluctuated at the low
end of double digit in the first half of 2011. The increase in the
interest rate was as a result of upward adjustment of MPR to
rein in inflation expectations. The reforms by the CBN designed
to strengthen the banking system and promote good
corporate governance, as well as the purchase of the toxic
assets of the DMBs by AMCON, were expected to sustain
lending to the real sector and stabilize short-term interest rates
in the second half of 2011.

On the upside, the performance of the US$500.0 million FGN
euro bond at the international market, indicated by a falling
yield represented a strong indication of the confidence of
international
investors
in
Nigeria’s
macroeconomic
management which could increase capital inflow.

In conclusion, monetary policy is expected to continue its
focus on curbing inflationary threats in the rest of the year. The
overall outlook for the domestic economy appears brightened
by the good prospects for growth and continued policy
coordination between the monetary and fiscal authorities.


...reforms by the
CBN ..........were
expected to
sustain lending to
the real sector
and stabilize short
-term interest rate
in the second half
of 2011.
The foreign
exchange market
witnessed
sustained pressure
especially towards
the
.capital market
witnessed some
level of activities in
the first half of 2011
...outlook suggests
an upward
movement in major
market indices in
the second half of

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APPENDICES
Communiqué of the Monetary Policy Committee
(January-June 2011)

Central Bank of Nigeria Communiqué No. 74 of the Monetary Policy Committee
Meeting, January 24-25, 2011

The Monetary Policy Committee (MPC) met on the 24th and 25th January, 2011 to
review domestic and international economic and financial developments in 2010
and the challenges facing the Nigerian economy in the year ahead.

On the global scene, the Committee noted the divergence in the economic
performance of advanced and emerging economies in 2010. Economic
uncertainties contributed to the weak recovery in advanced economies. As a
result, growth was sluggish and concerns about inflation were dominant on
account of the rising oil and commodity prices in the international markets and
fears of fiscal stress in the years ahead. On the other hand, robust economic
growth was recorded in emerging markets based essentially on strong domestic
demand which offset weak export demand. Financial market conditions in
advanced economies were, however, more stable than in the preceding two
years while some emerging economies were confronted with challenges posed by
large volatile capital inflows.

With regard to the domestic economy, the Committee noted with satisfaction the
impressive economic growth, the continuing recovery of the capital market and
the progress made towards restoring stability in the banking sector. It, however,
observed that inflation had continued to be relatively high and reiterated the
need for it to be reined in and for Government to further strengthen and deepen
economic and structural reforms.

Key Domestic Macroeconomic and Financial Developments

Domestic Output
The Committee noted the sustained output growth recorded in 2010. Provisional
data from the National Bureau of Statistics (NBS) indicated that real Gross
Domestic Product (GDP) grew by 8.29 per cent in the fourth quarter of 2010, up
from 7.86 per cent recorded in the third quarter. The overall GDP growth for 2010
was estimated to be 7.85 per cent, compared to the revised growth rate of 6.96
per cent recorded in 2009. The non-oil sector remained the major driver of overall
growth, with agriculture, wholesale and retail trade, and services contributing 2.39,


CBN Monetary Policy Review

2.04 and 2.08 per cent, respectively. The outlook for 2011 is projected to be
generally favourable in view of the continued improvement in the international oil
market and emphasis on the development of the non-oil sector.

Domestic Prices
The year-on-year headline inflation, as measured by the percentage change in
the all-items consumer price index (CPI, November 2009=100), trended
downwards during most periods of 2010. It declined to 11.8 per cent in December
2010 from 13.6 per cent in September. Similarly, core inflation declined to 10.9 per
cent in December 2010 from 12.8 per cent in September. Food inflation also,
dropped to 12.7 per cent in December 2010, from 14.6 per cent recorded in
September.

