Central Bank of Nigeria Communiqué No. 69 of the Special Monetary
Policy Committee Meeting, April 15, 2010

The Monetary Policy Committee (MPC) held a special meeting on April 15,
2010 to, among other things, consider the modalities for the injection of
N500 billion into the real economy in continuation of the current
quantitative easing policy. It also reviewed domestic economic conditions
during the first quarter of 2010 against the backdrop of the global economic
and financial developments with a view to guiding monetary and financial
sector policies for the rest of 2010.

The MPC noted the persisting tight credit conditions and the continuing
under-performance of key monetary aggregates which had informed its
earlier decision to embark on a quantitative easing policy to be implemented
through investment in debentures to be issued by the Bank of Industry
(BOI). The Committee commended the co-operation of key stakeholders in
preparing the modalities for the injection of the N500 billion financing
facility for the emergency power projects dedicated to industrial clusters and
restructuring/refinancing of DMBs’ exposures to the manufacturing sector
and SMEs. It stressed the need for even greater co-operation in fast-tracking
on-going reform efforts in the banking sector to ensure the smooth flow of
credit to the real sector of the economy as well as energizing reforms in the
power and other economic infrastructure sectors, to promote private
sector/foreign investment and employment-generating growth. In this regard,
the MPC welcomes the attention to the power sector by the Federal
Government. The Committee emphasized that while economic reforms and
human capital development remain key ingredients for economic growth,

the Bank is mindful of the supportive role that macroeconomic and
financial stability plays in achieving sustainable growth and, will continue to
focus attention on these two areas.

On the global scene, the Committee noted that the rebound in global
economic activity which started in the second half of 2009, has been
sustained. The rebound was driven largely by the fiscal policy stimuli
undertaken in both the developed and emerging market economies in
response to the global financial crisis and the ensuing economic slowdown.
In the wake of the financial and economic crises, monetary policy was
considerably eased with interest rates down to record levels in most
advanced and emerging markets, and central bank balance sheets expanded
considerably to accommodate the stimulus packages. The key concerns,
however, remain the speed and sustainability of the recovery process which
is progressing at varying degrees across the different regions.

The recovery in the advanced economies is still weak with real output
projected to remain below its pre-crisis level until late 2011. However,
growth in the emerging and developing economies is expected to recover
faster given their stronger initial economic conditions and swift policy
responses.

The MPC also noted the continuing rebound in commodity prices,
particularly crude oil prices, which is helping to support growth in
commodity producing regions, including Nigeria. However, the inflation risk
of the rebound in energy prices appears to be mitigated by the subsisting low

levels of capacity utilization, weak private demand and well-anchored
inflation expectations.

The MPC further observed that while financial markets have recovered
remarkably faster than expected, financing conditions, especially for
businesses and firms, were likely to remain weak in the near-term as
financial institutions continue to maintain a cautious approach to credit
extension. It noted the relative stability prevailing in most segments of the
market and the need for policies to ensure their sustenance.

Key Domestic Macroeconomic and Financial Developments

Output and Prices:
The robust output growth recorded in 2009 continued in 2010. Provisional
data from the National Bureau of Statistics (NBS) indicates that real Gross
Domestic Product (GDP) grew by 6.68 percent in the first quarter of 2010,
down from 7.44 per cent in the fourth quarter of 2009, but up from the 4.50
per cent recorded in the first quarter of 2009. The growth was largely driven
by the non-oil sector. Overall GDP growth for 2010 was projected at 7.53
per cent which is higher than the revised estimate of 6.66 per cent recorded
in 2009. Quarterly GDP growth rates of 7.24, 7.36 and 8.51 per cent was
projected for the second, third and fourth quarters of 2010, respectively.
The non-oil sector was expected to remain the main driver of overall
economic growth, with agriculture, wholesale and retail trade, and services
contributing 2.01 per cent, 2.10 per cent and 2.09 per cent, respectively. The
Committee noted that the impressive growth forecasts reflected prospects for
moderate rainfall in 2010, which would boost crop production and the

relative peace in the Niger-Delta, which could enhance crude oil and natural
gas production.

The year-on-year headline inflation rose from 12.0 per cent in the last
quarter of 2009 to stabilize at 12.3 per cent in January and February 2010.
Similarly, core inflation stabilized at 10.1 per cent in January and February
2010, up from 9.7 per cent recorded in the last quarter of 2009. The stability
in the domestic price level could be attributed to a number of factors,
namely, the continuing monetary contraction, the delay in the passage of the
2010 federal budget and the improvement in the supply of petroleum
products, amongst others. Notwithstanding these developments, the
Committee restated its earlier position that the threat of inflationary pressure
in the near-to-medium term remains real, but that it will continue to monitor
price developments in the months ahead with a view to creating an enabling
environment for sustainable growth and employment.

