Central Bank Of Nigeria Communique No 115 Of The Monetary Policy
Committee Meeting Of 25TH And 26TH September, 2017

Background

The Monetary Policy Committee met on the 25th and 26th of September,
2017 against the backdrop of a relatively optimistic global economy. The
Committee examined the global and domestic economic and financial
environments up to the third quarter of 2017, and the outlook for the rest of
the year. The recent spate of flooding and hurricanes in some parts of the
globe; the flooding in Nigeria; the increasing tension between the US and
North Korea, and the perception of hostilities on the Korean Peninsula as well
as the associated geo-political tensions, were identified as key risks to global
output growth.
On the domestic front, the economy exited recession (which began in the
first quarter of 2016) in the second half of 2017, with a modest positive short to
medium-term outlook, resulting largely from deliberate macroeconomic
stimulus and a stable naira exchange rate. Inflation expectations also

appeared anchored on the strength of prevailing tight monetary policy
stance. Seven (7) members of the MPC were present at the meeting.


External Developments
Global output is projected to improve further in 2017, as growth forecast by
the IMF in its July World Economic Outlook (WEO) was projected at 3.5 per
cent, up from 3.2 per cent in 2016. Output growth in some advanced
economies, including Japan, the Euro-area as well as some emerging market
and developing economies is expected to improve in 2017. Nigeria, Brazil
and South Africa, all exited recession, while Russia is likely to exit recession in
the fourth quarter of 2017, after a mild contraction of 0.57 per cent in the
second quarter. Growth forecast for the US was revised downwards from 2.3
per cent to 2.1 per cent in 2017, as a result of the weak growth observed in
the first quarter of the year.
The MPC, however, noted some headwinds confronting the optimistic global
growth prospects to include: recent developments on the Korean peninsula;
the damage to infrastructure caused by hurricanes - Harvey, Irma and Maria;
the lull in BREXIT negotiations and the normalization of monetary policy by the
US Fed, which is expected to instigate global capital flow reversal. Other
challenges include the continued slow pace of recovery in global oil and
other commodity prices and China’s reduction in uptake of global
commodities. In addition, the Committee noted the tepid global inflation

momentum, implying that continued monetary policy normalization could be
injurious to global growth prospects.
The uptick in global inflation persisted, but moderated, in response to rising oil
prices, continued accommodative monetary policy in the advanced
economies; and currency appreciation in some emerging markets and
developing countries. Average inflation for the developed economies is
projected at 1.9 per cent in 2017, while it is forecast to average 4.5 per cent
in the emerging and developing economies, as prices are expected to
moderate due to seasonal effects. The Committee observed that the outlook
for global monetary policy remains predominantly accommodative, in
support of recovery and growth.

Domestic Output Developments
Data from the National Bureau of Statistics (NBS) showed that real Gross
Domestic Product (GDP) grew by 0.55 per cent in the second quarter of 2017,
against the contractions of 0.91 and 1.49 per cent in the previous quarter of
2017, and the corresponding quarter of 2016, respectively, marking the
technical exit of the Nigerian economy from recession. Non-oil real GDP grew
by 0.45 per cent in Q2, 2017, driven largely by agriculture (3.0%), industry
(1.1%), and construction (0.1%). The modest growth was attributed to fiscal
injections from the implementation of the Economic Recovery and Growth
Plan (ERGP), and enhanced supply of foreign exchange arising from
improved crude oil prices. The Committee also noted the positive outlook

from the Purchasing Managers Index (PMI) for manufacturing and nonmanufacturing activities, which stood at 53.6 and 54.1 index points in August
2017, respectively, above the 50 index points benchmark, indicating
moderate signs of recovery. The Committee further noted that, although the
recovery was weak, it was hopeful that the active implementation of the
2017 budget could boost aggregate demand and employment.

Developments in Money and Prices
The Committee noted that money supply (M2) contracted by 11.06 per cent
in August 2017 (annualised), in contrast to the provisional growth benchmark
of 10.29 per cent for 2017. The development in M2 is largely due to the
contraction of 18.42 per cent in other assets net (OAN) in August 2017.
Similarly, M1 contracted by 12.25 per cent in August 2017, (annualised to -
18.37 per cent). Net domestic credit (NDC) contracted by 0.14 per cent,
annualized at -0.20 per cent, driven majorly by net credit to government,
which also contracted by 1.05 per cent against the programmed growth of
33.12 per cent. Credit to the private sector, however, grew marginally by 0.07
per cent in August 2017, compared with the provisional benchmark of 14.88
per cent. The MPC also noted the policy constraints in ensuring the flow of
credit to the real sector in the face of weak and underperforming monetary
aggregates. Inflationary pressure in the economy continued to moderate
with headline inflation (year-on-year) receding for the seventh consecutive
month to 16.01 per cent in August 2017, from 16.05 per cent in July 2017. Food

inflation declined slightly to 20.25 per cent in August 2017 from 20.28 per cent
in July 2017, while core inflation increased to 12.30 per cent in August 2017
from 12.21 per cent in July 2017. This development was attributed to the
contraction in money supply, decline in imported food and non-food prices,
favourable base effects, and the moderating effects of stable exchange
rates. The Committee, however, noted that the high food inflation was
traceable to rising prices of farm inputs and supply shortages, intermittent
clashes between farmers and herdsmen, as well as weak harvest, due to
increased flooding of farmlands.
Money market interest rates oscillated in tandem with the level of liquidity in
the banking system as the average inter-bank call rate which opened at
18.00 per cent on July 26, 2017, closed at 7.00 per cent on August 31, 2017.
The OBB rate opened at 15.03 per cent and closed lower at 7.83 per cent in
the same period. However, the average inter-bank call and OBB rates for the
period stood at 22.63 and 39.66 per cent, respectively. The movement in net
liquidity positions and flows reflected the effects of OMO sales; foreign
exchange interventions; statutory revenue payments to states and local
governments; remittances by Nigerian Customs and Federal Inland Revenue
Services for FAAC meetings; and the maturity of CBN Bills.
The Committee noted the continuing improvement in the external reserves
position and the equities segment of the capital market. External reserves
position grew to US$32.9 billion at close of business on 25th September, 2017
while the All-Share Index (ASI) rose by 7.20 per cent from 33,117.48 on June

30, 2017 to 35,504.62 on August 31, 2017. Market Capitalization (MC)
improved by 6.90 per cent to N12.24 trillion from N11.45 trillion during the
same period. Relative to end-December 2016, capital market indices rose by
32.10 and 32.30 per cent, respectively, reflecting growing investor
confidence, due to improvements in foreign exchange management.
Total foreign exchange inflows through the Central Bank of Nigeria (CBN) rose
by 1.98 per cent in August 2017, compared with the previous month. Similarly,
total outflow increased by 7.03 per cent during the same period, as a result of
increased international remittances, inclusive of public sector and JVC
payments; which rose by 58.59 per cent in the period under review.
The Committee noted the trend towards convergence between the rates at
the bureau-de-change (BDC) and the Nigeria Autonomous Foreign
Exchange (NAFEX) segments, as well as the stability of the exchange rate at
the inter-bank segment of the foreign exchange market during the review
period. Similarly, the Committee noted the success of the Investor and
Exporters’ window (I &E) of the foreign exchange market and traced this not
only to foreign investor confidence but also to the zeal and commitment of
Nigerian exporters who have demonstrated preference for the window to the
parallel market. The Committee observed that the I&E window has increased
liquidity and boosted confidence in the market with over US$7.0 billion inflow
in the last five months. The Committee will continue to introduce policies that
will improve the confidence of foreign investors in
the country’s
macroeconomic management regime.

