CENTRAL BANK OF NIGERIA
MONETARY
POLICY REVIEW
MONETARY
POLICY REVIEW
AUGUST, 2014
AUGUST, 2014
Central Bank of Nigeria
www.cbn.gov.ng
E-mail:
33 Tafawa Balewa Way
Central Business District
P.M.B. 0187, Garki,
Abuja
Phone: +234 (0)9 462 36011
Website
©2014 Central Bank of Nigeria
:
ISSN: 2141-6281
Mandate
Vision
Mission Statement
§Ensure monetary and price stability
§Issue legal tender currency in Nigeria
§Maintain external reserves to safeguard the international
value of the legal tender currency
§Promote a sound financial system in Nigeria
§Act as banker and provide economic and financial
advice to the Federal Government
“By 2015: Be the model Central Bank delivering Price and
Financial System Stability and promoting
Sustainable Economic Development"
“To be proactive in providing a stable framework for the economic
development of Nigeria through effective, efficient and
transparent implementation of monetary and exchange
rate policy and management of the financial sector"
Core Values

· Meritocracy
· Leadership
· Learning
· Customer - Focus
Central Bank of Nigeria
iii
CBN Monetary Policy Review
CBN Monetary Policy Review
CONTENTS
Page
v
CBN Monetary Policy Review
CBN Monetary Policy Review
Table of Contents
List of Tables
Statement by the Governor

ix
Chapter 1
Overview


Chapter 2
Output in the Domestic Economy
-
-
-

Chapter 3
Price Developments


Chapter 4
Monetary Policy and Liquidity Management -
..

Chapter 5
Developments in the Financial Markets
-
-

Chapter 6
Outlook


Table 3.1:
Inflation Rates, June 2013 – June 2014
..
..

Table 3.2:
Selected CPI Components' Contribution to Headline..
Inflation (Y-on-Y) Jan-Jun 2014
..
..
..

Table 3.3:
Selected CPI Components' Contribution to Headline
Inflation


(M-on-M) Jan-Jun 2014
Table 3.4:
Selected CPI Components' Contribution to Food Inflation
(Y-on-Y), Jan-Jun 2014..


Table 3.5:
Selected CPI Components' Contribution to Food
Inflation


(M-on-M) Jan-Jun 2014
Table 3.6:
Selected CPI Components' Contribution to Core Inflation
(Y-on-Y) Jan-Jun 2014 ..


Table 3.7:
Selected CPI Components' Contribution to Core Inflation
(M-on-M) Jan-Jun 2014


Table 3.8:
Actual and Seasonally Adjusted Headline Inflation
Jan-Jun 2014 ....


Table 4.1
OMO Bills Auction (January 2009 – June 2014) (N'million)

Table 4.2
CBN Standing Lending Facility
..
..
..

(January 2009 – June 2014) (N'billion)
Table 4.3
CBN Standing Deposit Facility (January 2009 – June 2014)
(N'billion)


Table 4.4
Foreign Exchange Supply by the CBN (US$ Million)
..

Table 4.12
Monetary Aggregates Outcomes (Growth in % except
otherwise stated)


Table 5.1
Weighted Average Money Market Interest Rates
(Dec 2013 – June 2014)


Table 5.2:
Average Monthly Spot Exchange Rates
(Jan 2013 – Jun 2014) (N/US$) ..
..
..
..

Table 5.3:
End-Month Exchange Rates Movement
(Jan 2013 – Jun 2014) (N/US$) ..
..
..
..

Table 5.4:
Nominal and Real Effective Exchange Rates Indices
(Jan 2013 – Jun 2014) ..


Table 5.5:
Foreign Exchange Demand and Supply
(Jan 2013 – Jun 2014) (US$'Million)
..
..
..

vi
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Page
Table 5.6:
CBN Monthly Foreign Exchange Flows
(Jan 2013 – Jun 2014) ..


Table 5.7:
Monthly Foreign Exchange Flows through the Economy
(Jan 2013 – Jun 2014) (US$ Million)
..
..
..

Table 5.8:
NSE All-Share Index (ASI) and Market Capitalization (MC)
(June 2013 – June 2014)


Table 5.9:
Trends in Warren Buffett Valuation Metric in Nigeria
(2013Q1-2014Q2)


Table 5:10:
Changes (MTM* % App/Dep) in Foreign Exchange Rates
Across Selected African Countries
..
..
..

Table 5.11:
Changes (MTM* % App/Dep) in Foreign Exchange Rates
in Nigeria and Selected North America
..
..

Table 5.12:
Changes (MTM* % App/Dep) in Foreign Exchange Rates
in Nigeria and Selected South America
..
..

Table 5.13:
Changes (MTM* % App/Dep) in Foreign Exchange Rates
in Nigeria and Selected European Countries ..
..

Table 5:14:
Changes (MTM* % App/Dep) in Foreign Exchange Rates
Across Selected Asian Countries
..
..
..

Table 6.1:
Global Output and Inflation Outlook ..
..
..

Figure 2.1:
Non-Oil Sector Performance, 2014Q1 and 2013Q4
..

Figure 2.2:
Agricultural Sector Contribution by Activity,
2013Q1 – 2014Q2


Figure 2.3:
Industrial Sector Contribution by Activity,
2013Q1 – 2014Q2


Figure 2.4:
Manufacturing Sub-Sector Contribution by Activity,
2013Q1 – 2014Q2


Figure 2.5:
Services Sub-Sector Contribution, 2013Q1 – 2014Q2 ..

Figure 2.6:
Crude Oil Production 2013Q1 – 2014Q2
..
..

Figure 2.7:
Bonny Light Price Dec 2013 - June 2014 In US Dollars ..

Figure 3.1:
Headline Inflation (June 2013-June 2014)
..
..

Figure 3.2:
Consumer Price Index, Headline, Core and Food
(June 2013-June 2014)..


Figure 3.3:
Year-on-Year Headline, Core and Food
(June 2013-June 2014)..


Figure 3.4:
Selected CPI Components' Contribution to Headline
Inflation (Y-on-Y) Jan-Jun 2014
..
..
..

Figure 3.5:
Selected CPI Components' Contribution to Headline
Inflation (M-on-M) Jan-Jun 2014
..
..
..

Figure 3.6:
Selected CPI Components' Contribution to Food
Inflation (Y-on-Y) Jan-Jun 2014
..
..
..

Figure 3.7:
Selected CPI Components' Contribution to Food
Inflation (M-on-M) Jan-Jun 2014
..
..
..

Figure 3.8:
Selected CPI Components' Contribution to Core Inflation
(Y-on-Y) Jan-Jun 2014 ..


List of Figures
Page
vii
CBN Monetary Policy Review
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Figure 3.9:
Selected CPI Components' Contribution to Core Inflation
(M-on-M) Jan-Jun 2014


Figure 3.10:
12 Months Moving Averages, Headline, Core and Food
(June 2013-June 2014)..


Figure 3.11:
Actual Headline Inflation and Its 12 Month Moving Averages
(MMA), June 2013 – June 2014
..
..
..

Figure 3.12:
Actual Core Inflation and Its 12 Month Moving Averages
(MMA), June 2013 – June 2014
..
..
..

Figure 3.13:
Actual Food Inflation and Its 12 Month Moving Averages
(MMA), June 2013 – June 2014
..
..
..

Figure 3.14:
Actual and Seasonally Adjusted Headline Inflation
Jan-Jun 2014


Figure 4.1:
Monthly Reserve Money Benchmark and Actual
(December 2013 – June 2014)..
..
..
..

Figure 4.2:
Reserve Money and its Components (Uses)
..
..

Figure 4.4:
Money Supply (M1) and (M2) (Dec 2013 – Jun 2014) ..

Figure 4.5:
Growth in Money Supply (M1) and (M2)
(Dec 2013 – Jun 2014) ..


