Central Bank of Nigeria Communiqué No. 71 of the Monetary Policy Committee
Meeting, July 5, 2010

The Monetary Policy Committee (MPC) met on 5th July, 2010 to review domestic
economic conditions during the first half of 2010 and the challenges facing the Nigerian
economy against the backdrop of developments in the international economic and
financial environments in order to reassess the options for monetary policy for the
remainder of the year.

On the global scene, the Committee noted that market anxiety over the fiscal positions of
several Euro Area countries was posing new challenges for the world economy even as
global economic recovery remained fragile. In order to address the weak fiscal position,
governments in these countries have started unwinding the fiscal stimuli by cutting
government spending. Such cuts in public spending may have serious implications for
growth and employment and may lead to a double dip recession with possible contagion
effects on the global economy. If this were to happen, there may be an impact on global
commodity prices, including prices of oil, with knock-on effects on the government’s
fiscal position and the foreign sector. However, recovery remained robust in most
developing and developed countries, with the exception of high-income European
countries where it stagnated. In this regard, the Committee commended the recent
commitment of the G-20 Summit in Toronto, Canada, which agreed to safeguard and
strengthen the recovery process to lay the foundation for strong, sustainable and balanced
growth, as well as strengthen the financial systems against risks. The G-20 leaders of the
world’s major industrialized and emerging market economies welcomed measures so far
taken to sustain global recovery and strengthen the financial systems, while agreeing to
work together to curb public deficits, enhance economic growth and job creation as well
as global prosperity. The Committee believes that the decision of the G-20 Summit
would refocus and galvanize global strategies towards the recovery process.

On the domestic scene, the MPC observed that financial markets, though still fragile,
have recovered faster than expected, urging greater efforts in accelerating reforms in the
other sectors of the economy. This is critical for economic growth.

The MPC also noted the sustained rebound in commodity prices which is helping to
support growth in commodity producing regions, including Nigeria. However, it
underscored the need to diversify the economy to protect the country from the vagaries of
oil price volatility. The Committee believes that the inflation risk of the rebound in
energy prices appears mitigated by the continuing low levels of capacity utilization, weak
private demand, good harvest, and well-anchored inflation expectations. In addition, as
mentioned above, the European fiscal crisis and the recent slowdown in manufacturing
output in China and other Asian countries may moderate the robustness of the markets.

Key Domestic Macroeconomic and Financial Developments

Output and Prices:
The Committee observed that the impressive 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 7.23 per cent in the first quarter of 2010 up from
4.50 per cent recorded in the first quarter of 2009. GDP was projected to grow by 7.68,
7.76 and 8.13 per cent in the second, third and fourth quarters of 2010, respectively.
Overall GDP growth for 2010 is projected at 7.74 per cent which is higher than the
revised figure of 6.66 per cent recorded in 2009. The non-oil sector is expected to
remain the main driver of overall growth, with agriculture, wholesale and retail trade, and
services contributing 2.49, 2.03 and 2.11 per cent, respectively.

The Committee believes that the impressive growth forecasts reflected prospects for
moderate rainfall in 2010, which is expected to support the production of major crops
across the country, coupled with the current peace in the Niger-Delta, which has led to an
increase in crude oil and natural gas production. It, however, cautioned that there is a
thick cloud hanging over commodity producing countries because of the current crisis
facing the Euro Area and emerging slowdown in manufacturing in major Asian countries

and the US as indicated above. In addition, the Committee highlighted the binding
constraints on the domestic economy namely; infrastructure inadequacy, lack of access to
finance, lack of requisite skills, unfavourable trade policy and a poor investment climate
all of which have the potential to constrain economic growth. The MPC, therefore,
stressed the need for government to pursue macroeconomic, structural and institutional
reforms that appear to have slowed down in the past few years.