The Committee noted that although inflation has been trending downwards, the
single digit benchmark was not achieved in 2010, despite the relatively good
harvest, improved supply of petroleum products and lower growth in monetary
aggregates. This, according to the Committee underscores the need to address
both supply and demand side factors that determine inflation dynamics in Nigeria.
One of the ways to keep aggregate demand in check is to restrain debt-financed
government spending in the medium-term. This calls for a review of subsidies and
other recurrent expenditure categories that constitute a drain on the national
budget as well as improving the revenue base. However, the Committee
commended the government for recognizing the existence of these issues in the
2011 budget proposal especially the reduction in the proposed level of total
spending. Although there has been a strong emphasis on capital expenditure
and infrastructure development, the Committee noted that recurrent expenditure
remained high at over 70 per cent of the total budget. For this reason, the MPC
believes that the risk to price stability posed by fiscal operations will need to be
constantly monitored if inflation is to be brought down to single digit levels in the
short- to medium-term. However, the Committee noted that the general thrust of
fiscal policy pronouncements is in the desired direction.

Monetary, Credit and Financial Market Developments
Provisional data showed that the growth in broad measure of money supply (M2)
was generally below the indicative benchmark throughout 2010 when compared
with the level at end-December 2009. Specifically, at end-December 2010, M2
growth was 6.70 per cent compared with the indicative benchmark of 29 per
cent for 2010.

Available data indicated that growth in aggregate credit to the domestic
economy (net) was similarly sluggish at 6.13 per cent in December 2010 compared


CBN Monetary Policy Review

with 59.6 per cent recorded in the corresponding period of 2009. This development
is connected to the damaged balance sheets of the DMBs in the wake of the
global financial and economic crises. However, aggregate credit to the Federal,
as well as State and local governments grew by 67.83 per cent and 19.17 per
cent, respectively, in 2010. Credit to the private sector contracted by 4.92 per
cent in contrast to the indicative benchmark growth of 31.54 per cent for 2010.
However, this outcome would need to be considered in the context of the
purchase of non-performing loans with face value of over N 2 trillion from the DMBs
by the Asset Management Company of Nigeria (AMCON) in 2010. These loans
were purchased at a discount and paid for by AMCON-issued zero-coupon
bonds. Adjusting for this factor, growth in credit to the private sector would
appear to be positive, since the loans were transferred to the balance sheet of
AMCON. The growth in credit to the three tiers of government against the
backdrop of the decline in private sector credit is a reflection of the fact that
government borrowing had to some extent crowded out private sector credit.

Developments in retail market interest rates indicated that the retail lending rates
remained relatively high in 2010. The average maximum lending rate declined
from 23.18 per cent in January 2010 to 21.86 per cent in December 2010. The
average prime lending rate also declined consistently from 18.38 per cent in
January to 15.74 per cent in December 2010.

Inter-bank and OBB rates moderated to 8.06 and 6.86 per cent respectively in
December 2010. The weighted average savings rate declined consistently from
3.33 per cent in January 2010 to 1.51 per cent in December 2010. The
consolidated deposit rate initially declined from 6.13 per cent in January to 2.07
per cent in September, 2010 but rose marginally to 2.24 per cent in December
2010. Thus, the spread between the average maximum lending rate and the
consolidated deposit rate widened from 17.05 percentage points in January to
19.76 percentage points in December 2010. The Committee noted with concern
the extremely low returns paid to savers and depositors as this poses a major disintermediation risk and is inconsistent with developmental goals of financial
inclusion.

The domestic capital market recorded significant recovery in 2010, after the
decline associated with the global financial and economic crises in 2008/2009. The
All-Share Index (ASI) rose from 20,827.17 points as at end-December 2009 to 24,
770.52 points as at end-December 2010, representing a growth of 18.93 per cent.
Market Capitalization (MC) rose from N4.98 trillion as at end-December 2009 to
N7.91 trillion as at end-December 2010, representing a growth of 58.83 per cent.
For the fourth quarter of 2010, the All-Share Index (ASI) increased by 7.5 per cent


CBN Monetary Policy Review

from 23,050.59 to 24,770.52 at end-December 2010 while Market Capitalization
(MC) increased by 40.1 per cent from N5.65 trillion to N7.91 trillion. However, the
number of deals, volume and value of shares traded declined as at December.
The increase in ASI and MC was partly due to share price recoveries in the
Banking, Food/Beverage, Insurance and Oil & Gas sectors. Nonetheless, the
recovery process needs to be sustained through further strengthening of
macroeconomic and structural reforms. The Committee noted the major role
being played by the Securities and Exchange Commission (SEC) in reforming and
improving governance processes in the NSE and encouraged the SEC to continue
as this is necessary for restoring confidence in the Nigerian financial system.