Figure 4.6:
Net Domestic Asset (NDA) (Dec 2013 – Jun 2014
..

Figure 4.7:
NDA, NDC and Other Assets (net) (Dec 2013 – Jun 2014)

Figure 4.7:
Net Domestic Credit (Dec 2013 – Jun 2014)
..
..

Figure 4.10:
Domestic Credit to Private Sector (Dec 2013 – Jun 2014)

Figure 5.1:
Weighted Average Money Market Interest Rates
(Dec 2013 – June2014)


Figure 5.2:
Daily Interbank Call Rate (January – June 2014)
..

Figure 5.3:
Open Buy Back Rate (January – June 2014) ..
..

Figure 5.4:
Daily Exchange Rate (January – June 2014) ..
..

Figure 5.5:
End-Month Exchange Rates Movement
(Jan 2013-June 2014) (N/U$$) ..
..
..
..

Figure 5.6:
Nominal and Real Effective Exchange Rate ..
..

Figure 5.7:
Demand and Supply of Foreign Exchange at r/wDAS

Figure 5.8:
CBN Monthly Foreign Exchange Flows
(Jan 2013 – Jun 2014) ..


Figure 5.9:
Monthly Foreign Exchange Flows through the Economy
(Jan 2013 – Jun 2014) (US$ Million)
..
..
..

Figure 5.10a:
NSE ASI and MC (Jan. 2014 – Jun. 2014
..
..

Figure 5.10b:
NSE ASI and MC (June 2013 – June 2014)
..
..

Figure 5.11:
NSE Market Capitalisation by Sector as at End-June 2014

Figure 5.12:
NSE Market Capitalisation by Sector as at EndDecember 2013


Figure 5.13:
10-Year U.S. Dollar-denominated Bond Yields for Nigeria
(June 28, 2013 – June 30, 2014)
..
..
..

Figure 5.14:
FGN Bonds Yield Curves: End-June 2013 vs. EndDecember 2013 vs. End-June 2014
..
..
..

Figure 5.15:
Structure of the Nigerian Capital Market (June, 2014)

Figure 5:16:
Changes (MTM* % App/Dep) in Foreign Exchange
Rates Across Selected African Countries
..
..

Figure 5.17:
Changes (MTM* % App/Dep) in Foreign Exchange
Rates in Nigeria and Selected North America
..

Figure 5.18:
Changes (MTM* % App/Dep) in Foreign Exchange
Rates in Nigeria and Selected South America
..

Figure 5.20:
Changes (MTM* % App/Dep) in Foreign Exchange
Rates in Nigeria and Selected Asian Countries
..

Figure 6.1:
Fan Chart for Inflation from 2012:m3 - 2015:m12
..

Box 2.1:
GDP Rebasing and the Nigerian Economy
..
..

Box 2.2:
Impact of Global Shale oil production on Nigeria
..

Box 5.1:
Foreign Portfolio Investment (FPI) in the Nigerian
Equities Market


Box 5.2:
Warren Buffett Valuation Metric
..
..
..

Box 5.3 :
QE3 Tapering ..


List of Boxes
Page
viii
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ix
CBN Monetary Policy Review
CBN Monetary Policy Review
STATEMENT BY THE GOVERNOR
The monetary Policy environment in the review period was benign with continued
moderation in consumer price inflation to single digit, indicating the effectiveness of
the sustained tight monetary policy stance of the Bank. This was against the
background of several key challenges including the announced QE3 tapering
policy by the US Federal Reserve Bank; anticipated increase in government
spending in preparation for the 2015 general elections; and the depletion of fiscal
buffers required to sustain exchange rate stability on account of slow accretion to
foreign reserves. Domestic output growth remained resilient in the face of a
weakening global economy; although some of Nigeria's major trading partners
including the US, Europe and China were gradually returning to a long-run growth
path. Accordingly, the thrust of monetary policy in the second half of 2013 remained
the sustenance of the relative price stability achieved in the first half of 2013.
The conclusion of the banking sector reforms afforded the MPC a clearer view of
financial stability to detect a creeping perverse incentive problem reflected in the
build-up in excess liquidity in the banking system, alongside sluggish growth in
private sector credit and rising cost of liquidity management; all traced to DMB's
appetite for government securities. Banks source huge amounts of public sector
deposits and lend same to the Government (through securities) and the CBN (via
OMO bills) at high rates of interest, thereby constricting the flow of funds to the real
economy. In order to address this, the MPC announced a discriminatory CRR system
for public and private sector deposits at the end of its regular meeting in July 2013.
While the CRR on private sector deposits remained at 12.0 per cent, that on public
sector deposits was raised to 50.0 per cent to address the effects of the buildup in
excess liquidity on the banking system as well as stem the pressure on the exchange
rate. Other policy measures were maintained. The decision of the Bank to retain,
most of the policy measures that prevailed in the first half of 2013, was to allow the
effects of previous policy actions to permeate through the economy, as well as
promote better anchoring of inflation expectations by economic agents.
The outcome of policy measures was satisfactory and justified the investment in
liquidity management. The performance of monetary aggregates was largely
below indicative benchmarks for the period indicating the impact of tight monetary
policy in controlling system liquidity. The naira exchange rate continued to enjoy
relative stability as evidenced by the slight appreciations in the official and
interbank rates, and modest depreciation at the BDC segment. However, the
strategic intervention of the Bank in the foreign exchange market including the reintroduction of the retail Dutch Auction System (rDAS) helped in stabilizing the
market. Market real interest rates remained positive, against the backdrop of
moderating inflationary pressures which sustained the flow of investment into the
economy.
Emerging signals from both the international and domestic environments suggest a
clouded fiscal and external sector outlook in the near to medium term but the
monetary authority would continue to proactively respond to the various
challenges with a view to fostering a stable and robust macroeconomic
environment.
Godwin I. Emefiele
Governor,
Central Bank of Nigeria.


CBN Monetary Policy Review

CHAPTER ONE

1.0
OVERVIEW
Onetary policy in the first half
of 2014 aimed at addressing
price stability with specific
focus on anchoring inflation within the
single digit range. The policy stance
was tight with a view to addressing the
rising inflation trend. Headline Inflation
was
upward
ticking,
fluctuating
between 8.0 and 8.2 per cent in
January
and
June,
respectively.
Inflation was driven mostly by rising
food prices due to insurgencies in
some northern parts of the country. The
exchange
rate,
which
faced
considerable pressure, was moderated
by the tight policy stance throughout
the period under review. While there
were concerns about the possibility of
a slowdown and perhaps capital
reversal due to rising sovereign risk and
QE3 tapering, external reserves in the
first half of 2014 remained relatively
stable. It however, recorded a slight
dip at end-June 2014, compared with
the end-December 2013 level. Overall,
the
financial
markets
remained
generally stable, with spreads between
lending and deposit rates remaining
fairly
constant.
A
mix
of
policy
instruments were employed to address
price and financial system stability, with
a
view
to
strengthening
investor
confidence and thus, undermining the
impact of rising sovereign risk.

The primary policy instrument adopted
to achieve these objectives was the
Monetary
Policy
Rate
(MPR),
complemented with a mix of other
intervention
instruments.
The
intervention
Instruments
included;
Open
Market
Operations
(OMO),
Discount Window Operations, Cash
Reserve
Ratio
(CRR)
and
Foreign
Exchange Net Open Position (NOP).
During the period, MPR remained
constant at 12.0 per cent with a
symmetric corridor of +/- 200 basis
points around the MPR. The CRR for
both private and public sector deposits
was increased from 12.0 and 50.0 per
cent to 15.0 and 75.0 per cent,
respectively, in order to address the
liquidity surfeit in the banking system.