The year-on-year headline inflation declined to 11.0 per cent in May 2010 from 12.5 per
cent in April and 11.8 per cent in March. Similarly, core inflation fell to 8.8 per cent in
May 2010 from 9.8 per cent in April and 9.5 per cent in March. The downward trend in
the domestic price level could be attributed to a number of factors, including the
continuing underperformance of monetary aggregates, with the associated constrained
demand, adequate food supply, stable exchange rates and improvement in the availability
of petroleum products, amongst others. Notwithstanding these developments, the MPC
reiterated its earlier position on the threat of inflationary pressure arising from several
factors including the announcement effect of salary increase in the civil service and the
rising food prices against the backdrop of the famine in neighboring Niger Republic. The
Committee restated its commitment to continue to monitor price developments with a
view to taking appropriate measures to stem any inflationary threat and ensure that the
downside risk of inflation to growth is minimized.

Monetary, Credit and Financial Market Developments:
Provisional data showed that relative to end-December 2009, broad money (M2) declined
by 0.2 per cent in May 2010, which, when annualized represented a contraction of 0.48
per cent, compared with the indicative growth target of 29.26 per cent for 2010. Reserve
money (RM), which stood at N1,668.50 billion at end-December 2009, declined to
N1,516.55 billion at end-April and N1,534.79 billion at end-May 2010. As at June 23,
2010, the RM level of N1,618.02 billion was below the provisional 2010 second quarter
indicative benchmark of N1,872.80 billion by 13.6 per cent.

Available data showed that in May 2010, aggregate domestic credit (net) grew by 12.38
per cent over the December 2009 level, and by 29.72 per cent when annualized, which
was still below the 2010 indicative target of 55.54 per cent. Credit to government (net),
which grew substantially by 50.87 per cent over end-December 2009 (or 122.1 per cent
on annualized basis), was the major contributor. Credit to the private sector declined by
1.88 per cent
(or 4.51 per cent on annualized basis), in contrast to the growth benchmark of 31.54 per
cent for 2010. The substantial growth of credit to government (net) against the backdrop
of declining private sector credit reflected the risk aversion of the DMBs to lending to
non-government borrowers. The Committee believes that in order to provide the private
sector with the necessary credit to grow the economy, further efforts are needed to unlock
the credit market in order to enhance the flow of credit to the real economy.

The rates at the inter-bank segments of the money market were much higher than what
obtained in the preceding period owing to the short-lived tight liquidity conditions in
May 2010. Consequently, in May 2010, the average inter-bank call and Open-Buy-Back
(OBB) rates rose significantly to 5.97 and 4.92 per cent, respectively, representing
increases of 470 and 381 basis points above the 1.27 and 1.11 per cent recorded in the
preceding month. In line with the increase in rates at the inter-bank call and OBB
segments, the 7- and 30- day NIBOR rates increased by 397 and 311 basis points to 6.43
and 8.24 per cent, respectively, from 2.46 and 5.13 per cent in April. However, with the
release of statutory revenue in the last week of May, the banking system became liquid.
As a result, the average inter-bank call and OBB rates declined from 7.71 and 7.07 per
cent, respectively on May 25, 2010 to 1.17 and 1.10 per cent on June 1, 2010. Thereafter,
rates remained stable and low, hovering around an average of 1.20 per cent.
Developments in interest rates structure indicated that the retail lending rates were still
relatively high even though they were declining. The average maximum lending rate
dropped to 22.56 per cent in May 2010, from 23.45 percent in December, 2009. Also, the
average prime lending rate dropped to 18.77 per cent in May 2010, from 19.03 per cent in
December 2009.

Similarly, the weighted average savings rate dropped marginally to 2.92 per cent in May
2010 from 3.36 per cent in December 2009. The consolidated deposit rates declined to
3.30 per cent in May 2010 from 6.13 per cent in December 2009. Thus, the spread
between the average maximum lending rate and the consolidated deposit rate widened to
19.27 per cent in May 2010 from 17.34 per cent in December, 2009. The Committee
noted that the key policy challenges remained the negative growth in money supply and
private sector credit as well as the subsisting high lending rates in the face of declining
inter-bank rates.