Monetary, Credit and Financial Market Developments:
Provisional data showed that relative to end-December 2009, broad money
(M2) declined by 0.23 per cent at end-February 2010, which, when
annualized represented a decline of 1.38 per cent, compared to the indicative
growth target of 29.26 per cent for 2010 and the annualized M2 decline of
5.16 per cent in the corresponding February of 2009. The reserve money
(RM), which stood at N1,668.50 at end-December 2009, declined to
N1,574.33 and N 1,636.60 billion in January and February 2010,
respectively, but rose to N 1, 782.21 billion in March 2010. As at April 8,
2010, the RM level of N1, 710.0 billion was just below the provisional 2010

second quarter indicative benchmark of N1, 872.80 billion by N162.76
billion or 8.69 per cent.

Available data showed that in February 2010, aggregate domestic credit
(net) grew by 2.66 per cent over the December 2009 level, and by 15.96 per
cent when annualized, which is higher than the annualized decline of 55.6
per cent recorded in the corresponding period of 2009, but below the 2010
indicative target of 55.54 per cent. Credit to government (net), which grew
by 17.84 per cent, was the major contributor to the growth in aggregate
credit (net) in February 2010, as credit to the private sector declined, by 1.97
per cent. The annualized growth rate of credit to the private sector as at
February 2010, was -11.82 per cent, as against the provisional benchmark of
31.54 per cent for 2010. The substantial growth of credit to government
(net) reflects the risk aversion of the DMBs and suggests the possible
crowding out of private sector credit.

During the first quarter of 2010, the downward slide in interest rates in the
domestic money market, which began in July 2009, following the Bank’s
decision to guarantee interbank transactions, continued. The low rates
provide ample evidence of the surplus funds in the banking system that
resulted from the huge volume of funds injected through fiscal operations.
The weighted average interbank call rate, which was 2.89 per cent as at endDecember 2009, declined to 2.48, 2.17, and 1.50 per cent in January,
February, and March, 2010, respectively. Similarly, the securitized openbuy-back (OBB) rate, which was 2.64 per cent at end-December 2009,
declined to 2.46, 2.20, and 1.31 per cent in January, February, and March

2010, respectively, compared with the monetary policy rate (MPR) of 6.00
per cent and Standing Deposit Facility rate of 1.0 per cent.

Notwithstanding the falling interbank rates, the DMBs’ interest rates
structure failed to reflect this trend as the high retail lending rates persisted.
The average maximum lending rate increased to 23.32 percent in February,
2010 from 23.18 per cent in the preceding month compared with 23.45 and
23.1 per cent in December and November 2009, respectively. The average
prime lending rate, on the other hand, declined marginally to 18.28 per cent
in February 2010 from 18.38 per cent in January. It was 19.03 and 18.93 per
cent, respectively, in December and November, 2009.

The weighted average savings rate rose to 3.38 per cent in February 2010
from 3.33, 3.36 and 3.35 per cent in January 2010, December and November
2009, respectively. The consolidated deposit rate, which remained
unchanged at 6.13 per cent in December 2009 and January 2010 dropped to
5.53 percent in February 2010. Thus, the spread between the average
maximum lending rate and the average consolidated deposit rate widened to
17.79 per cent in February 2010 from 17.05 per cent in January 2010 and
17.34 per cent in December, 2009. The Committee noted that the key policy
challenges remain the negative growth in credit to the private sector, high
lending rates and widening interest rate spread despite the declining
interbank rates and relative surplus liquidity in the banking system.

Compared to the last quarter of 2009, the Nigerian capital market is showing
signs of recovery. The All-Share Index (ASI) increased by 30.7 per cent
from 20,827.17 as at end-December 2009 to 27,216.03 on 7th April, 2010.

Market Capitalization (MC) also increased, by 32.1 per cent, from N4.98
trillion at end-December 2009 to N6.58 trillion on 7th April 2010. The
number of deals, volume and value of shares traded increased by 115.6,
134.6 and 326.1 per cent, respectively, during the review period. The
increase in ASI and MC was partly due to share price increases in the
Banking, Food & Beverage and Oil/Gas sectors.

The Committee welcomed the improvements in the stock market, and noted
further prospects for continuing recovery with the passage of the Asset
Management Corporation Bill. It, however, emphasized that the recovery of
the capital market does not necessarily translate to economic recovery as the
reforms initiated in the other sectors of the economy needed to be carried
through in order to grow the economy. The Committee, therefore, called for
the political will and commitment to see these reforms through.

External Sector Developments:
The foreign exchange market remained relatively stable in the first
three months of 2010. At the WDAS, the review period opened with an
exchange rate of N149.08/US$1 (1% commission inclusive) and closed at
N149.78/US$1, with an average closing rate of N149.94/US$1 for the
quarter. When compared with the average closing rate of N146.87/US$1
recorded during the first quarter of 2009, this represented a depreciation of
N3.07 (2.05 percent). The average exchange rate depreciated marginally at
the inter-bank market from N150.35/$ in the fourth quarter of 2009 to
N150.43/$ in the first quarter of 2010. In the same vein, the premium
between the WDAS average exchange rate and the inter-bank market rate

remained low at N1.98/$ (1.31%) in the first quarter of 2010, while that
between the WDAS average exchange rate and the BDCs rate narrowed
from N4.58 (3.0%) in the fourth quarter of 2009 to N4.02 (2.63%) in the
first quarter of 2010.