External Sector Developments
The foreign exchange market remained relatively stable. Between end-2009 and
end-2010, the Naira/Dollar exchange rate depreciated by N1.08 or 0.72 per cent,
to N150.66/US$ from N149.58 /US$ at end-2009, as against 15.65 per cent
depreciation recorded at the end of 2009. The average premium between the
CBN transaction rate and the BDC’s as at end-2010, was 1.83 per cent, compared
with 8.58 per cent in 2009.


The Committee reaffirmed its conviction that a stable exchange rate regime is
critical to maintaining price stability but noted that in the absence of
complementary policies the regime is only sustainable at the cost of significant
attrition in foreign reserves. The MPC, therefore, continues to emphasize that the
solution to reserve depletion lies in the implementation of appropriate reforms with
regard to industrial and trade policies aimed at reducing import-dependence,
which are beyond the scope of monetary policy. Substantial foreign exchange is
expended annually on JVC Cash calls and importation of petroleum products due
to the delay in implementing much needed reforms in the oil sector. This is in
addition to the huge amounts spent on petroleum subsidies which are likely to
increase with higher oil prices. The country is also expending foreign exchange on
import of food items such as rice whereas what is needed is the implementation of
policies that will lead to food security and total self-sufficiency. The Committee
noted that external reserves stood at US$32.32 billion as at end-December 2010. It,
however, rose to US$33,26 billion as at 20th January 2011.

In the Committee’s view, implementation of these reforms along with the
improved outlook for oil price and output should go a long way in reversing the
negative trend in our foreign reserves position.


CBN Monetary Policy Review

The Committee’s Considerations
The considerations of the MPC following from the above review suggest that while
the general outlook on growth is highly favourable, it is important to be vigilant on
prices and financial market developments. The likelihood of improved oil output
and rising oil prices in the international market would contribute to growth and
help rebuild external reserves which is vital to sustain consumer and investor
confidence in the economy.

The Committee noted that the risk of inflation is on the upward side as a result of
the liquidity injections from the likely increase in government spending in the run
up to the April 2011 elections, and AMCON purchases, as well as rising global
energy and food prices and the expected pass-through to the domestic
economy. It noted that the existing subsidy regime on petroleum products is not
sustainable in view of government’s current finances. In view of these factors, the
Committee noted, that inflation remains a major concern that cannot be ignored
in the short- to medium-term.

The MPC also noted with serious concern the existing low rates of about 1.0 per
cent paid on savings deposits and its implications for financial intermediation and
the mobilization of long-term funds which is critical for enhancing investment in
real sector economic activities, and hence, economic growth. The Committee
felt that in preparation for the removal of the CBN guarantee of inter-bank market,
banks need to provide reasonable incentives for the mobilization of savings for
growth and financial inclusion. The Committee, however, stated its commitment
to continue to monitor developments with a view to coming up with appropriate
measures to address the issue.

With regard to external reserves, the Committee observed that the fundamental
structural problem of the country as an import-dependent economy was largely
responsible for the continuing depletion of the external reserves. The continuing
decline in reserves was accounted for by the payment for JVC cash calls,
amounting to US$6,867 million and US$5,657 million in 2009, funding of the foreign
exchange market to the tune of US$24,835.65 million as against US$25,070 million in
2009 in the case of WDAS. Sales to BDCs amounting to US$5,337 million in 2010
compared with US$4,734 million in 2009, in addition to the payment of subsidies on
petroleum product as well as other government external payment obligations. The
Committee stressed that a significant portion of the foreign exchange outflow will
be stemmed with the Petroleum Industry Bill because JVC Cash Calls alone
accounted for a large proportion of the total net outflow in 2010. The Committee
observed that if exchange rate had not been managed in a stable manner,
inflation would not have moderated. The policy thrust on exchange rate stability is


CBN Monetary Policy Review

informed by the overwhelming impact of exchange rate pass-through on inflation,
given the import-dependent nature of the economy.