2.0. Overall Outlook and Risks
Available data and forecast of key macroeconomic variables indicate a
relatively positive outlook, predicated on existing policy initiatives including
the ERGP. Other potential drivers of economic recovery are; the expected
increase in government revenue arising from favourable crude oil prices,
stable output, and general improvements in the non-oil sector, especially,
agriculture, industry and construction. The intervention by the CBN in the real
sector is expected to continue to yield positive results in terms of output and
lower consumer prices.
The Committee, however, noted some downside risks to the overall short- to
medium-term positive outlook for the economy. These include; flooding
which displaced farming communities and political agitations. On the
external front, the hawkish policy stance in the United States, rising geopolitical tensions and sluggish output recovery in the Euro-area and Japan,
could slow-down the momentum of global output growth, with significant
spillovers to emerging markets and developing countries, including Nigeria.

3.0. The Considerations of the Committee
The Committee applauded the exit of the Nigerian economy from recession
but observed that the growth remains fragile and, therefore, hopes that
complementary fiscal and monetary policies would sustain the growth
momentum. The Committee further expressed satisfaction with the gradual,
but consistent decline in inflation, noting, however, the substantial base

effect in addition to the continuous improvement in the naira exchange rate
across all segments of the foreign exchange market; and considerable
improvement in foreign capital inflow. The Committee welcomed the steady
implementation of the 2017 Budget, especially, the capital component of the
budget, and urged increased momentum in expenditure directed at the
growth-stimulating sectors of the economy in order to reduce youth
unemployment and restiveness.
The Committee, however, expressed concern on the sustained pressure on
food prices, noting risks posed by floods, strikes and insurgencies in various
parts of the country to food production and distribution. Regarding the tepid
turnaround in economic activities in the second quarter of 2017, the
Committee emphasized that the employment gains of recovery were still
minimal, noting that a number of important job elastic sub-sectors were still
weak and may require more fiscal support to regain traction. The Committee,
however, commended the Federal Government for issuing the Executive
Order aimed at improving the ease of doing business in the country. It also
noted the efforts of the government to create jobs in the agricultural sector
with the inauguration of the Presidential Committee on job creation,
targeting at least ten thousand jobs in each state of the Federation, over the
next six months through a boost in agricultural support and funding. The
Committee enjoins the state governments to work with the Presidential
Committee to actualise this plan without further delay.

The MPC also noted with satisfaction, the directive of the Federal
Government to all states to promptly pay outstanding salary arrears, in order
to boost aggregate demand. It commended efforts to clear outstanding
contractor arrears; prompt settlement of trade disputes with certain Unions of
organised labour, including the Academic Staff Union of Universities (ASUU)
and Health Workers; as well as the release of money to settle outstanding
entitlements of the erstwhile workers of the defunct Nigeria Airways. These
efforts, the Committee reasoned would improve aggregate demand and
strengthen the weak recovery. The Committee restated its commitment to
maintaining stability in prices, without which meaningful recovery cannot be
achieved. In this regard, members welcomed the gradual narrowing of rate
spreads in the foreign exchange market and urged the Bank to continue to
monitor and respond proactively to threats and vulnerabilities in the foreign
exchange market.
On the outlook for financial stability, the Committee noted that, in spite of the
banking sub-sector’s resilience, the weak macroeconomic environment has
continued to impact negatively on the stability of the sub-sector. The
Committee reiterated its call on the Bank to sustain its surveillance of deposit
money banks (DMBs) activities for the purpose of prompt identification and
mitigation of potential vulnerabilities. The Committee also called on the DMBs
to support the quest to move the economy forward by extending reasonably
low priced credit to the private sector.

4.0. The Committee’s Decisions
In arriving at its decision, the Committee took note of the gains so far
achieved as a result of its earlier decisions; including the stability in the foreign
exchange market and the moderate reduction in inflation. The option was
whether to hold, tighten or ease. These were subjected to extensive debate.
As in previous meetings, although tightening would help rein in inflation
expectations and strengthen the stability in the foreign exchange market, the
Committee felt that it would further widen the income gap, depress
aggregate demand and adversely affect credit delivery to the private
sector. The Committee also noted that tightening may result in the deposit
money banks re-pricing their assets and loans, thus raising the cost of
borrowing and therefore heightening the already weak investment climate
and non-performing loans.
With respect to loosening, the Committee believed that although while it
would make it more attractive for Nigerians to acquire assets at cheaper
prices, thus increasing their net wealth, and therefore stimulate spending as
confidence rises, it nevertheless, felt constrained that loosening at this time
would exacerbate inflationary pressures and worsen the exchange rate and
inflationary conditions. The Committee also felt that loosening will further pull
the real rate deeper into negative territory as the gap between the nominal
interest rate and inflation widens.
On the argument to hold, the Committee believes that the effects of fiscal
policy actions towards stimulating the economy have begun to manifest as

evident in the exit of the economy from the fifteen-month recession.
Although still fragile, the fragility of the growth makes it imperative to allow
more time to make appropriate complementary policy decisions to
strengthen the recovery. Secondly, the Committee was of the view that
economic activity would become clearer between now and the first quarter
of 2018, when growth is expected to have sufficiently strengthened and gains
in receding inflation, very obvious. The most compelling argument for a hold
was to achieve more clarity in the evolution of key macroeconomic
indicators including budget implementation, economic recovery, exchange
rate, inflation and employment generation.
In consideration of the headwinds confronting the domestic economy and
the uncertainties in the global environment, the Committee decided by a
vote of 6 to 1 to retain the Monetary Policy Rate (MPR) at 14.0 per cent
alongside all other policy parameters. In arriving at this HOLD decision, the
MPC commits to employing maximum flexibility to guide the economy on the
path to optimal growth. Consequently, 6 members voted to retain the MPR
and all other parameters at their current levels, while one member voted to
lower the MPR to signal an ease to the current stance of tight monetary
policy. However, overall, majority of the members expressed a strong
commitment to policy flexibility that would allow the Committee to promptly
take the necessary actions that would promote overall macroeconomic
stability and engender sustainable growth.

In summary, the MPC voted to:
(i) Retain the MPR at 14.0 per cent;
(ii) Retain the CRR at 22.5 per cent;
(iii) Retain the Liquidity Ratio at 30.0 per cent; and
(iv) Retain the Asymmetric corridor at +200 and -500 basis points around the
MPR.