In
the
period
under
review,
the
National Bureau of Statistics (NBS)
rebased
and
revised
the
Gross
Domestic Product (GDP) from 1990 to

basic
prices.
The
rebasing
identified a total of 46 economic
activities
from
the
previous
21,
categorizing them under five broad
sectors
(Agriculture,
Industry,
Construction, Trade, and Services).
Following the rebasing, real GDP for
2013 was N63.2 trillion (Nominal GDP of
80.2
trillion).
Economic
growth
remained resilient in the first and
second quarters of 2014, with real GDP
growth rates of 6.21 and 6.54 per cent,
respectively, (down from 6.77 per cent
in quarter four of 2013). The non-oil
sector remained the major driver of
growth, rising by 8.21 and 6.71 per
M


CBN Monetary Policy Review

cent, respectively, in the first and
second quarters of 2014. Services,
Agriculture and Trade were the major
contributors to the non-oil sector GDP,
as
Industry
and
Construction
contributed marginally. The overall
increasing contribution of the Services
sector to total real GDP signalled a
diversification of the economy from the
agricultural and oil sectors.

Liquidity management by the Central
Bank was conducted mainly by using
OMO to mop up liquidity from or inject
liquidity into the system. In January
2014, there was a general decline in
interest rates due to injections into the
system
arising
from
maturity
of
government securities. In the period
under review, the economy continued
to experience fluctuations in liquidity
levels. The CRR was used to address
these
liquidity
issues
in
order
to
smoothen the liquidity cycle. The trend
in monetary aggregates, in general,
reflected the effects of the continued
tight monetary policy stance of the
Bank during the review period. Reserve
money and its components trended
downwards relative to their volume in
the second half of 2013. Both Broad
and Narrow measures of money supply
were slightly upward trending relative
to the end-December 2013 values. The
development reflected the liquidity
surfeit attributable to cyclical Federal
Account Allocation Committee (FAAC)
allocations and increased spending as
a
build-up
to
the

general
elections.
The money market remained largely
calm during the period. The Interbank
Call and Open Buy Back (OBB) rates
remained within the +/-200 basis points
corridor, with rates oscillating around
the lower band of the policy rate. Even
though the OBB market was quite
active
during
the
period,
OMO
dominated activities in the money
market as it was the most used
instrument. Despite the occasional
spikes
experienced
in
the
daily
Nigerian
Interbank
Offered
rates
(NIBOR)
that
reflected
periods
of
liquidity tightness, overall, the rate was
mostly stable within the period. The
Capital
Market
continued
to
demonstrate robustness In spite of
anticipated portfolio capital reversal
attributed to QE3 tapering as all
market indices showed positive trends,
compared with both the first and
second halves of 2013. The All Share
Index (ASI), the major indicator of
equity market capitalization in Nigeria,
grew by 2.8 and 17.5 per cent, when
compared with the end-December

and
end-June

levels,
respectively. Transactions in the fixed
income
securities
market
was
dominated by Federal Government of
Nigeria
(FGN)
Bonds
with
fewer
transactions
observed
in
the
State/Local
Government
and
Corporate Bond segments of the
market. On the global stage, financial
markets remained relatively calm with
concerns of capital reversal from the
frontier and emerging markets to the
developed markets, as QE3 tapering


CBN Monetary Policy Review

gained ground. In the period under
review, the exchange rates of major
international currencies experienced
mild
fluctuations
while
regional
currencies such as the Ghanaian cedi,
Kenyan shilling, the South African rand
and
the
Egyptian
pound
also
experienced relative fluctuations.

The outlook for inflation is projected to
remain stable and within single-digit in
the
near
term,
hinged
on
developments in the food component.
Headline
inflation
is
projected
to
oscillate around 8.4 and 8.1 per cent
at
the
end
of

and
2015,
respectively. This outlook is based on
the assumption that the Bank will
continue to pursue a tight monetary
policy stance and the pump price of
Premium Motor Spirit (PMS) remains
stable.

Output growth in quarter four of 2013
was 6.77 per cent. This is projected to
rise to 6.8 per cent in 2014 but slow to
6.7 per cent in 2015. The International
Monetary Fund (IMF), however, has a
more optimistic output forecast of 7.1
and 7.0 per cent in 2014 and 2015
respectively.
This
is
against
the
backdrop
of
emerging
global
developments,
security
and
infrastructural issues. The IMF’s optimism
is based on anticipated improvements
in power supply and infrastructure
following the on-going reforms.


CBN Monetary Policy Review

CBN Monetary Policy Review

CHAPTER 2

2.0
OUTPUT IN THE DOMESTIC
ECONOMY

he National Bureau of Statistics
(NBS) released the 2010 GDP
figures, rebased and revised
from their 1990 basic prices. With 1990
as the base year, the relative price
level had become progressively less
representative of current economic
conditions, necessitating the need to
update the base year to a more
recent period. The primary reasons for
rebasing were the changing structure
of the economy, consumption pattern
and
change
in
domestic
prices
between 1990 and 2014. The rebasing
resulted in an increase of economic
activities from 21 to 46 across five
broad
sectors,
namely
Agriculture,
Industry,
Construction,
Trade,
and
Services).

Real GDP grew at 6.21 per cent in Q1
2014, up from 4.45 per cent recorded
in the corresponding quarter of 2013,
but lower than 6.77 per cent recorded
in Q4 2013. The decrease in growth
rate recorded in Q1 2014, compared
with Q4 2013, was due to the decline in
the relative contributions of industry,
trade and services from 0.81, 1.28 and
3.44 per cent to 0.65, 1.09 and 2.73 per
cent,
respectively.
However,
the
sectors that led growth in Q1 2014
were services, industry, agriculture and
trade, with their total share of 36.28,
22.66, 19.65 and 17.35 per cent,
respectively,
with
construction
contributing just 4.06 per cent.

In Q2 2014, real GDP growth rate was
6.54 per cent, higher than 5.40 per
cent recorded in the corresponding
quarter of 2013 and 6.21 per cent
recorded in Q1 2014. In the second
quarter, the services sector was the
largest contributor to real GDP (53.15
per cent), followed by industry (25.96
per cent) and agriculture (20.89 per
cent). The slowdown in the growth rate
of real GDP relative to the Q4 2013
figure of 6.77 per cent was partly
attributable
to
the
decline
in
contribution of agriculture primarily
due to threats of insurgency in the
North-east of the country. On an
annual basis, real GDP grew at 5.49 per
cent in 2013, 4.21 per cent in 2012 and
5.31 per cent in 2011.

2.1
Domestic Economic Activities

Domestic output growth remained
resilient despite weak and sluggish
recovery in the global economy.

The non-oil sector remained the major
driver of growth. It grew by 8.21 per
cent in Q1 2014, compared with 8.78
per cent in Q4 2013 and 7.44 per cent
in Q1 2013. Growth in this sector
however declined to 6.71 per cent in
the
second
quarter
of
2014,
representing a 2.17 per cent decline
compared with the corresponding
quarter of 2013. Although the non-oil
sector posted positive growth rates in
T


CBN Monetary Policy Review

the first half of 2014, the growth rate of
6.71 per cent in Q2 2014 was less than
the level of 8.21 per cent in Q1 2014.

Relative to the non-oil sector, oil
refining declined in output by 15.23
and 6.75 per cent in Q1 and Q2 2014
respectively. This development can be
attributed
in
part
to
oil
pipeline
vandalism and increased contribution
of other sectors such as services to
overall output.

In terms of contribution to the non-oil
real GDP in the first quarter 2014, the
services sector contributed 41.15 per
cent, agriculture 22.29 per cent, trade
19.68 per cent, industry 12.28 per cent
and construction 4.61 per cent. The
increased contribution of the services
sector to total real GDP in Q1 2014,
demonstrated a diversification from
the oil economy. The contribution of
the services sector to the non-oil
sector, however, declined from 41.51
per cent in Q4 of 2013 to 41.15 per
cent in Q1 2014 (Figure 2.1).