The MPC identified the greatest challenge facing the economy as the lack of flow
of credit to the critical sectors, and the consequent need to unlock the flow of
credit for critical investments in agriculture, SMEs and manufacturing sectors. To
achieve this, government would need to create the right policy and regulatory
environment, including the sustained fight against corruption, strengthening of
transparency and institutions, as well as implementing critical reforms. On its part,
the CBN will continue to engage banks and take the lead in programmes and
interventions to channel credit to the real economy. To this end, the Committee
noted the initiatives being pursued by the Bankers’ Committee and urged speedy
implementation.

The Committee further stated that the economy is affected not only by monetary
and fiscal policy measures but also by political risk and concerns about national
security which affect investors’ confidence in the economy. In this regard, the
Committee stressed the need to pay greater attention to the issue of security and
how to manage uncertainty in the political environment.

MPC Decisions
In the light of the above considerations, the Committee committed to maintaining
price stability by pursuing the current policy thrust of monetary tightening in view
of the perceived inflation risks in the near term. The Committee took the decision
to further tighten monetary policy. This was a decision taken by a majority of 11:1.
The following measures were approved:

1.
Raise the MPR by 25 basis points from 6.25 per cent to 6.50 per cent with
immediate effect (a majority vote of 11:1);

2.
Maintain the symmetric corridor of +/- 200 basis points by 7-5; 4 members
voted for asymmetric corridor by 50 basis points increase in Standing
Deposit Facility rate;

3.
Raise the Cash Reserve Requirement (CRR) Ratio by 100 basis points from
1.00 per cent to 2.00 per cent with effect from February 1, 2011 with a
majority vote of 11:1; and


CBN Monetary Policy Review

4.
With effect from March 1, 2011, raise the Liquidity Ratio (LR) by 500 basis
points from 25.00 per cent to 30.00 per cent with a majority vote of 11:1.


Sanusi Lamido Sanusi
Governor,
Central Bank of Nigeria
Abuja
January 25, 2011


CBN Monetary Policy Review

Central Bank of Nigeria Communiqué No. 75 of the Monetary Policy Committee
Meeting, March 21-22, 2011

The Monetary Policy Committee (MPC) met on the 21st and 22nd March, 2011 to
assess the current domestic and international economic and financial
developments as well as the challenges that lie ahead of the Nigerian economy in
the short-to medium term.

On the international scene, the Committee noted the continuing recovery in a
number of developed economies but observed that unemployment rates
continue to be high and threats of inflation strong in the light of the rising global
commodity and energy prices. In emerging market economies, growth has been
robust but inflationary pressures are strong and on the rise. The negative impact
of the political crises in the oil-producing Middle East and North Africa (MENA)
region on oil prices and the disruptions and destructions associated with the
earthquake and tsunami in Japan have added to uncertainty about the
sustainability of global economic recovery and growth. There are also concerns in
the European periphery of increasing interest rates. The implications of these
developments together with the likelihood of sharp increases in international
interest rates for the Nigerian economy need to be kept under continuous watch.

With regard to the domestic economy, the Committee noted the continuing good
output performance, the rising external reserves, the moderation in the inflation
rate and the steady movement towards realization of banking sector stability.
Monetary indicators have not picked up sufficiently while money market rates
were generally high. The fiscal stance continues to be unduly expansionary. The
Committee therefore emphasized the need to pursue sound policies, including
exchange rate stability in order to ensure price stability without losing sight of the
imperative of maintaining the current growth momentum.