Thank you for listening.
Godwin I. Emefiele
Governor, Central Bank of Nigeria
26th September, 2017

PERSONAL STATEMENTS BY THE MONETARY POLICY COMMITTEE MEMBERS
1.
BALAMI, DAHIRU HASSAN
The September 2017 MPC came at a time when the economy had
technically moved out of recession, but faced with the problem of
stagflation. Inflation in the economy had fallen from a high of 16.05% at the
end of July 2017 to a low of 16.01% by September. GDP growth had moved
from -0.91% in March 2017 to 0.55% in June 2017. There has been relative
stability in the foreign exchange market at N305.85 to the US dollar. External
reserves have risen from US$30,869.69 million to US$32,833.80 million in
September, 2017. Another variable that has witnessed change is the higher
oil prices that have moved from US$52.59 per barrel in July to $59.51 per
barrel, due partly to development in the US Shale oil. It should be noted that
although the economy has witnessed some positive developments, there are
critical areas of concern which include: unemployment, inflation and interest
rate. It should be noted that the gap between inflation (16.01%) and MPR
(14.0%) is still wide.
In my opinion, unemployment is an important area that requires sound
policies both from the monetary and fiscal authorities, to reduce the level of
unemployment, which would help spur growth in the economy. What can be
done to reduce unemployment in Nigeria by the monetary authority? In the
past, Ministries, Departments, Agencies and Banks, would visit institutions to
interview potential graduates for employment positions. The situation has
however changed as unemployment exists among primary and secondary

school leavers as well as graduates. It is disheartening that many graduates
with First Class and Second Class honours are roaming the streets without
jobs. Unemployment refers to a situation where an able-bodied individual
with the requisite qualification, and who wants to work, does not have a job.
The CBN has a responsibility to assist in reversing the situation through putting
in policies that would facilitate or support economic growth. What can we
do to increase employment and livelihood among the youths?
As monetary authorities, there is need to intervene in the various sectors of
the economy that have a high propensity of employment generation such
as: agriculture, small and medium scale entrepreneurship, establishing Silicon
Valley centres etc. Credits should also be extended to those who have
participated in the various centres for entrepreneurship development, in the
country. This should be in the form of seed money. The largest employer of
labour in Nigeria is in the private sector, and as such, should be supported.
The government should provide an environment for the private sector to
thrive, so as to create job opportunities. It is true that graduates do not see
themselves going to the farm, and as such, the private sector should be
supported to provide employment for our teaming graduates. Addressing the
issue of power/electricity by guaranteeing at least six hours a day, of
constant and adequate voltage power, would go a long way in assisting the
private sector. For example, those in the welding and hairdressing heavily
depend on electricity for their businesses to run. The entrepreneurships

centres all over the country could serve as job creation centres through the
provision of seed money to trainees on their successful completion.
Interest rate is another important area the monetary authorities could come
in, at the theoretical level, lowering the MPR will lead to lowering the prime
lending rate. This would make loanable funds relatively cheaper, which
would induce investors to borrow and invest, thereby creating more
employment opportunities, raising the level of income, output, and growth of
the economy. However, to lower the MPR, CBN has to study this in relation to
the inflation dynamics, monetary conditions, real economic activities, as well
as inflation risks in the economy. The exchange rate as well as the global
environment are areas that need to be looked into.
Credit targeting can also be favourable to the agricultural sector. We
however, have to go back in history, because a lot of intervention schemes
had been introduced in the past. While interventions are good, some could
destabilize the system. What went wrong with the previous interventions? How
can they be sharpened or modelled to contribute towards the effective
growth and stabilisation of the economy? How can the loopholes in the past
schemes be blocked to make them more effective because unemployment
is worrisome? Policy makers practically want low interest rates so as to make
credit available to economic agents. This means that Deposit Money Banks
should be encouraged to direct credit to sectors with high job generation
ability. The Central Bank should design an incentive scheme that would
encourage banks to lend direct to job creation areas such as agriculture.

Taking into consideration the data available for the above variables of the
economy, three options are available: to hold, tighten, or to ease. In my
opinion, at the global level, the achieved growth is fragile because of the
global risks and vulnerabilities. At the domestic level, some stability has been
achieved at the interbank foreign exchange market as well as a trendy
growth of resources; inflation has gone downwards, though not as much as
expected; liquidity has improved, as well as return on assets (ROA) and return
on equity (ROE).
The GDP has also registered some positive growth, although the improvement
was due largely, to favourable commodity price (oil). Easing at this time will
lead to capital flight, discourage the inflows in terms of FDIs and FPIs. Inflation
would rise, and the external revenue may go down. The excess liquidity to be
created, as a result of the easing may destabilize the foreign exchange
market, thus, draining away the gain that has been achieved. Tightening
should not be considered now because of the current economic condition. I
vote to hold on, and wait for more clarity on the direction the economy is
moving, with the hope that the fiscal side would play its role in stimulating
growth through the implementation of the 2017 budget; and putting money
into the hands of the various consumers, which would help stimulate
consumption, demand, as well as improvement in purchase manager index
of the various sectors of the economy.
I therefore vote for the following:

a. To retain the MPR at 14.0%
b. To retain the CRR at 22.5%
c. To retain the liquidity ratio at 30.0%
d. To maintain the asymmetric corridor at +200/ -500 basis points around
the MPR

2.
BARAU, SULEIMAN
Background
The
overall
macroeconomic
condition
continued
to
show
relative
improvement. The result recently released by the National Bureau of
Statistics (NBS) showed an expansion in economic activities by 0.55 per cent
in the 2nd quarter, after a contraction for three successive quarters, indicating
that the economy is exiting recession. Inflation is still high, but receding, while
the imbalance in the external sector is equally waning. These developments,
in addition to other monetary policy measures have strengthened the foreign
exchange market and bolstered the value of the domestic currency as well
as sustaining its stability for the past two quarters.
The foregoing notwithstanding, GDP growth at 0.55 per cent in the face of
annual population growth rate of 2.7 per cent summarizes the story of the
weak economic recovery. The tepid nature of the recovery, among other
risks, suggests that the likelihood of relapse cannot be completely ignored. In
my view therefore, the next stage of policies should not focus only on
accelerating the pace of economic recovery, but should equally include
crisis mitigation measures. This would naturally entail elimination of
uncertainties in the macroeconomic environment and rebuilding of
confidence among economic agents, including foreign investors. In practical
terms, such a process would involve continuous fine-tuning of policy
pathways for managing complex interaction of many macroeconomic
variables with a view to promoting accelerated economic recovery,

strengthening the exit from recession, and achieving enduring economic
growth. Against this perspective, it is commendable that the Federal
Government has put up a number of initiatives particularly the N-power
under the Economic Recovery and Growth Plan (ERGP), but the speed of
progress may be challenged by a number of supply side bottlenecks like
rising level of industrial unrests, political agitations, all forms of militancy and
herdsmen activities, as well as limited fiscal space.
Under the present macroeconomic regime therefore, it may be expected
that the appropriate mode through which monetary policy could
complement the various fiscal stimuli is by some easing measures. This,
however, may not be the optimum path at the moment given the primacy of
building resilient macroeconomic environment. In the light of the need to
build a defense around the ongoing recovery through a strong and stable
macroeconomic environment, I will propose that the existing measures of
monetary policy be retained.
Pressure Points
Global Environment
A number of issues are emerging in the global environment that may
negatively alter the strong rebound earlier projected for the year. Among
others, the condition in the global financial markets suggests the need for
cautious optimism. Although the post Brexit economic landscape is still
evolving as negotiation is ongoing, Britain financial authority has issued a