The Committee observed that the naira exchange rate has remained stable in
all segments of the market during the first quarter and believes that if the
current exchange rate policy stance of liberalizing the foreign exchange
market, with a view to enhancing foreign exchange supply, remains in place,
the relative stability in the foreign exchange market and the exchange rate, is
likely to be sustained in the near term. The Committee will, however,
continue to monitor developments in the market to ensure that measures are
taken to eliminate speculative demand.

The gross external reserves stood at US$40.68 billion as at 31st March, 2010,
representing a decrease of US$0.71 billion or 1.71 per cent relative to the
level of US$41.39 billion as at 28th February 2010. Although the
Committee noted that the external reserves were sufficient to finance 17
months of imports, which were well above the internationally recommended
3-months import cover, it believed that with the rising price of crude oil in
the international market in recent months, coupled with the improvement in
output with peace in the Niger Delta, there is likely to be an improvement in
the level of foreign exchange reserves in the near term.

The Committee’s Considerations
The principal concerns of policy at this point in time were identified as the
following:

1. Ensuring that the quantitative easing adopted by the Committee
actually translate to injection of credit to the private sector players in
the real economy;
2. Establishing some correspondence between the monetary policy rate
(MPR) and prime and maximum lending rates of DMBs in order to
establish a proper transmission channel from policy rate movements
to market interest rates; and
3. Maintaining macroeconomic stability and stimulating growth while
remaining vigilant with respect to inflation and capital market asset
price bubbles.

In considering the modalities for the restructuring/refinancing programme,
the Committee was concerned about the need for a proper definition of
SMEs that will not exclude many potential beneficiaries thereby limiting the
effectiveness/impact of the intervention. In this regard, the MPC noted the
existence of several definitions of SMEs, but felt that by providing a limit to
the size of the loan per borrower from an institution more potential
borrowers would be covered.

The Committee also reviewed developments in the economy during the first
quarter of 2010. The MPC noted with concern the persisting high lending
rates despite the current low inter-bank and deposit rates, and as a
consequence the wide spread between lending and deposit rates. This, the
Committee attributed to inefficiency in cost management and unrealistic
profit expectations and targets. It believed that promoting transparency in the
pricing and setting of rates by DMBs could help to drive down lending rates.
In this regard, DMBs would be required to regularly publish and submit their

risk-based interest rate pricing model to the CBN. In addition, the banks
would be required to provide a statement showing the relationship between
the MPR and their prime and maximum lending rates.

For the avoidance of doubt, the MPC will not fix lending and deposit rates
by fiat. However, every bank will be required to disclose the maximum
spread it charges above the MPR to its prime customers and the risk
premium it charges between prime and maximum lending rates. The pricing
model would also disclose the basis for the spread and principal components
covered.

The articulation of the pricing model in this mode and its disclosure to the
general public will serve two purposes. First, by providing visibility on
relative efficiency of financial institutions, banks will be encouraged to seek
profitability by driving down costs and charging competitive rates rather
than charging excessive rates of interest. Second, by explicitly stating prime
and maximum lending rates as a fixed spread over MPR, the policy rate
becomes an effective tool for driving lending rates up or down as policy
stance dictates.

The MPC noted with satisfaction the existing macroeconomic conditions. In
this regard, the Committee restated its commitment to monitoring
developments in the economy and stands ready to take appropriate action
when the need arises.

Decisions
In the light of the above, the MPC:

1. Approved the technical committee’s recommendations with respect to
modalities for the Refinancing/Restructuring of DMBs facilities to
manufacturers with N1Billion as the maximum loan size a bank may
refinance for a single borrower. The guidelines will be released
shortly.

2. Directed that banks be required to submit their Risk-based Interest
Rate Pricing Model to the Central Bank of Nigeria on a monthly basis
which will be published. A circular to this effect will be issued
shortly. Loan pricing, henceforth be stated as fixed spread above
MPR, and shall be adjusted along with MPR movements.

3. Retained the MPR at 6 per cent and existing asymmetric corridor
around the MPR at +2.0 per cent and -5.0 per cent.

4. Endorsed complementary policies being put in place by the Board of
the CBN, especially the revised guidelines for loan loss provisioning
for preferred sectors, the N200 billion guarantee for real sector credit
and regulations governing margin lending.

5. Noted with satisfaction the progress of the AMCON Bill through the
National legislature and urged the CBN to continue in its effort
towards expedited passage of the Bill and speedy implementation.


Sanusi Lamido Sanusi
Governor,
Central Bank of Nigeria
Abuja

April 15, 2010