Key Domestic Macroeconomic and Financial Developments

Domestic Output
The Committee noted that the impressive output growth in 2010 was sustained in
QI 2011. Provisional data from the National Bureau of Statistics (NBS) indicated that
real Gross Domestic Product (GDP) was projected to grow by 7.43 per cent in the
first quarter of 2011, compared with the 7.36 per cent recorded in the
corresponding period of 2010. The overall GDP growth for 2010 was estimated to
be 7.85 per cent, higher than the growth rate of 6.96 per cent recorded in 2009.
The non-oil sector remained the major driver of overall growth, with agriculture,
wholesale and retail trade, and services contributing 2.39, 2.04 and 2.08 per cent,


CBN Monetary Policy Review

respectively. The Committee considers the outlook for 2011 to be generally good,
given the expected improvement in the oil economy and the growing emphasis
on the development of non-oil sector and key infrastructure.

Domestic Prices
The year-on-year headline inflation in February was 11.1 per cent compared to
12.1 per cent recorded in January 2011 and 12.8 per cent in December 2010.
Core inflation was 10.6 per cent in February 2011, down from 12.1 per cent in
January and 10.9 per cent in December 2010. Food inflation however, rose to 12.2
per cent in February from 10.3 per cent in January but was lower than the 12.7 per
cent in December 2010. The rise in food inflation was consistent with the seasonal
pattern. In addition, the increase in the costs of imported food items,
transportation and energy prices contributed to food inflation. With the output
performance being good, the challenge to inflation control lies, therefore, in
containing aggregate expenditure and moderating the impact of imported
inflation via exchange rate channel. This is where the role of fiscal prudence
becomes very critical.

Monetary, Credit and Financial Market Developments
Provisional data showed that the growth in broad money (M2) in the first two
months of 2011 relative to December was moderate. Credit to private sector
continued to be sluggish partly because of the delay in the passage of the 2011
Federal budget and ongoing banking sector reforms. Net foreign assets in the first
two months have posted positive growth, the first time since January 2009. Pick up
in credit to private sector should be possible given the high potential for
accelerated growth, the fact that the banking sector stability is largely restored
and the intensification of the operations of the Asset Management Corporation of
Nigeria (AMCON).

The interbank market rates fluctuated at the various segments since the beginning
of the year. Key interbank rates moved in tandem with the upward revision of the
monetary policy rate (MPR) to 6.5 per cent from 25th January, 2011. Between
January 25 and March 17, 2011, the interbank call and open buy-back (OBB) rates
showed increases mainly in response to the MPC’s increase of the MPR and a
more effective implementation of monetary policy decisions. Consequently,
interbank call and OBB rates rose from 4.93 and 4.75 per cent on 26th January,
2011 to 8.44 and 8.04 per cent, respectively, on March 17, 2011.

The Committee noted that the Central Bank of Nigeria (CBN) has recently finetuned its monetary policy implementation framework using reserve averaging over
a reserve maintenance period extended to 4 weeks. The Committee urged


CBN Monetary Policy Review

continuous monitoring of the developments and taking appropriate measures
necessary for improving the implementation framework in the months to come.
Retail lending rates remained relatively high in the first two months of 2011 while
the spread between the average lending rate and the consolidated deposit rate
widened to 19.83 percentage points in February 2011 from 19.52 percentage
points in January. The Committee noted that a policy challenge is to ensure that
the interest rate spread is significantly moderated.

In 2011 thus far, share prices and market capitalization recorded significant
decline due to both domestic and international developments. However, with the
ongoing reforms by the regulatory authorities and robust growth prospects, the
outlook in the medium-term appears generally good.


External Sector Developments
The Committee noted the re-emergence of demand pressures in the foreign
exchange markets during the review period. The total supply to the wDAS
segment by the CBN amounted to US$5.145 billion from January through March
16, 2011, while demand stood at US$6.815 billion during the same period. The
Committee expressed concern that, of the amount supplied, US$1.34 billion was
spent on importing refined petroleum products alone, which has adverse
implications both for the reserves position and government finances as a result of
the huge subsidy implications.