deadline of end-December 2017 for EU banks within UK to signal their intent
of conversion to full-fledged UK banks. Thus, uncertainty with respect to the
post-Brexit status of many EU banks in the UK would weigh on investors’
sentiment and heighten volatility in the global financial markets particularly
through the channel of pound sterling denominated instruments. In a related
dimension, the issue of monetary tightening by the US Federal Reserves may
accelerate at a faster pace than earlier anticipated. Although the FOMC
kept the rate unchanged at their last week meeting, emerging signals after
the meeting suggests that the approach would morph from gradual to a fast
track model as from next month. Besides, rising geo-political tension portends
strong capacity to exhibit spillover and contagion to both global financial
markets and output. The current frosty relationship between the Communist
North Korea and the US has heightened fear of nuclear annihilations and
weigh heavily on investors’ sentiments particularly in the equity market. In
response, investors are beginning to flee to safe havens like bonds, gold, the
Yen and Swiss Franc. Among other negatives, the resultant appreciation in
the Yen is affecting competitiveness of Japan’s export and by extension
trade balance. Another Asian economy that is potentially at risk is China as
trade relationship with the USA could suffer setback. All these developments
may impinge on global growth with far reaching consequence on the fragile
recovery of the domestic economy.

Domestic Environment
The headwinds within the domestic environment include the followings.
Limited Fiscal Space: One key distinguishing feature of the current recovery
process relative to the previous episodes is the apparent weakness of the
government sector. Taking the 2008/9 global financial crisis induced domestic
financial crisis as an example, the fast pace of recovery at that time was
aided by strong fiscal buffer as there was a balance of about US$22 billion in
the Excess Crude oil Account (ECA) compared to this period when the ECA
has been depleted. The fiscal authority has enunciated a number of
measures in the Economic Recovery and Growth including the recent
inauguration of a Presidential Committee on Employment with a view to
strengthening the recovery process. In as much as these schemes are
laudable innovations, a key challenge is the constraint imposed by the
limited financial resources available to the fiscal authority.
Rising External Vulnerability: The current Moody’s rating on the country’s debt
is B1, four levels below investment grade, while S&P global rating is a step
lower than Moody’s. The government is planning to raise additional
US$3.5billion external loan to finance the budget out of which about
US$1.5billion would be sourced at the commercial rate in the Eurobond
market. Although there is improvement in oil output, which is propelling the
country out of recession, hence likely positive assessment by investors.
Nonetheless, the current rating is still below the investment grade and

therefore, new borrowing by government would most likely attract higher
premium. This would ultimately increase the vulnerability of the economy to
the shocks in the global financial markets particularly through the much
anticipated rise in the global interest rate as the US Fed commences tight
monetary policy stance.
Tight Credit Conditions: The banking sector has been challenged by a
number of factors ranging from prudential to macroeconomic issues. The
benchmark interest rate is 14 per cent, which is still below the current inflation
rate by 2 percentage point, while NPL level is rising. The level of infrastructure
particularly, energy and power have not shown appreciable improvement.
These factors would invariably feed into the credit pricing model, suggesting
that average lending rate cannot be lower than 20 per cent. It would be
extremely hard for Small and Medium Scale Enterprises to operate profitably
under such a regime when their internal rate of return could barely exceed
20 per cent. This development would continue to pose considerable risk to
private investment in the medium term.
Rising Socio-Political Tensions and Industrial Unrest: The inflation dynamics
reveals that headline inflation eased from 16.05 to 16.01 per cent between
July and August 2017, but the principal drivers were mainly imported items like
processed food, clothing, and footwear. This, more likely, reflects the stability
in the exchange rate. The trend was however different for farm products
despite the fact that the current period falls within the harvesting season.
Farm produce, fruits, vegetables, yams, potatoes and other tubers recorded

an upward trend in price level during the period. This phenomenon could
only be attributed to supply shortfalls on the backdrop of disruption to
agricultural production and distribution by all kinds of militancy activities
including insurgency in the North-East, displacement of farming communities
by herdsmen, activities of cattle rustlers, and various political agitations that
have heated the polity. The development is further complicated by
numerous strikes and labour unrest which had threatened the supply side of
economic activities.
Way Forward
Strengthening Confidence in the Macroeconomic Environment: An integral
part of the ongoing recovery phase should essentially include the need to reignite the confidence of economic agents, particularly foreign investors. My
view is hinged on the thesis of self-fulfilling nature of expectation, which on
the other hand, is driven largely by market sentiment of optimism or
pessimism. The business confidence index has been rising, hinged basically on
the improvement in the foreign exchange market. This invariably suggests the
need to sustain the evolving stability in the foreign exchange market.
Strengthening the foreign exchange market in the midst of rising uncertainties
in the crude oil market must necessarily involve some trade-offs in the money
market. It is desirable to reduce interest rate on the strength of supporting the
ongoing recovery, but such a pathway would be very costly to the foreign
exchange market and by extension hurt confidence in the macroeconomic
environment. Besides, it is becoming entrenched in economic literature that

an expansionary monetary policy stance under a regime of unstable
macroeconomic fundamentals would eventually become contractionary.
For instance, a reduction in interest rate at such a period when global interest
rate is rising would widen interest rate differential, leading to capital outflow
and invariably reduce the stock of money supply. A reduction in the stock of
money when demand remains constant would drive up domestic interest
rate and ultimately slowdown investment. As such, it may be a sub-optimal
decision to reduce the policy rate during this phase of economic recovery.
Mitigate Exposure to External Vulnerability: One of the distinguishing features
of the latest recession when compared with previous episodes particularly
the one witnessed in the mid-eighties was the low level of external debts
which provided some latitude for policy manoeuvring. Among other benefits,
it provided domestic macroeconomic policy makers with the much needed
autonomy to explore an ingenious home grown approach without being
cowed to accepting unfriendly conditionalities from international creditors.
As the economy is moving into post-recession stage and expenditure would
be required to stimulate economic activities, it is incumbent to preserve this
legacy. This is more so when cognizance is taken of the ongoing rate hike by
the US Fed which would generate spillover and contagion across global
financial markets. With this in mind, it may be in order for government to be
circumspect in respect of the component of the external financing that
would come from the Eurobond. I would advocate that available widows
from development banks should always be explored. Furthermore, protection

should be offered to the domestic currency through interest rate in order to
avert sharp depreciation that could turn repayment of external obligations to
a burden.
Activate Macro Prudential Measures: The condition in the banking sector is a
little bit complex and somehow difficult to address by the conventional
monetary policy tools. NPLs are significantly high and above the prudential
limit, while liquidity condition, on the other hand, reveals a surfeit. The
condition is complicated by weakness in credit growth to the private sector,
thereby imposing strain on the foreign exchange market. Imposing additional
CRR (conventional monetary policy tools) to address the liquidity surfeit
would invariably tighten credit condition and complicate the NPLs position.
My assessment of the nature of the liquidity surfeit reveals that it is systemic
and time varying. Consequently, a blunt monetary policy instruments such as
the MPR or CRR may not be able to address the challenge. I will therefore opt
for the activation of macro prudential measures like systemic liquidity
surcharges or time varying systemic liquidity surcharges.
Decision
From the perspectives of the foregoing, strengthening the stability in the
macroeconomic environment appears to be imperative at the moment. To
achieve this therefore, I would like to propose for the retention of current
measures of monetary policy.