In
Q2
2014,
crop
production
contributed 18.55 per cent to the total
non-oil real GDP followed by trade,
telecommunications and real estate
with shares of 16.77, 9.25 and 7.87 per
cent, respectively.


Figure
2.1:
Non-Oil
Sector
Performance,
2014Q1and 2013Q4


2.2
Sectoral Analysis

The following section analyses the
performance of each sector, and
highlights key institutional factors that
influenced output in the period under
review.

2.2.1
Agriculture

In the rebased GDP, agriculture was
displaced to the third position by the
services
and
industrial
sectors.
Nonetheless, the sector remained a
major driver of economic activity in
terms of provision of employment,
staples and raw materials for the
industrial sector. Its share of total GDP
however declined from 24.39 per cent
in Q4 2013 to 19.65 per cent in Q1 2014,
rising to 20.89 per cent in Q2 2014.
Compared with the 1990 base year,
the agricultural sector’s share of GDP
declined from an average of 40.0 per
cent to an average of 20.00 per cent
in the 2010 base year.


Per cent
2013 Q4
2014 Q1


CBN Monetary Policy Review

2.2.1.1
Agricultural Production and
Food Prices

Agricultural output in the first half of

was
dominated
by
the
production of crops such as maize and
yam
in
the
southern
states
and
livestock
farming
and
off
season
harvesting in the northern states. In Q1
2014, crop production contributed
17.12 per cent, livestock 1.72 per cent,
forestry 0.24 per cent and fishing 0.58
per cent (Figure 2.2). In Q2 2014, the
contribution of crop production and
forestry rose to 18.55 per cent and 1.56
per cent, respectively, while livestock
and fishing declined to 1.56 per cent
and 0.53 per cent, respectively. Fishing,
forestry and livestock with marginal
contributions to real GDP, require
intensified
efforts
including
more
incentive schemes and institutional
support programmes to boost the
performance of the sector. Livestock
production in particular, was adversely
affected by the insurgency in some
parts of the Northern region that led to
the
displacement
of
some
cattle
rearers resulting in disruption of some
cattle rearing activities.

Figure 2.2: Agricultural Sector Contribution by
Activity, 2013Q1 – 2014Q2

2.2.1.2
Agricultural
Policies
and
Institutional Support

The performance of the sector was
enhanced by a number of policies,
reforms and institutional support.


The
Agricultural
Credit
Guarantee
Scheme
(ACGS):
Between January and June
2014, the scheme guaranteed
35,413 loans valued at N5.928
billion.


N200
Billion
Commercial
Agricultural
Credit
Scheme
(CACS): Between April and
June 2014, a total of N6.192
billion was disbursed to six
banks to fund eleven projects.


N200
Billion
SME
Credit
Guarantee Scheme (SMECGS):
Between April and June 2014,
four
projects
valued
at
N155.234
million
were
supported under the scheme.

2.2.2
Industry

The industrial sector retained the
second position in terms its contribution
to GDP in the 2010 base year similar to
the 1990 base year. The index of
industrial production, which measures
the output of businesses integrated
within the industrial sector of the
economy, namely crude petroleum
and natural gas, solid minerals and
manufacturing, grew by 1.12 per cent

Q1-2013 Q2-2013 Q3-2013 Q4-2013 Q1-2014 Q2-2014
Per Cent
Crop Production
Livestock
Forestry
Fishing


CBN Monetary Policy Review

in the first quarter of 2014 compared
with the corresponding quarter in 2013.
The increase was attributed to relative
increase in the supply of electricity
during the review period.

2.2.2.1
Industrial Production and Output

Industry contributed a total of 22.66
per cent to total GDP in Q1 2014,
declining to 21.07 per cent in Q2 2014.
A Sub-Sectoral analysis of output in Q1
2014 showed that crude petroleum
and natural gas, solid minerals and
manufacturing contributed 11.83, 0.15
and 10.68 per cent, respectively. In Q2
2014,
their
contribution
declined
marginally;
crude
petroleum
and
natural gas 10.76 per cent, solid
minerals
0.14
per
cent,
and
manufacturing 10.16 per cent. Solid
minerals performed the least in the
sector (coal mining 0.01 per cent in
both quarters; metal ores 0.01 per cent
in both quarters; and other minerals
0.13 and 0.12 per cent in the first and
second quarters, respectively).

The development is indicative of the
need for considerable investment and
skills acquisition in the solid minerals
sub-sector, in order to harness its
potentials and improve its contribution
to the overall economy.


Figure 2.3: Industrial Sector Contribution by
Activity, 2013Q1 – 2014Q2


The
manufacturing
sub-sector
contributed 10.68 per cent to total
GDP. A total of thirteen activities
contributed to the output of the subsector with Food, Beverages and
Tobacco; and Textiles, Apparels and
footwear dominating (figure 4).

Figure
2.4:
Manufacturing
Sub-Sector
Contribution by Activity, 2013Q1 – 2014Q2


2.2.2.2 Industrial Policy and Institutional
Support

The performance of the sector during
the
period
benefited
from
the
continuation of a number of reforms
and incentives. These include:


Q1-2013
Q2-2013
Q3-2013
Q4-2013
Q1-2014
Q2-2014

Per cent
Q4-2013
Q1-2014
Q2-2014


CBN Monetary Policy Review

N300 Billion Power and Airline
Intervention Fund (PAIF): The
PAIF was instituted as a means
of addressing the continued
nationwide shortage of power
supply
and
the
weak
infrastructural capacity of the
airline industry. A total sum of
N500 billion was approved by
the Monetary Policy Committee
in 2010 for investment in the
securities of the Bank of Industry
(BoI). 60.0 per cent of the fund
was
scheduled
to
finance
infrastructure in the power and
airline
industry,
while
the
balance was targeted at SME
restructuring.


N200 Billion SME Restructuring/
Refinancing Fund (RRF): The
Central
Bank
of
Nigeria
established
the
scheme
in
March 2010 to refinance and
restructure banks’ existing loan
portfolio to manufacturers in
line with FSS 2020 SME financing
target of 20.0 per cent total
credit to the economy.


Other incentives and reforms
include:
o
Foreign
investors
and
industries are granted 30.0
per cent tax concession for
five years for minimum local
raw materials utilization as
follows: agro 80.0 per cent,
agro
allied
and
petrochemical
70.0
per
cent each;

o
25.0 per cent concession of
the cost of providing basic
infrastructure such as roads,
water and electricity;

o
Dividends
derived
from
manufacturing companies
in
petro-chemicals
and
liquefied natural gas subsector are tax-exempt;

o
Dividend from companies in
the manufacturing sector
with turnover of less than
N100 million is tax-free for
the first five years;

o
Right of access to the court
for the determination of
investor’s interest and the
amount of compensation
to which the investor is
entitled;

o
All areas of investment in
the
energy
sector
are
considered to be of pioneer
status and as a result there
is tax holiday of 5 to 7 years
; and

o
Provision for 100.0 per cent
foreign ownership of mining
companies and concerns.


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2.2.3
Construction and Trade

2.2.3.1 Construction

The sector’s contribution to the broad
performance of the overall economy
was modest with 4.06 per cent in Q1
2014, rising to 4.32 per cent in Q2 2014.
However, the sector grew by 17.88 per
cent in Q1 2014 but slowed to 10.70 per
cent in Q2 2014 compared with growth
rates of 15.13 and 14.67 per cent in Q4
2013 and Q1 2013, respectively.