The wDAS segment of the foreign exchange market, however, remained relatively
stable. The Naira/Dollar exchange rate opened on February 1, 2011 at
N151.85/US$ and closed at N152.52/US$ on March 17, 2011, representing a slight
depreciation of 0.44 per cent (or 67 kobo). However, the premium between the
rates at the WDAS and other segments of the market widened towards the end of
the review period, reflecting a sharper depreciation in non-wDAS segments of the
foreign exchange market. The Committee, however, observed that given strong
oil sector fundamentals, this trend is likely to be temporary. The Committee urged
the CBN to continue to pursue the strategy of maintaining exchange rate stability
to contain inflation.

The Committee welcomed the recent build-up of foreign exchange reserves
owing to increase in output and rising crude oil receipts. Foreign exchange
reserves increased by US $2.82 billion to US$35.16 billion on March 16, 2011 from US
$32.34 billion recorded at the end of December 2010. However, the Committee
welcomed the reserve build up and reiterated that the solution to reserve


CBN Monetary Policy Review

depletion lies in the implementation of appropriate reforms with regard to
industrial and trade policies aimed at reducing import-dependency.

The Committee’s Considerations
The MPC noted the positive growth outlook in the near to medium-term but
expressed serious concern over the heightened risk of inflation following from the
proposed high expenditure outlay of the Federal Government as contained in the
2011 Appropriation Bill recently passed by the National Assembly, especially in the
wake of rising global food and energy prices. In this regard, the Committee
recalled that in the past few MPC meetings, it had stressed the need for fiscal
retrenchment and drawn attention to the unsustainability of the rising trend of
domestic debt. However, the proposed expenditure outlay negates the initial
sentiment for fiscal retrenchment which would have supported monetary policy
effectiveness. The current fiscal stance is inconsistent with the objective of
maintaining stability in exchange rates, prices and interest rates. The Committee,
therefore, believes that unless the fiscal stance is reversed, the economy would
have to bear a high cost in terms of pressure on foreign reserves, high interest rates
and/or higher level of inflation.

Against the foregoing, the MPC is of the view that a further tightening of monetary
policy is imperative. This stance needs to be appreciated in the context of the fact
that resolution of the problems in the banking sector has not yet been completed.
However, a number of banks have signed a memorandum of understanding with
core investors and public announcement will be made this week. In the light of
this, the interbank guarantees and guarantees of foreign credit lines will need to
be extended beyond the deadline of June 30, 2011. The MPC, however,
recognizes that any action that is taken at this point in time should not serve as a
disincentive to the current high growth impulses. It, however, recognizes that the
principal problem is access to finance in critical sectors like agriculture and
manufacturing. This should remain the focus of CBN in the short - to medium term.

Decisions
In the light of the foregoing analysis, Members of the Committee voted
unanimously for further tightening of monetary policy because of heightened risk
of inflation. The Members specifically pointed out the rising international food and
energy prices, the impact of import costs on domestic prices, the challenges that
fiscal stance posed to the external value of the Naira and the likely front-loading
of public expenditure in the election period. Against this background, the
following decisions were taken:


CBN Monetary Policy Review

1.
A majority of 9 to 3 Members voted for an increase in MPR by 100 basis
points from 6.50 per cent to 7.50 per cent. The 3 Members voted for a 50
basis points increase;

2.
A unanimous decision to,

a.
Retain the symmetric corridor of +/- 200 basis points;
b.
Retain the current CRR of 2.0 per cent and the liquidity ratio of 30.0
per cent; and
c.
Extend the CBN guarantee on interbank transactions and
guarantee of foreign credit lines by three months from June 30,
2011 to September 30, 2011.


Sanusi Lamido Sanusi, CON
Governor
Central Bank of Nigeria

March 22, 2011


CBN Monetary Policy Review

Central Bank of Nigeria Communiqué No. 76 of the Monetary Policy Committee
Meeting, May 23 - 24, 2011

The Monetary Policy Committee (MPC) met on 23rd and 24th May, 2011 to assess
current domestic and international economic and financial developments as well
as the challenges facing the Nigerian economy in the short- to medium-term.