3.
GARBA, ABDUL-GANIYU
Decision
1. I vote to reduce the MPR by 50 basis points (0.5%). This implies (i) a
reduction in the MPR from 14% to 13.5% and (ii) a reduction in Standing
Lending Facility (SLF) from 16% to 15.5% and the Standing Deposit Facility
(SDF) from 9% to 8.5%.
2. My vote is a vote for (i) consistency and effectiveness of monetary policy;
(ii) growth in private investment, creation of new jobs, output growth,
financial system stability and medium term macroeconomic stability; (iii) a
shift from passive monetary policy (Hong Kong Model) to an active and
truly independent monetary policy (Chinese Model); (iv) substantive
medium term macroeconomic stability rather than a superficial (whited
sepulcher-type) short-term stability and (v) a gradualist approach to the
shift from passive to active monetary policy regime.
Justification
3. At the July meeting of the MPC, I voted for a reduction in MPR by 200 basis
points (2%) as the implied changes in SLF and SDF. I believe I need to
explain as clearly as I can why I did not maintain the vote for a 200 basis
point reduction in MPR or vote for passivity.
4. First, I highlight what has not changed and which strengthen the case for
a shift from passive monetary policy of the last seven years to an active
and independent monetary policy that is, a monetary policy that

promotes domestic investment, employment, incomes, growth and wellbeing. Second, I will explain why I voted for a gradualist approach rather
than a shock therapy.
What has not changed
1. My conviction that finding the paths to low inflation growth conducive to
job creation and economic growth, financial system stability and fiscal
prudence are the most urgent strategic and policy priorities. I also remain
convinced that the “March Retreat” provided a good foundation for
strategic and policy progression.
2. The urgency of building on the March Retreat which laid the following
foundations: (i) established humility, sincerity and integrity as the key
principles for effective strategic and policy coordination; (ii) emphasized
the organic links between fiscal, monetary and prudential policy and the
urgent necessity for interdependent and coordinated strategic and policy
analysis, choices and actions and (iii) recognized the urgent need for
coordinated and effective movements along the three pathways: low
inflation conducive to growth, financial system stability (FSS) and fiscal
prudence or discipline. I still believe strongly that unless we build on the
foundations of the “March retreat” we will be matching in retreat.
3. The growing costs of willfully or inadvertently ignoring the lessons of
Nigerian and global economic history to the present and the future of
Nigeria. We know from analysis of market and macroeconomic data of
the last forty-five years (1972-2017) that crude prices are unstable and

continue to have destabilizing effects on Nigeria’s public finance, current
account balance, money survey and monetary policy. We also know from
analysis of data and policy of the last thirteen years (2004-2017) that
portfolio investors have powerful destabilizing effects on financial markets
(money, capital, government securities and forex), interest rates,
exchange rates, inflation, investment, employment, growth and public
finance. We also, know that the pathways to low inflation conducive to
growth, financial system stability and fiscal prudence does not pass
through a portfolio flows attracting strategy or policy. We have made this
same point consistently since my Personal Statement of September 2011
after one year of deflationary policy appeared then to benefit foreign
portfolio investors and hurt domestic investors. I have repeatedly drawn
attention to the medium to long term challenges that portfolio flows pose
to the stability of the economy. From what we now know about the cost
of the AMCON resolution of the banking crisis and the interventions costs
and consequences, we have a better understanding now of the width
and depths of the impacts of portfolio flows on the Nigerian economy. The
commonwealth does not benefit from opening the barn doors to portfolio
flows and the wisdom of widening the barn doors after what we know is
harder to understand from the viewpoint of the commonwealth.
4. The macroeconomic challenge remains overwhelming: (a) a tentative exit
from technical recession driven by oil GDP – a long way from recovery to
2014 level let alone growth from 2014 level; (b) an unemployment rate of

14.2% as at 2016:Q4 (likely to be higher given the trend); (c) a 0.04% fall in
headline inflation driven by seasonal effects, which caused a decline in
food inflation of 0.03% partly offset a 0.1% rise in core inflation; (d) a
N2.01trillion rise in public debt, a Federal deficit of N1.9 trillion in the first 8
months, debt service of N1.58 trillion (2.4 times the spending on capital
project); (e) rising maximum lending rate to 31.2% (by 0.26%), prime
lending rates of 17.69% (by 0.04%) and widening interest rate spread to
26.95% (from 26.83%); (f) a very active revolving door of liquidity –
pumping in and mopping out; (f) collapse of the interest rate corridors,
which makes Standing Lending Facility and Standing Deposit Facility rates
redundant as effective monetary policy tools; (g) 32.1% growth in All Share
Index driven mainly by banking stocks (58.6%) and Consumer Goods
(31.81%) that are in turn powered by (h) a monthly average growth in
portfolio and FDI investments in the capital market that averaged 52%
between April and August 2017.
5. The unresolved issues: (a) a forward looking medium to long term
strategic macroeconomic management framework for Nigeria as the
context for policy analysis and choice; (b) continuing malfunctions in the
credit market which tends to allocate credit to sectors with traditionally
high NPLs, low output and employment elasticities as well as a tendency
to restrict access and to charge maximum rates on credit to sectors and
economic agents with traditionally lower NPLs and higher output and
employment elasticities; (c) the dominance of rent havens in both the real

and financial sectors, and the public space; (d) prevalence of present
hedonistic and backward looking orientation and (e) efficient and
effective use of existing Nigerian capacity in all aspect of the political
economy.
6. The Hong Kong model within which monetary policy has been conducted
since January 2012 imply a trading off of a capacity for independent
monetary policy. The theory is clear that the trading off of monetary policy
independence means that monetary policy adjustments to support the
exchange rate could lead to a high interest rate trap. Therefore, the case
against a lowering of interest has less to do with the inflation rate than with
the risk of reversing flows. The data is clear, when deflation began in
September 2010, the inflation rate was 13.6% and MPR was 6%. By August
2011, MPR had been gradually raised to 8.75% and by then, the inflation
rate had dropped more than proportionately to 9.3%. It would have
continued to drop, but for the policy shock of January 2012 when the
price of petroleum products was suddenly raised from N65 per liter to N141
per liter before it was later reduced to N97 per liter. This spiked the inflation
rate up to 12.6% in January of 2012. Back in October 2011, the only
emergency meeting of the MPC so far, sharply raised MPR to 12% (a 2.75%
increase) to respond to exchange rate pressures. Thereafter, MPR
remained at the same level even when inflation was either below or at the
upper bound of 9% for 29 months (January 2013 to May 2015). In several