The Nigerian capital market is still showing some signs of recovery. The All-Share Index
(ASI) increased from 20,827.17 at end-December 2009 to 25,554.35 as at 23rd June,
2010, or by 20.70 per cent. Market capitalization (MC)—equities only, increased by 24.9
per cent from N4.98 trillion to N6.28 trillion over the same period. The number of deals,
volume and value of shares traded increased by 16.34, 19.23 and 100.00 per cent,
respectively. The increase in ASI and MC was principally due to share price increases in
the Banking, Food & Beverage and Oil/Gas sectors. The Committee welcomed the
continuing improvement in the stock market, and noted the potentials for further recovery
given the passage of the harmonized Asset Management Corporation (AMCON) Bill by
both chambers of the National Assembly.


External Sector Developments:
The foreign exchange market remained relatively stable in the first half the year. During
the period- January 01 - June 16, 2010, total sales at 45 bi-weekly WDAS auctions
amounted to US$11,155.10 million, equivalent to an average of US$247.89 million per
auction. In the corresponding period of 2009, the sum of US$12,995.48 million was sold
at 70 daily and bi-weekly RDAS auctions, equivalent to an average of US$185.65 million
per auction.
In May 2010, the average foreign exchange demand of US$459.26 million per auction
was recorded against the average sales of US$394.45 million, representing sales as a

percentage of demand of 85.89. As at June 23, 2010 average demand for the month
dropped to US$315.73 million and, correspondingly, the average sales also declined, to
US$297.69 million, representing sales as a percentage of demand of 94.29

In June 2010, the WDAS rate opened at N150.27US$1 (inclusive of 1% commission) and
closed at N150.09/US$1, at an average exchange rate of N150.24/US$1 for the month.
This represented an appreciation of 6 kobo (0.04 per cent) compared with the average
closing rate of N150.30/US$1 recorded in May 2010. The BDC segment of the market
recorded average selling rates of N153.26/US$1 and N153.86/US$1 in the months of
May and June 2010 respectively, representing a depreciation of 0.4 per cent.

At the inter-bank market, the average selling rates for May and June 2010 were
N151.48/US$ and N151.35 respectively, representing a 0.09 per cent appreciation. The
WDAS and interbank segments of the foreign exchange market witnessed mild naira
exchange rate appreciation while the BDC segment experienced mild depreciation. Thus,
the stability of the naira exchange rate attained in the foreign exchange market since the
first half of 2009 continued in the first half of 2010. The Committee observed that the
naira exchange rate has remained stable in all segments of the market during the review
period, reflecting increased confidence in the Naira and the efficacy of the current
exchange rate policy stance. It believes that the relative stability in the foreign exchange
market 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 and volatility in the market.

The Gross external reserves stood at US$37.63 billion on 23rd June, 2010 representing a
decrease of US$1.19 billion or 3.06 per cent when compared with the level of US$38.82
billion as at 31st May 2010. The Committee, however, noted that the current external
reserves level is still adequate as it would finance 16 months of import, compared to the
internationally recommended benchmark of 3 months of import cover for a country’s
external reserves.

The Committee’s Considerations

Against the backdrop of the foregoing, the MPC noted with satisfaction the continued
macroeconomic stability. It, however, stressed the need to grow the real sector on a
sustainable basis. It also reiterated the possible inflation risks highlighted at the last MPC
meeting, in the light of the anticipated budget deficit and the operationalisation of the
proposed Asset Management Corporation. However, monetary aggregates are still underperforming and the Asset Management Corporation is yet to take-off. On balance,
therefore, the inflation threat remained subdued in the short to medium term. In addition,
some of the approved quantitative easing measures are yet to be completely implemented.
The Committee, therefore, considered it appropriate to continue to monitor developments
with a view to intervening as the need arises.

Decisions
In the light of the above, the Committee decided that :


1. No changes are made to the current policy stance viz: the MPR should remain
unchanged at 6.0 per cent; and

2. The asymmetric corridor of 200 basis points above and 500 basis points below the
MPR, respectively, are to be retained.


Sanusi Lamido Sanusi
Governor,
Central Bank of Nigeria
Abuja

July 5, 2010