On the international scene, the Committee noted the recovery in some of the
major developed economies along with improvements in stock market indices,
although unemployment remained high. Inflationary threats, however, still
persisted following sharp increases in international oil and commodity prices. In
addition, there are serious concerns about debt sustainability in many developed
countries, particularly the Euro-zone, requiring strong fiscal adjustment with
attendant risk of economic slowdown in the medium-term.

Emerging market economies have become the engine of the global economic
recovery, with their output levels above those recorded during the crisis years. It is
expected that growth in Asia’s exports in 2011, though below the very high rates of
2009 and 2010, will be supported by the slow but gradual recovery in the industrial
countries. Sub-Saharan African countries are projected to record moderate
growth and to face inflation threats. Weak economic recovery in industrialized
countries may also affect exports from the region.

With regard to the domestic economy, the Committee noted the estimated high
output growth in Q1 2011, improvement in stock market indicators, modest
accretion to external reserves since the beginning of 2011 reflecting in part the
high crude oil prices, stable naira exchange rate and rise in interbank rates in
response to the tightening of monetary policy stance. Notwithstanding the recent
monetary policy tightening measures implemented since January 2011, the
Committee observed that inflation rate remained at the double digit level,
indicating the apparent role of structural factors and supply bottlenecks in the
elevated inflationary pressures in Nigeria. The Committee, therefore, urged that
economic reforms be fast-tracked to ensure that the downside risk of inflation to
growth is minimized.

Key Domestic Macroeconomic and Financial Developments

Domestic Output
The Committee noted that the impressive output growth in 2010 was sustained in
QI 2011. Provisional data from the National Bureau of Statistics (NBS) indicated that
real gross domestic product (GDP) was projected to grow by 7.43 per cent in the


CBN Monetary Policy Review

first quarter of 2011, compared with the 7.36 per cent recorded in the
corresponding period of 2010. The non-oil sector grew by 8.46 per cent while the
oil sector output growth was estimated at 2.90 per cent. Thus, the overall output
growth was driven mainly by the non-oil sector with significant contributions from
services, wholesale and retail trade, and agriculture. The Committee considers the
outlook for 2011 to be generally good, underpinned by the favourable conditions
for increased agricultural production, encouraging outcomes of the banking
sector reforms and measures to channel credit to the real economy, as well as
other initiatives by governments to stimulate the economy.

Domestic Prices
The year-on-year headline inflation rate declined to 11.3 per cent in April 2011
from 12.8 per cent in March 2011. Food inflation also declined to 10.7 per cent in
April from 12.2 per cent in March and February 2011. However, core inflation at
12.9 per cent in April was slightly higher than the 12.8 per cent in March 2011. The
decline in headline inflation rate was primarily due to the decline in the prices of
some
food
items
and
non-alcoholic
beverages,
imported
food
items,
transportation, and clothing and footwear. Notwithstanding the decline in the
inflation rate in April, inflation expectations remain high owing to the subsisting
high fiscal spending, the recent increases in public sector wages, the possible
removal of subsidy on petroleum products in the near-term and further liquidity
injection due to AMCON activity.


Monetary, Credit and Financial Market Developments
Provisional data showed that the growth in broad money (M2) during the first four
months of 2011 was 3.24 per cent, or 9.72 per cent when annualized. Aggregate
credit continued to decline largely as a result of reduction in credit to the core
private sector, and to state and local governments. Net foreign assets, which
posted positive growth in February and March, declined in April 2011. The huge
growth in credit to government against the backdrop of continuing decline in
private sector credit clearly indicates that government borrowing is crowding-out
private sector credit. Besides, in the post-crisis period banks in their bid to rebuild
their balance sheets have become increasingly risk-averse, and have preferred to
channel their funds into the relatively risk-free government sector. The Committee,
therefore, urged that efforts be sustained to de-risk the real economy through
appropriate reform measures.