personal statements I raised concerns about a high interest rate trap just
as most of the global central banks were then in a low interest rate trap.
7. It is the Hong Kong model that locks the door on lower interest rates. We
have had two major episodes of the model and have already paid
excessively huge costs that has not yet been fully estimated and their
implications analyzed and fully understood. I cannot support a third
episode which started effectively this year because the implications are
clear. I have no doubt that for Nigeria, the Chinese model is a far better
trading off of the dilemma because it (i) limits vulnerability to destabilizing
financial flows that are far too busy plucking ripe fruits and grains and
storing where they had not sown and have absolutely no interest in
expanding the farmland, sowing and nurturing and (ii) frees monetary
policy to support paths to fiscal prudence and financial system stability
and to continue the metaphor, the expanding of new farmlands and the
planting and nurturing of new fruit trees and grains.
What has changed
8. New empirical evidence were provided by independents and Bank Staff
on the possible impacts of alternative paths of MPR cuts. I found the new
evidence on the impacts of rate cuts on a broad range of
macroeconomic variables very useful in guiding my decision. Typically, the
impacts were mixed as it should be given the nature of binding
macroeconomic constraints and the inevitability of trade-offs. The key
issue for policy has always been which macroeconomic variables hence,

underlying interests should be assigned the greater weights given current
macroeconomic conditions, and future national and global outlooks.
9. The results suggested trade-off between key nominal and real variables
(interest rates, credits, investments, GDP, public finance and external
account balance which were positively impacted) and key nominal
variables (domestic prices and exchange rate which marginally
increased). In my informed judgment, I gave greater weights to interest
rates, credits, investments, GDP, public finance and external account
balance. These imply a preference to Nigerian investors, workforce,
economic growth, a more sustainable public finance and external
balance.
10. The empirical analysis of two alternative paths - a gradualist path and a
shock therapy - suggested clearly that the gradualist path was more
sustainable in the medium to long term. In my judgment, a significant
medium to long term stability trumps a superficial short term stability from
the perspective of the good of the commonwealth.
Influence on Decision
11. My careful interpretation and analysis of the results convinced me to vote
for a gradualist approach in shifting from an outward-oriented passive
monetary policy to an inward-oriented independent monetary policy.
12. Consequently, I moderated the rate cut of MPR to 50 basis points (0.5%) as
a first step on the paths to low inflation conducive to growth, financial
system stability and fiscal prudence.

13. As I concluded my last personal statement: “Lowering interest rate is just a
first step towards policy consistency and policy effectiveness. It should be
a consensus point on which the monetary and fiscal authorities could
build on to produce a consistent forward looking strategic framework for
coordinated, effective and constrained monetary, prudential and fiscal
policies.”

4.
NNANNA, OKWU JOSEPH

Since the July MPC meeting, growth indices have strengthened and the
fragile macroeconomic condition has improved. Recovery in oil production,
the unwinding of growth related policies of the ERGP, improved access to
foreign exchange and enhanced agriculture productivity has continued to
provide the needed momentum. GDP growth is propelled by agriculture
(3.0%), industry (1.1%) and construction (0.1%) subsectors, while oil GDP
returned to
positive
growth.
Manufacturing
and non-manufacturing
Purchasing Manager’s Index (PMI) stood at 53.6 and 54.1 index points in
August 2017, indicating expansion in the fifth and fourth consecutive months,
respectively. Similarly, production level index for manufacturing sector grew
for the sixth consecutive month in August 2017. At 57.4 points, the index
indicated an increase in production at a slower rate, compared to its level in
the preceding month. Downside risks to the growth outlook continue to be
the subsisting structural rigidities, protracted impact of flooding in different
parts of the country and uncertainty in the recovery of crude oil prices, which
may weaken revenues and slow down the pace of implementation of public
investment.

Inflation moderated downwards signalling subdued inflationary pressures
owing to the continued favourable base effect and subdued pass-through
effect of the exchange rate appreciation on domestic prices. Headline

inflation narrowed marginally by a 0.04 percentage point to 16.01 per cent in
August relative to its level in July. While core inflation moderated at 12.30 per
cent compared to 12.21 per cent in July. Food inflation remained high at
20.26 per cent in August, but lower than the 20.28 per cent in July due to
subsisting supply-side disruptions associated with insecurity, higher energy
costs, protracted infrastructure bottlenecks and seasonality factors.

Financial conditions remain fragile due to provisioning for foreign exchange
interventions and open market operations, rising average interbank and
open buy back market rates. Consequently, the drag on financial
intermediation and credit conditions subsisted as average inter-bank call rate
and OBB rate rose to 22.63 and 39.66 per cent in August 2017 from 12.28 and
19.34 per cent in July 2017, respectively. Staff estimates show that persistent
output gap and exchange rate contributed to the behaviour of money
market rates. Banking sector credit to the core private sector contracted by
0.36 per cent in July (-0.62 per cent on annualized basis) as a result of the
persisting crowding-out effect of government borrowing requirements.
Maximum and prime lending rates were elevated at 30.95 and 17.72 per cent
in August 2017. The intervention in the foreign exchange market bolstered the
stock market with the All Share Index (ASI) and market capitalisation (MC)
rising by 7.2 and 6.9 per cent, respectively, reflecting buoying investor
sentiments.

Global growth is expected to remain strong, while global inflation moderated
as oil and other commodity prices showed some moderate recovery.
Although there were signs of moderation in the growth headwinds,
nevertheless extreme global risks persisted, the Korean peninsula crisis
remained; uncertainty over Brexit were amplified; and the outcome of the
Catalonian independence referendum in Spain may dampen growth. Other
risks included the impact of hurricane across the globe, slack in China’s
growth which has reduced demand for commodities; and continued
monetary policy normalisation by the US Fed with unintended implications for
global capital flows.

Fiscal space to implement the Economic Recovery and Growth Plan (ERGP)
remained delicate as the recovery in crude oil prices may be muted by the
anticipated effect of huge investment in shale oil production. However, more
revenue was expected from achieving and sustaining oil production at 2.2
mbpd. I remain positive that that the recently launched tax amnesty
programme under the Voluntary Asset and Income Declaration Scheme
(VAIDS) would scale-up tax revenue and build buffers to cushion the impact
of oil prices on fiscal operations. Also fiscal reforms are needed to assist in
speeding up capital expenditure under the ERGP.

External sector indicators remained resilient supported by improved oil
production and the effectiveness of the “investors’-exporters’” foreign

exchange window in the provision of foreign exchange liquidity. The
interbank and BDC premium narrowed from 27.9 per cent at end-August
2016 to 19.5 per cent at end-July 2017, 19.6 per cent at end-August 2017, and
further to 19.3 per cent at September 5, 2017. This was due largely to the
sustained interventions by CBN in the foreign exchange market and the
increase in the volume of external reserves. External reserves at September
11, 2017 stood at US$32.85 higher than US$23.97 recorded in the
corresponding period in 2016 and could finance approximately 12 months of
import cover.

Overall, the macroeconomic outlook was relatively favourable, driven largely
by exchange rate stability. The risk of a reversal of the current deceleration in
the inflation path is very unlikely as positive core inflation shocks would
moderate the uptick in food inflation in the short-to-medium term. Against the
backdrop of fiscal dominance, despite lower than expected growth, and on
the balance of risks based on available data, I vote to retain the current
stance of monetary policy tightening.

5.
SALAMI, ADEDOYIN
At the end of this meeting, I voted with the majority of colleagues to hold all
monetary policy parameters constant.