2.2.3.2. Trade

Trade continued to be a key sector in
the economy, contributing 17.35 per
cent to total real GDP in Q1 2014 and
16.77 per cent in Q2 2014 compared
with 16.36 and 17.34 per cent in Q4
2013 and Q1 2013, respectively. The
sector grew by 6.28 and 5.15 per cent
in Q1 2014 and Q2 2014, respectively.
The slight decline in the rate of growth
in Q2 2014 was due to seasonal
factors. Growth in the sector could be
enhanced by improvements in the
performance of other sectors.

2.2.4
Services Sector

The
services
sector
became
the
largest sector in the rebased GDP
displacing agriculture, which used to
be the leading sector, to the third
place. The development reflected the
transformation that had taken place
between 1990 and 2010. The sector’s
share in the real GDP were 36.28 per
cent in Q1 2014 and 36.95 per cent in
Q2 2014. The services sector, which
had 8 sub-sectors in the 1990 base
year, now has 13 sub-sectors with 22
economic activities. The sector grew
by 7.62 and 6.82 per cent in Q1 2014
and Q2 2014, respectively, compared
with 17.98 per cent in Q4 2013. The
performance of the key sub-sectors in
the services sector are presented in
figure 2.5.

Figure 2.5: Services Sub-Sector Contribution,
2013Q1 – 2014Q2


2.2.5
Oil Sector

The share of crude oil petroleum and
natural gas declined from an average
of about 20.0 per cent of the real GDP
in the 1990 base year to an average of
11.0 per cent in the 2010 base year. On
a quarterly basis, there was a marginal
decrease in oil production from 1.887
million barrel per day (bpd) in Q1 2014
to 1.880 million bpd in Q2 2014. The
sector, which contributed 11.83 and
10.76 per cent to the real GDP in Q1
and Q2 2014, respectively, declined by
6.6 per cent in Q1 2014 but grew by
5.14
per
cent
in
Q2
2014.
The

Per cent
Q4-2013
Q1-2014
Q2-2014


CBN Monetary Policy Review

development
was
due
to
illegal
bunkering, pipeline vandalism and oil
theft, among others. The stepped-up
efforts at curbing these anomalies by
the authorities as well as on-going
reforms, led to some recovery during
the review period.

Figure 2.6: Crude Oil Production 2013Q1 –
2014Q2


Oil prices (bonny light) declined slightly
between December 2013 and June
2014 from $114.64 per barrel to $114.36
per barrel, with major fluctuations over
the review period (see Figure 2.7).

Figure 2.7: Bonny Light Price Dec 2013 - June
2014 in US Dollars


Between January and June, 2014, the
average price of bonny light at $111.21
per barrel, was considerably higher
than the $103.10 per barrel, recorded
in the corresponding period of 2013.
The relatively high oil price boosted
foreign exchange receipt and the
overall
federation
revenue.
Consequently, higher levels of public
expenditure across the three tiers of
government was facilitated, thereby
accentuating the liquidity surfeit in the
banking system.


Q12013
Q22013
Q32013
Q42013
Q12014
Q22014
Per cent
Output

USDollars


CBN Monetary Policy Review

BOX 2.1
GDP REBASING AND THE NIGERIAN ECONOMY

The GDP is the monetary value of aggregate goods and services produced in a country
over a period of time, usually one year. The measurement of economic activities by
countries, captured by the Gross Domestic Product (GDP), is necessary for effective
planning with a view to improving the standard of living of the citizens. The GDP is a
measure of the current price and quantity of goods and services produced in an economy
over a period, with a specified base year. Over time, the base year becomes outdated
especially, when it is far removed from the current period owing to changes in prices and
economic activities and structural transformation. As a result, the GDP may no longer be a
true reflection of the size of the economy. To update the GDP requires a replacement of
the old base year with a more recent one - a process known as rebasing.

In 2014, Nigeria’s GDP was rebased from the 1990 to 2010 base year. The rebasing
estimated a much higher real GDP for Nigeria, upscaling it to N63.2tn (forecast) in 2013,
thereby making it the largest economy in Africa, while South Africa becomes the second.
The rebasing also revealed important changes in the composition and structure of
economic activities such as:

•
Stronger diversification of the Nigerian economy: The structure of the Nigerian
economy has changed significantly, leading to a decline in the share of agriculture
and a rise in that of Services in nominal GDP, indicating stronger diversification of
the Nigerian economy.

•
Better coverage of the Services sector: Economic activities in the services sector,
including human health & social services, information and communication as well
as professional, scientific and technical services have been better captured.

•
Inclusion of new economic activities: New activities such as entertainment,
research, patents and copyrights, among others, have been included in the
rebased GDP.

Why Did Nigeria Rebase?
The exercise is necessary for the following reasons;
(i)
To obtain more accurate and updated estimates of the size and structure of the
economy;
(ii)
To provide policy makers and analysts with a better reflection of current realities in
the economy for enhanced evidence-based decision-making;
(iii)
To provide better understanding of the structure of the economy and its sectoral
drivers, with a view to identifying investment opportunities and resource allocation
that facilitate growth and development;
(iv)
To correct distortions posed by the use of outdated base year and fixed base
method of computing constant price GDP in Nigeria.


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Implications of GDP Rebasing for the Nigerian Economy
Rebasing Nigeria’s GDP has policy implications for various sectors of the economy. Some of
the implications are highlighted below:

Fiscal Sector
The rebased GDP has resulted in a lower ratio of tax revenue to GDP, and emphasized the
need to improve and intensify revenue collection across all tiers of government, to meet up
with increased government expenditure. In addition, the broader re-classification of
economic activities in the rebasing presents opportunities for expanding the tax revenue
base.

Growth Opportunities
The rebasing has highlighted sectors with huge growth potentials. The sectors include coal
mining, arts, entertainment and recreation, motion picture, sound recording and music,
telecommunications and information services, among others. Governments, investors and
other economic agents are therefore provided with improved information regarding the
investment opportunities that support economic growth, create jobs and improve
livelihood.

Financial Sector
The rebased figures can be used to compute a number of financial intermediation metrics.
For example, the ratio of SME Loans to GDP is now very low, and calls for improved access
to credit to further enhance growth and job creation. In addition, the rebasing of GDP is
expected to boost Nigeria’s financial market as the increased size and transformation of
the economy presents greater investment opportunities.

However, caution should be exercised in the interpretation and application of a number of
ratios derived from the rebased GDP. In general, some ratios tend to diminish, for example
M2/GDP, Credit to the Private Sector/GDP, Banking Sector Credit/GDP, SME/GDP and GDP
per capita which is still very low indicating the need to intensify effort in these areas. On the
contrary some ratios are exaggerated, suggesting that the indicators have improved. For
instance, after the rebasing, the ratio of public debt to GDP was significantly reduced from
16.79 per cent to 8.87 per cent in 2013. This may suggest there is room for more Government
borrowing, when in fact this may not be the case.


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BOX 2.2
Impact of Global Shale oil production on Nigeria

Oil Shale is a naturally occurring organic-rich sedimentary rock from which liquid
hydrocarbons called shale oil can be extracted. Shale oil is a substitute for conventional
crude oil. It is, however, more expensive to produce and has a higher environmental
impact than conventional crude oil. There is potential for shale oil (light oil) production to
spread globally in the long term as large deposits have been discovered in several
countries. Canada, Russia, China, Chile and some Middle Eastern countries etc. have
indicated interest in exploiting their shale oil resources. Increasing oil supply from shale
could likely reduce global demand for crude oil, resulting in a decline in oil price.

Net oil importers such as India, Japan, China, and the Eurozone would benefit from oil price
reductions, while trade balances of oil exporters such as Nigeria, the Middle East and Russia,
etc. could be adversely affected in the long run.

In Nigeria, oil export is the dominant source of public sector revenue and foreign exchange
earnings. The emergence of shale oil and gas is therefore, a threat to Nigeria’s economic
fortunes in the areas of export earnings, accretion to reserves, public finance and
macroeconomic stability. Currently, the increase in shale oil production has not translated
into significant changes in the price of Bonny Light.