The interbank market rates fluctuated at the various segments since the beginning
of the year. Key interbank rates moved in tandem with the upward revision of the
monetary policy rate (MPR) to 7.5 per cent from 22nd March, 2011. Between March


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22 and May 13, 2011, the inter-bank call and open buy-back (OBB) rates
fluctuated, increasing to a high interbank call rate of 11.95 per cent on April 12,
2011. A significant decline in both rates was recorded thereafter, following the
enhanced liquidity in the banking system occasioned by the use of AMCON
bonds to secure funds and the impact of the new reserve averaging policy.
Consequently, interbank and OBB rates softened, with the OBB recording a low of
6.90 per cent on 9th May, 2011.

Retail lending rates, however, remained relatively high with the spread between
the maximum lending rate and the consolidated deposit rate widening slightly to
19.64 percentage points in April 2011, from 19.57 percentage points in March.

The All-Share Index and market capitalization recorded increases as the capital
market began a gradual recovery since the last MPC meeting. This was due
largely to share price increases in the Banking, Food/Beverages and Insurance
sectors. With the ongoing reforms by the regulatory authorities and robust growth
prospects, the outlook in the medium-term remains generally good.

External Sector Developments
The Committee noted the persisting demand pressure in the foreign exchange
market between March 23 and May 18, 2011. The total supply to the wDAS
segment by the CBN (including US$160.00 million worth of maturities at the wDAS
Forwards) amounted to US$4.32 billion.

The foreign exchange market remained relatively stable owing to a deliberate
policy on the part of the CBN to increase supply to the market to maintain the
exchange rate within a band of ±3 percentage points, complemented by funding
from autonomous sources. At the wDAS segment, the Naira/Dollar exchange rate
opened at N152.63/US$ (including 1% commission) on March 23, 2011 and closed
at N154.74/US$ on May 18, 2011, representing a slight depreciation of 1.38 per
cent (or N2.11k). The interbank rates opened at N155.97/US$ and closed at
N156.70/US$, a depreciation of 0.47 per cent. The premium between the rates at
the WDAS and other segments of the market narrowed towards the end of the
review period.

The Committee noted the modest accretion to the external reserves in recent
months. It, however, noted that inflow into the CBN is not consistent with the high
oil prices and, this underscores the need for tighter fiscal controls around oil
revenues as well as first line charges including JVC deductions and subsidies. A
higher rate of retention of oil revenues should facilitate the efforts at maintaining


CBN Monetary Policy Review

exchange rate stability as an antidote to imported inflation without excessive
reliance on monetary tightening measures.

The Committee’s Considerations
The Committee urged that in a highly import-dependent economy with large
pass-through effects of import prices on domestic prices, it is necessary to create a
climate conducive to larger foreign capital inflows through appropriate fiscal
measures, particularly in the light of the gains that could be made in the current
context of high crude oil prices. The MPC, therefore, stressed the importance of
continuing structural reforms and infrastructural development to enhance
domestic production to reduce the import bill and its pass-through effects on
inflation. It also noted the inflationary impact of the likely deregulation of
petroleum product prices.

The Committee held that it would be prudent to adopt a monetary policy stance
that is consistent with the need to address inflationary expectations associated
with excessive liquidity and pressure on foreign exchange market. Although the
fiscal authorities have declared their intention to fiscal consolidation, the MPC
recognizes that time will be required for fiscal adjustment to take place. In the
interim, monetary policy will have to bear the burden of adjustment through
further tightening in order to rein in inflation to maintain price stability, as well as
continuing with the progress toward positive real interest rates.

Decisions
In the light of the above, Members of the Committee voted as follows:

1.
9:1 in favour of further tightening of monetary policy. All nine in favour of
tightening voted for an increase in CRR from 2 per cent to 4 per cent with
effect from June 8, 2011 to align with the next reserve averaging
maintenance period; Six (6) members voted for 50 basis points increase in
MPR from 7.5 per cent to 8.0 per cent, three (3) voted for 25 basis points
increase while one (1) voted for no change; and

2.
Maintain the symmetric corridor of +/- 200 basis points around the MPR.

Sanusi Lamido Sanusi, CON
Governor
Central Bank of Nigeria
Abuja

May 24, 2011


CBN Monetary Policy Review