As is usual, the data for inflation was published in the run-up to the meeting.
In August 2017, compared to the previous month, the seasonally adjusted
measures of price change (in other words, year-on-year measure) showed a
decline in Headline inflation to 16.01 per cent from 16.05 per cent. Similarly, in
the same period, Food Inflation eased from 20.28 per cent to 20.25 per cent.
In contrast, Core or Non-food Inflation rose to 12.30 per cent from 12.21per
cent the previous month. These numbers, at best, indicate ‘sticky prices’ – in
other words, the momentum propelling inflation downwards may be losing
steam.

Slightly better picture of inflationary development is provided by the monthon-month measures, which provide the most recent impression of price
change. Increases at rates of 0.97 per cent, 0.93 per cent and 1.14 per cent
for aggregate, Core and Food prices respectively, show a reduction in the
rate of increase across all definitions of price. It may also be noteworthy that
the observed change is the lowest since the beginning of this year. Taken
together, the latest data on inflation shows that, whilst prices continue to
ease, the speed of decline may be slowing.

Ahead of this meeting, the National Bureau of Statistics (NBS) released data
on Gross Domestic Product (GDP) from the output side of the economy.
These provisional figures show positive growth of 0.55 per cent – for the first
time since Q4-2015. Welcome as growth is, it represents the initial positive,
albeit tentative steps, away from recession. The figures also provide clarity
around the enormity of the task which Policy Managers face in trying to
achieve rapid, sustained and sustainable growth.

The ‘big’ 6 sectors which contribute three-quarters of total output –
Agriculture (23 per cent), Distributive Trade (17 per cent), ICT (9.5 per cent),
Manufacturing (9.38 per cent), Oil and Gas (8.99 per cent) and Real Estate
(7.22 per cent) -, either slowed of shrank. In the aggregate, the fragility which
the data confirms is unsurprising – first tentative steps out of recession. It is
however useful to note the slowing of growth in key sectors namely
Agriculture and Manufacturing.

The Banking System Stability Review provided by Bank Staff points to a Sector
struggling to cope with the consequences of a fragile economy.
Characterised by high levels of liquidity – approximately 44 per cent
compared to regulatory requirement of 30 per cent -, and the Report authors
stress that there is no ‘systemic distress’ in the sector, they do however note in
their report that “Financial Conditions of the banks remain a concern,
especially the small and medium banks – due largely to the adverse external

and domestic shocks/headwinds”. They continue, “...... banking industry is
significantly vulnerable to the weak economic and financial conditions”. As
they also point out, “ ........ the key risk factors to continue to watch include
credit default risk, obligor and sector concentration risk and liquidity risk”.

What is clear from my review of economic conditions is the urgent need for
economic policy makers to define a series of pathways to (i) lower inflation,
(ii) lower interest rates, (iii) banking system stability and (iv) rapid, inclusive
and sustainable growth. Fortunately, these pathways do not preclude one
each other. In my view, they can be mutually reinforcing of each other.

As I noted earlier, the reduction in inflation is losing its steam. Presently,
inflation remains significantly above both the CBN target range of 6-9 per
cent and estimates of the threshold level beyond which its impact is on
output is adverse. This position should require a tightening of monetary policy.
Given the provisional nature of the latest GDP data, I can only conclude that
activity is fragile. I would thus like to see data covering a few more months in
coming to a decision. I thus vote to hold.

6.
UCHE, CHIBUIKE U
Despite the fact that oil prices have again started inching upwards, our
economy remains in dire straits without any clear path for positive change
ahead. Bluntly put, the additional revenue being earned from oil have at
best brought about temporary relief for government. The structural defects in
our national economy remain unaddressed. The confusion surrounding the
exit of the country's economy from recession is indicative of the widespread
pessimism about the future of the Nigerian economy.
The poor state of the Nigerian economy is perhaps not surprising especially
given the fact that the Government has done very little to operationalize its
economic change mantra. The inability of the Government to meaningfully
reform its over bloated civil service has meant that most of the excessive
monies being injected into the economy- borrowed or printed- end up being
used to service the recurrent needs of this inefficient government machinery.
It is troubling that the government is increasing its international indebtedness,
with attendant exchange rate risks, without a clear plan of ensuring that such
loans will be repaid. These huge borrowings and injections into the national
economy also complicate monetary policy by making the future direction of
inflation unclear.
The above dynamics also impact on the health of our country’s banking
system. It is for instance my view that a good way of gauging the economic
health of any nation is to examine the health of its banking system. This is so

because banks essentially intermediate between surplus and deficit units of
any economy. The success of such intermediation always depend on the
health of the underlying economy that such intermediated capital is used to
finance. Given the current high levels of the bad debt portfolio in some
Nigerian banks, which has persisted for some time, it is clear that our banking
system is inching towards being encumbered.
It is based on this level of increasing threats that I find calls for the further
tightening of monetary policy to be inappropriate. An immediate
consequence of such a hasty action will be a corresponding rise in the
already high levels of the bad and doubtful debts portfolio of Nigerian banks.
In my view, the need to prevent another banking crisis should be of great
importance in the formulation of monetary policy in present day Nigeria. It is
for instance public knowledge that the Central Bank of Nigeria is still
grappling with the negative consequences on its balance sheet of the last
financial crisis resolution strategy that it adopted.
At another level, it is troubling that the Central Bank of Nigeria has not been
able to curtail the speculative behavior of private portfolio investors in the
country. This is unfortunate especially given the fact that history has taught us
that speculative short term capital flows are incapable of aiding the
economic development of developing countries. Foreign capital is only
useful to economic development to the extent that it helps fund the
acquisition of long term capital assets, skilled manpower and technology.

While short term speculative capital can sometimes help shore up the value
of local currencies in developing countries, to the delight of central banks,
this has never been sustainable. The capital flight/ exit that always follow
usually have far more negative consequences than whatever temporary
gains the inflows may have had.
Finally, it has also been widely canvassed that MPC should consider loosening
its monetary policy stance by lowering the MPR. With inflation rate currently
above MPR, I do not see how this will have any meaningful positive impact
on our economy. If MPR is lowered at the present time, most rational
economic beings will simply convert their deposits to assets in order to
mitigate against inflation driven diminution in the value of their deposits.
In conclusion, I am of the opinion that the least destructive line of action for
monetary policy at the present time is to do nothing. For the avoidance of
doubt this stance is not a magic wand and does not address most of our
present monetary policy concerns. All it can do is to provide a semblance of
stability which can enable government to undertake the structural economic
reforms that are necessary for any meaningful economic progress to be
made in our country. The reality is that there is little monetary policy can do in
an oil rent, import dependent economy that has continued to expand its
over bloated, inept and corrupt bureaucracy even when it is obvious that its
oil rent income, despite hiccups, is clearly on a downward trajectory. In a
country that is bereft of any meaningful infrastructure that can help facilitate

industrial development and economic growth, it is troubling that the
government has shown little willingness to curtail the widespread practice, at
both the state and Federal levels, of borrowing to satisfy recurrent needs.
Surely such levels of fiscal recklessness were never imagined by those who
conceptualized monetary policy.
It is on the basis of the above constraints that I vote as follows: (i) to retain the
MPR at 14.00 per cent; (ii) to retain the CRR at22.50 per cent; (iii) to retain the
Liquidity Ratio at 30.00 per cent; and (iv) to retain the Asymmetric Window at
+200 and -500 basis points around the MPR.