However, China’s demand for Bonny Light and other African crudes has declined due to
higher stocks from shale oil production in the US Gulf Coast, cheaper crude from Latin
American producers (Venezuela, Brazil, Ecuador and Mexico, etc.) and higher freight rates
of Bonny Light compared with Dubai crude, which reflects geopolitical risks.

The U.S. has long been one of the major importers of oil from Nigeria, accounting for 40 per
cent of Nigeria’s exports and 9 - 11 per cent of the US total crude oil import. However, this
has changed as the Energy Intelligence Agency (EIA) of the United States has reported
significant decline in oil imports from Nigeria. From May 2013 to May 2014, US crude oil
imports from Nigeria fell by 70.2 per cent from 12.25 million to 3.65 million barrels per day.

Apart from its policy of reducing energy dependence, the projection for total U.S. oil
production increased from an estimated 7.4 million b/d in 2013 to 8.5 million b/d in 2014 and
9.3 million b/d in 2015, reflecting production growth from shale oil development. The growth
in U.S. domestic production has contributed to a significant decline in petroleum imports to
22 per cent of total U.S. liquid fuels consumption as at June 2014, from an average of 33 per
cent in 2013 and 60 in 2005 (EIA).


CBN Monetary Policy Review

CHAPTER 3

3.0
PRICE DEVELOPMENTS

nderlying inflationary pressures,
largely attributed to rising food
prices, resulted in an upward
trend in inflation rate in the first half of
2014. Following a decline from 8.0 per
cent in January, 2014 to 7.7 per cent in
February 2014, year-on-year headline
inflation inched up steadily to 8.2 per
cent in June 2014 (Figure 3.1). The
exchange rate remained relatively
stable over the period, with occasional
fluctuations in the BDC segment of the
foreign exchange market largely in
response to policy impulses.

Table 3.1: Inflation Rates, June 2013 – June

The domestic interbank money market
rates were well anchored within the
policy
rate
band
and
oscillated
around the lower limit of the corridor
during the review period, reflecting
liquidity surfeit in the banking system.


3.1
Trends in Inflation

The
Bank
maintained
its
tight
monetary policy stance during the
review period. This was with a view to
containing the expected increase in
spending
as
the

elections
approached and rising food prices
due to insurgency in some parts of the
Northern region of the country. The
core and food
measures
of the
Consumer Price Index (CPI) increased
from 153.30 and 155.50 in January to
157.40 and 161.90 in June 2014,
respectively. In effect, food inflation
exerted greater pressure on headline
inflation.
Consequently,
headline
inflation (year-on-year) rose to 8.20 per
cent in June from 8.00 per cent in
January 2014 (Table 3.1 and Figures 3.1
- 3.3).

Figure 3.1: Headline Inflation (June 2013-June
2014)


Food inflation continued to be the
major driver of headline inflation in the
first half of 2014. Other factors included
housing;
water;
electricity;
and
transport. Within the food measure of
inflation, processed food (year-onYear/
Month
CPI
Y-on-Y
12 MMA
CPI
Y-on-Y
12 MMA
CPI
Y-on-Y
12 MMA
Jun-13

Jul-13

Aug-13

Sep-13

Oct-13

Nov-13

Dec-13

Jan-14

Feb-14

Mar-14

Apr-14

May-14

Jun-14

Food Inflation
Core Inflation
Headline Inflation

Per cent
Headline Inflation Y-on-Y
U


CBN Monetary Policy Review

year) increased from 4.4 per cent in
January to 9.2 per cent in June 2014.

Figure 3.2: Consumer Price Index, Headline, Core
and
Food
(June
2013-June
2014)


Similarly, the contribution of meat to
food inflation increased marginally
from 0.86 per cent in January to 0.89
per cent in June 2014, while the
contribution of yam, potatoes and
other tubers decreased from 1.19 per
cent in January to 1.13 per cent in
June. The contribution of fish and sea
food to food inflation increased from
0.88 per cent in January to 0.96 per
cent in June.

Figure 3.3: Year-on-Year Headline, Core and
Food (June 2013-June 2014)


Core
inflation
(year-on-year)
accelerated to 8.10 per cent in June
2014 from 6.6 per cent in January 2014
(Figures 3.2. and 3.3). The continued
increase in core inflation in the first half
of 2014 was attributable mainly to
increases in energy costs.

3.1.2
Headline Inflation
Analysis of the major components of
headline inflation (year-on-year) reveal
that
food
and
non-alcoholic
beverages component exerted the
most pressure, as it rose from 4.79 per
cent in January to 5.06 per cent in
June 2014. This was followed by
housing, water, electricity, gas and
other fuel components, whose price
rose from 0.95 to 1.07 per cent in the
review period (Table 3.2 and Figure
3.4). Headline inflation was, however,
moderated by the declines in the
prices
of
clothing
and
footwear;
transport;
and
education
among
others in response to the tight liquidity
policy stance taken at the January
and March 2014 MPC meetings. For
instance, public sector CRR was raised
from 50.0 to 75.0 per cent in January
while private sector CRR was raised
from 12.0 to 15.0 per cent in March
2014 to rein in excess liquidity in the
system.

Table
3.2:
Selected
CPI
Components'
Contribution to Headline Inflation(Y-on-Y) JanJun 2014


Jun-13
Jul-13
Aug-13
Sep-13
Oct-13
Nov-13
Dec-13
Jan-14
Feb-14
Mar-14
Apr-14
May-14
Jun-14
Per cent
Headline
Core
Food

Jun-13
Jul-13
Aug-13
Sep-13
Oct-13
Nov-13
Dec-13
Jan-14
Feb-14
Mar-14
Apr-14
May-14
Jun-14
Per cent
Headline Y-on-Y
Core Y-on-Y
Food Y-on-Y
Date
Headline
Food & NonAlcoholic
Bev.
Housing,
Water,Eletricity,
Gas & Other
fuel
Clothing &
Footwear
Transport
Furnishings,H
H,Equip.& HH
Maint.
Education
Jan. 14

Feb. 14

Mar.-14

Apr.-14

May.-14

Jun.-14


CBN Monetary Policy Review

Figure
3.4:
Selected
CPI
Components'
Contribution to Headline Inflation(Y-on-Y) JanJun 2014


Table
3.3:
Selected
CPI
Components'
Contribution to Headline Inflation (M-on-M) JanJun 2014


Headline inflation (month-on-month)
also maintained an upward trend from
0.64 per cent in January to 0.77 per
cent
in
June
2014.
The
major
components
of
headline
inflation
(month-on-month) continued to be
food and non-alcoholic beverages;
and housing, water, electricity, gas
and other fuel, with price increases
ranging from 0.31and 0.60 per cent to
0.53 and 0.14 per cent, respectively
(Table 3.3 and Figure 3.5).

Figure
3.5:
Selected
CPI
Components'
Contribution to Headline Inflation (M-on-M) JanJun 2014


3.1.2
Food Inflation

During
the
review
period,
food
inflation
(year-on-year)
consistently
trended upward from 9.30 per cent in
January to 9.78 per cent in June.
Processed food was the main driver of
food
inflation,
and
fluctuated
significantly, ranging from 4.40 per cent
in January to 9.18 per cent in June. Fish
and sea food was the next major
contributor to food inflation, fluctuating
between 0.88 per cent in January and
0.96 per cent in June. The prices of
vegetables; yam, potatoes and other
tubers; and farm produce, however
maintained a downward pressure on
food inflation as the raining season set
in with price declines from 1.02, 4.10
and 1.19 per cent in January to 0.99,
0.59 and 1.13 per cent in June 2014,
respectively (Table 3.4 and Figure 3.6).