7.
EMEFIELE, I. GODWIN, GOVERNOR OF THE CENTRAL BANK OF NIGERIA
AND CHAIRMAN, MONETARY POLICY COMMITTEE
With wide-ranging improvements in key macroeconomic indices over the
last three quarters, the outlook of the Nigerian economy, both in the near-
and short-term, have begun to brighten. The upturn in real GDP from a nadir
of -2.3 per cent at the depth of the recession in 2016q3 culminated in a
positive growth of 0.6 per cent in 2017q2 with a prospect of attaining 1.5 per
cent by 2017q4. At these positive rates of growth, however, output gap
remains considerably negative as real GDP stayed below its potential.
Inflation rate decelerated in August 2017 for the seventh consecutive month
to 16.0 per cent from the peak of 18.7 per cent in January 2017. Relative
stability and convergence continued in the FX market as the Investors and
Exporters (I&E) window and Bureau de change (BDC) rates hovered around
N363/US$, narrowing the premium with the interbank rate.
Regardless of these heartening developments, some macroeconomic
indices, including the unemployment rate and nominal interest rates, remain
at undesirable levels. This is essentially due to the structural imbalances and
associated rigidities, which characterise the Nigerian economy and resonate
the urgent need for diversification. The inevitability of diversification is even
more exigent at this time given the planned medium-term phase-out of
hydrocarbon fuels by major industrialised economies and the weak shortterm global demand.

Though the global economy is expected to strengthen for the rest of 2017,
year-to-date outcomes in many regions are tepid. Estimated at 3.5 and 3.6
per cent for 2017 and 2018, respectively, global growth was somewhat
revised downward by the IMF. Growth projections were, similarly, lowered for
the US and UK. However, outlook improved for the euro-area, Japan, and a
number of emerging market economies especially, Brazil and South Africa,
which exited recession in the first half of 2017. While rebound in global
demand would likely provide tailwind to the continued recovery of the
Nigerian economy in short-term, the tepid long-run outlook of global
economic conditions and the imminent discard of hydrocarbon fuels
threaten the long-term path of potential output.
After five consecutive quarters of contraction, Nigeria’s economic recovery
took a modestly positive turn, as output expanded by 0.6 per cent in the
2017q2 from a 0.9 per cent contraction in 2017q1. This followed the general
improvement in business and investor sentiment observed since the
beginning of the year, the stability in the FX market, savoury developments in
the oil sector, and brightening short-term outlook. The growth was driven by
expansion in both the oil sector (1.6 per cent) and non-oil sector (0.5 per
cent). In terms of contributions, the oil sector accounted for nearly 0.2 per
cent of the overall GDP growth while about 0.4 per cent was from non-oil
activities. I note that, while production improved moderately during the
quarter, the observed economic growth largely reflected falling average
costs of input as the FX market stabilises. To safeguard the ongoing recovery,

it is imperative to ensure that gains from declining costs and relative FX
stability are complemented by strong rises in production. It is also important
to strengthen household demand and business investments. Accordingly,
the elevated public spending on capital projects and infrastructure as well
as the recent Executive Order to improve Nigeria’s ease of doing business
are indeed laudable. As I stated earlier, it is vital to sustain the pace of
capital projects into the medium-term so as to reduce infrastructural deficits,
with potential favourable effects on output and prices.
Since the last MPC, inflation rate continued to decelerate; falling from 16.1
per cent in July to 16.0 per cent in August 2017. Food inflation, though still
high, moderated around 20.3 per cent, whereas core inflation rose
marginally to 12.3 per cent from 12.2 per cent during that period. Analysis
indicated an uptick in imported food inflation from 14.1 per cent to 14.4 per
cent reflecting inflation ascent in key overseas economies. The overall
outcome in headline inflation was essentially driven by the continued
stability in the FX markets as well as the tight liquidity conditions in money
and financial markets. I note that, while observed disinflation is pleasing, it
remains fragile and at a growth-retarding level. It behoves us, therefore, to
ensure that monetary impulses are optimally delayed to avert a reversal of
the current trend of disinflation and a derailing of the delicate economic
recovery.

Tight liquidity conditions continued in the money and credit markets during
the review period as restrictive monetary stance remained. In August 2017,
broad money supply M2 contracted by 11.1 per cent annualised as against
a target expansion of 10.3 per cent. Net claims on government indicated an
annualised contraction of 1.6 per cent, while private sector credits recorded
an annualised expansion of 0.1 per cent. I note that whereas the marginal
growth in private sector credit is propitious, more needs to be done to
ensure sufficient flow of financing to high impact, employment elastic real
sector ventures. This is with a view to bolstering domestic productivity,
creating jobs and reducing poverty. The CBN will continue to work with
Deposit Money Banks (DMBs) to ensure that critical sectors are not denied
vital credits at affordable rates.
As
we
continue
to
welcome
the
encouraging
macroeconomic
development especially the stability in the FX market, continued disinflation,
favourable oil sector developments, and the exit from recession, I note that
the fragile conditions require delicately balanced and correctly timed policy
actions. The fundamental issues of structural imbalances, supply constraints
and the need to diversify the economy remain significant for long-term
growth and prosperity. Nonetheless, monetary policy will continue to ensure
that short-term outcomes are smoothened for the overall benefit of the
economy. A critical anchor variable in the Nigerian economy is the
exchange rate. Today the relative stability of the rate is reflecting in
moderation of consumer price inflation and in declining marginal costs in the

productive sectors as average costs of imported raw materials fall. It is
therefore sacrosanct to sustain FX market stability.
Prevailing conditions in the domestic economy provide compelling
arguments for all possible outcomes of MPC decisions; ease, hold or tighten.
Given that the impulses from previous policy adjustments are still permeating
the system, we need to be prudent with our decisions. I maintain my view
that monetary impulses at this time may be impetuous. To safeguard the
relative stability in the FX market and maintain balanced inflows to the
economy, interest rate parity must not be distorted, especially as recent
recovery is still fragile.
I understand the need to boost output by lowering interesting rate, but
reiterate that inflation is still at intolerable growth inhibiting level and needs
to
be
reined
in decisively.
Although, lowering
rates
now
seems
counterintuitive and counterproductive, raising interest rates is somewhat
insensitive to the fragile recovery. I am of the view that the current level of
real interest rate is appropriate to balance the objectives of exchange rate
and price stability, and output stabilisation. As I have noted before, my
personal preference is to achieve a low single-digit nominal interest rate in
the long-run. Current realities do not, however, support the widely held
sentiment of lowering monetary policy rate; especially as it is negative in real
terms.

In my consideration, holding monetary policy instruments at their current
levels is pragmatic. Policy impulses could generate adverse shocks which
would not only destabilise the path of economic recovery, but also reintroduce unwarranted pressures in both the goods and FX markets. To
ensure that the corrective effects of previous policies are not jeopardised by
distortive shocks, I vote to:
1. Retain the MPR at 14.0 percent;
2. Retain the CRR at 22.5 percent;
3. Retain the asymmetric corridor at +200/–500 basis points; and
4. Retain liquidity ratio at 30.0 percent

GODWIN I. EMEFIELE, CON
Governor

September 2017