Jan. 14
Feb. 14
Mar.-14
Apr.-14
May.-14
Jun.-14
Per cent
Headline
Food & Non-Alcoholic Bev.
Housing, Water,Eletricity, Gas & Other fuel
Clothing & Footwear
Transport
Furnishings,HH,Equip.& HH Maint.
Date
Headline
Food & NonAlcoholic
Bev.
Housing,
Water,Eletricity,
Gas & Other
fuel
Clothing &
Footwear
Transport
Furnishings,
HH,Equip.&
HH Maint.
Education
Jan. 14

Feb. 14

Mar.-14

Apr.-14

May.-14

Jun.-14

Jan. 14
Feb. 14
Mar.-14
Apr.-14
May.-14
Jun.-14
Clothing & Footwear
Transport
Furnishings,HH,Equip.& HH Maint.
Education
Headline
Food & Non-Alcoholic Bev.


CBN Monetary Policy Review

Table
3.4:
Selected
CPI
Components'
Contribution to Food Inflation (Y-on-Y), Jan-Jun

Figure
3.6:
Selected
CPI
Components'
Contribution to Food Inflation(Y-on-Y) Jan-Jun

Food
inflation
(month-on-month)
during the review period reflected a
similar pattern to its year-on-year trend
though to a lower degree. The major
components
responsible
for
the
upward trend in food prices on monthon-month basis were farm produce;
yams, potatoes and other tubers which
rose from 0.10 and 0.11 per cent in
January to 0.39 and 0.12 per cent in
June
2014,
respectively.
The
development
was,
however,
moderated
by
the
indices
of
processed food; fish and sea food; and
vegetables that experienced price
declines from 0.70, 0.12 and 0.11 per
cent in January to 0.43, 0.08 and 0.8
per cent in June 2014, respectively
(Table 3.5 and Figure 3.7).

Table
3.5:
Selected
CPI
Components'
Contribution to Food Inflation (M-on-M) Jan-Jun

Figure
3.7:
Selected
CPI
Components'
Contribution to Food Inflation (M-on-M) Jan-Jun

3.1.3
Core Inflation

Core
inflation
(year-on-year)
also
exhibited an upward trend as it rose by
1.52 percentage points from 6.6 per
cent in January to 8.12 per cent in
June 2014. The price of all the major
components of core inflation year-onyear (housing, water, electricity, gas
and other fuel; transport; furnishing,
household
equipment
and
maintenance; clothing and footwear;
Food
Processed
Food
Fish and
Sea Food
Meat
Vegetables
Yams,
Potatoes &
other
Tubers
Farm
Produce
Jan. 14

Feb. 14

Mar.-14

Apr.-14

May.-14

Jun.-14

Jan. 14
Feb. 14
Mar.-14
Apr.-14
May.-14
Jun.-14
Per cent
Food
Processed Food
Fish and Sea Food
Meat
Vegetables
Yams, Potatoes & other Tubers
Farm Produce
Date
Food
Processed
Food
Fish and
Sea Food
Meat
Vegetables
Yams,
Potatoes &
other Tubers
Farm
Produce
Jan. 14

Feb. 14

Mar.-14

Apr.-14

May.-14

Jun.-14

Jan. 14
Feb. 14
Mar.-14
Apr.-14
May.-14
Jun.-14
Per cent
Food
Processed Food
Fish and Sea Food
Meat
Vegetables
Yams, Potatoes & other Tubers
Farm Produce


CBN Monetary Policy Review

education;
and
processed
food)
contributed significantly to the steady
increase recorded from January to
June except in March, where there
was a decrease of 0.4 percentage
point (Table 3.6 and Figure 3.8).

Processed food recorded the highest
price decrease of 1.90 percentage
points from 4.6 per cent in February to
2.70 per cent in March, but thereafter
trended upward and ended the half
year on 3.21 per cent at end-June
2014. Housing, water, electricity, gas
and other fuel component recorded
price increase of 0.43 percentage
point in the review period.

Table
3.6:
Selected
CPI
Components'
Contribution to Core Inflation (Y-on-Y) Jan-Jun

Figure
3.8:
Selected
CPI
Components'
Contribution to Core Inflation (Y-on-Y) Jan-Jun

Table
3.7:
Selected
CPI
Components'
Contribution to Core Inflation (M-on-M) Jan-Jun

On a month-on-month basis, core
inflation shared a similar trend as its
year-on-year counterpart. For instance,
core inflation (month-on-month) rose
persistently from 0.20 per cent in
January to 0.66 per cent in June, 2014.
Processed food continued to be the
major driver of upward pressure in core
inflation, followed by housing, water,
electricity,
gas
and
other
fuel
component (Table 3.7 and Figure 3.9).

Figure
3.9:
Selected
CPI
Components'
Contribution to Core Inflation (M-on-M) Jan-Jun

3.1.4
Moving Averages of Inflation

The headline, core and food inflation
measures on twelve-month moving
average
(12MMA)
basis,
exhibited
opposite trend when compared with
Date
Core
Housing,
Water,Eletri
city, Gas &
Other fuel
Transport
Furnishings,
HH,Equip.&
HH Maint.
Clothing &
Footwear Education
Processed
Food
Jan. 14

Feb. 14

Mar.14

Apr.-14

May.14

Jun.14

Jan. 14
Feb. 14
Mar.14
Apr.-14
May.14
Jun.14
Per cent
Core
Housing, Water,Eletricity, Gas & Other fuel
Transport
Furnishings,HH,Equip.& HH Maint.
Clothing & Footwear
Education
Processed Food
Core
Housing,
Water,Eletrici
ty, Gas &
Other fuel
Transport
Furnishings,
HH,Equip.&
HH Maint.
Clothing &
Footwear
Education
Processed
Food
Jan. 14

Feb. 14

Mar.14

Apr.14

May.14

Jun.14

Jan. 14
Feb. 14
Mar.14
Apr.14
May.14
Jun.14
Per cent
Core
Housing, Water,Eletricity, Gas & Other fuel
Transport
Furnishings,HH,Equip.& HH Maint.
Clothing & Footwear
Education
Processed Food


CBN Monetary Policy Review

the
year-on-year
basis
between
January and June 2014 (Table 3.10 and
Figure 3.10). The headline inflation on
12MMA basis consistently showed a
downward trend from 8.4 per cent in
January to 8.0 per cent in June 2014.
Similarly, core inflation on 12MMA basis
maintained a downward trend from
7.30 per cent in January to 7.0 per cent
in February through April, before rising
to 7.4 per cent in June 2014.

Food
inflation
on
12MMA
basis
remained fairly stable with a slight
decline of 0.10 percentage point in the
first half of 2014. It declined marginally
from 9.60 per cent in January to 9.40
per cent in April and May before rising
to 9.50 per cent in June 2014. Food
inflation was the main driver of the
headline inflation in both year-on-year
and twelve-month moving average
bases
(Figures
3.11
-
3.13).
The
downward trend in all measures of
inflation under the 12MMA basis was
due to the waning effect or base
effect as well as tight monetary policy
measures in the review period.

Figure
3.10:

Months
Moving
Averages,
Headline, Core and Food (June 2013-June 2014)


Figure 3.11: Actual Headline Inflation and Its 12
Month Moving Averages (MMA), June 2013 –
June 2014


Figure 3.12: Actual Core Inflation and Its 12
Month Moving Averages (MMA), June 2013 –
June 2014


Figure 3.13: Actual Food Inflation and Its 12
Month Moving Averages (MMA), June 2013 –
June 2014


3.1.4
Seasonally-Adjusted Inflation

The actual headline inflation and
seasonally-adjusted headline inflation

Jun.13
Jul.13
Aug.13
Sep.13
Oct.13
Nov.13
Dec.13
Jan.14
Feb.14
Mar.14
Apr.14
May.14
Jun.14
Per cent
Headline 12 MMA
Core 12 MMA
Food 12 MMA

Jun.13
Jul.13
Aug.13
Sep.13
Oct.13
Nov.13
Dec.13
Jan.14
Feb.14
Mar.14
Apr.14
May.14
Jun.14
Per cent
Headline Inflation Actual
Headline Inflation 12 MMA

Jun.13
Jul.13
Aug.13
Sep.13
Oct.13
Nov.13
Dec.13
Jan.14
Feb.14
Mar.14
Apr.14
May.14
Jun.14
Per cent
Core Inflation Actual
Core Inflation 12 MMA

Per cent
Food Inflation Actual
Food Inflation 12 MMA


CBN Monetary Policy Review

trended downwards, with the latter
either the same or consistently lower
than the former in most of the first half
of 2014 (Table 3.8 and Figure 3.14).
Earlier in the review period, both actual
and
seasonally-adjusted
inflation
showed downward trends between
January and February 2014 (extending
to
March
for
seasonally-adjusted
inflation), indicating the continued
impact of tightness of the monetary
policy stance. In April, May and June,
actual inflation was consistently higher
than
seasonally-adjusted
inflation,
reflecting the increased consumption
expenditures associated with the series
of religious holidays (for Muslims and
Christians) and World Economic Forum
events.

Table 3.8: Actual and Seasonally Adjusted
Headline Inflation Jan-Jun 2014


Figure 3.14: Actual and Seasonally Adjusted
Headline Inflation Jan-Jun 2014


3.3
Key Factors that Influenced the
Domestic Price Level

The year-on-year headline and core
measures of inflation were sustained at
single digit level, though there was an
upward trend in food inflation during
the first half of 2014 compared with the
preceding half year. The period also
witnessed a gradual uptick in the rate
of inflation from February to June 2014
which reinforced the need for a
sustained tight monetary policy. These
developments were attributed to both
domestic and global economic and
financial conditions, including excess
liquidity,
agricultural
output
and
distribution bottlenecks in the North
Eastern part of the country, among
others.

3.3.1
Demand-Pull Factors

The injection of funds subsequent to
the approval of the 2014 budget, the
increased pre-elections spending and
additional spending due to security
concerns exerted upward pressure on
domestic prices.

In addition, the relatively high oil prices
experienced during the review period
boosted overall federation revenues
and supported higher levels of public
expenditure across the three tiers of
government. These factors contributed
to increased demand, which helped
fuel inflation.


Date
Inflation
SA Inflation
Jan. 14
8.00
8.00
Feb. 14
7.70
7.90
Mar.14
7.80
7.80
Apr.14
7.90
7.80
May.14
8.00
7.90
Jun.14

Jan. 14 Feb. 14 Mar.14 Apr.14 May.14 Jun.14
Per cent
Inflation
SA Inflation


CBN Monetary Policy Review

3.3.2. Cost-Push Factors
In
the
first
half
of
2014,
the
contribution
of
agricultural
output
dropped
relative
to
the
previous
period. In addition to the decline in
agricultural
output,
the
incessant
security
challenges
hampered
effective distribution of agricultural
products, accentuating higher food
prices.

The pricing in by economic agents of
risk associated with the anticipated
upward review of tariffs on imported
cars that had been scheduled to take
effect from July 1, 2014, further exerted
upward pressure on domestic prices.
Additional factors include high cost of
imported
factor
inputs
and
the
widening
premium
between
the
official, interbank and BDC exchange
rates.

3.3.3
Moderating Factors
The
main
moderating
factor
to
domestic prices in the first half of 2014
was the continued tight monetary
policy stance of the Bank. In addition,
ongoing government reforms aimed at
stimulating real sector activities and
other incentives for micro small and
medium
scale
enterprises
(MSMEs)
helped to lower industrial costs. The
construction
of
new
roads
and
improvement in the nationwide supply
of fuel tempered energy costs, and
had
salutary
effect
on
price
development.


CBN Monetary Policy Review

Chapter Four

4.0
MONETARY
POLICY
AND
LIQUIDITY MANAGEMENT

he
conduct
of
monetary
policy in the first half of 2014
was underpinned by concerns
on issues such as uncertainties
in the global economy, especially
arising from the commencement of
the QE3 tapering by the Fed; emerging
challenges to monetary policy and
slowing output growth in emerging
markets that portend risks to both
financial system and price stability in
the
domestic
economy.
On
the
domestic
front,
while
stability
in
exchange rate was sustained and
inflation largely remained in the singledigit target, concerns for monetary
policy during the period included
depletion of fiscal buffers following the
continuing decline in oil revenue,
rundown of reserves and depletion of
excess crude oil savings. Portfolio and
FDI inflows were on the downward
trend with widening gap between the
official and the BDC exchange rates.

These developments, coupled with the
desire
to
consolidate
on
the
achievements of price and exchange
rate stability informed monetary policy
decisions in the second half of 2014.


4.1.
Highlights of Monetary Policy
Measures
The Bank largely maintained its tight
monetary policy stance during the first
half of 2014 as it retained the MPR at
12.0 per cent, with a corridor of +/-200
basis points around the MPR during the
period. At its January 2014 meeting,
the Monetary Policy Committee (MPC)
raised public sector CRR from 50 to 75
per cent. The decision was predicated
on the need to limit excessive reliance
on external reserves to support the
exchange rate by reining in on liquidity
through further monetary tightening
until fiscal buffers are rebuilt. In its
meeting of March 2014, the MPC,
opted
for
further
tightening
of
monetary
policy,
considering
the
commencement
of
uptick
in
the
inflation rate; the need to maintain
exchange rate stability; the potential
headwinds in 2014; the ultimate goal of
transiting to a truly low – inflation
environment; and the need to retain
portfolio
flows.
The
Committee
consequently
raised
the
CRR
on
private sector deposits by 300 basis
points to 15 per cent.

4.2. Decisions of the Monetary Policy
Committee

4.2.1
January 2014 MPC meeting

The
Monetary
Policy
Committee
(MPC) was delighted at the sustained
stability of the exchange rate and
single digit inflation in 2013. However,
T


CBN Monetary Policy Review

the concerns for policy in the short to
medium-term included the depletion
of
fiscal
buffers
following
the
continuing decline in oil revenue,
rundown of reserves and depletion of
excess
crude
oil
savings;
falling
portfolio and foreign direct inflows;
widening gap between the official
and the BDC exchange rates; and
creeping increase in core inflation.

The
Committee
re-affirmed
its
commitment to a stable exchange
rate regime and urged the fiscal
authority
to
provide
support
by
reducing fiscal leakages, improving
controls
around
oil
revenues
and
reviewing terms around production
sharing
agreements
with
oil
companies,
while
awaiting
the
passage of the Petroleum Industry Bill
(PIB). The Committee also noted the
necessity
for
a
complementary
monetary policy response to ensure
sustained exchange rate stability and
convergence of rates in all segments
of the foreign exchange market.

The MPC consequently decided to
retain the MPR at 12.0 per cent +/- 200
basis points and liquidity ratio (LR) at 30
per cent. Public sector CRR was
increased from 50.0 per cent to 75.0
per cent; while private sector CRR was
retained at 12.0 per cent. The Bank
was mandated to take immediate step
to
redress
the
supply-demand
imbalance in the BDC segment while
maintaining its focus on anti-money
laundering (AML) activities.
4.2.2
March 2014 MPC meeting

The MPC meeting of March 2014
gave considerations to resurgence of
core inflation in spite of the downward
trend in headline inflation. Further, it
opined that prudent monetary stance
would facilitate better reserve and
exchange rate management in an
environment
where
QE3
tapering
increases pressure on financial markets
in emerging market economies. The
Committee further noted that the
sustenance of relative exchange rate
stability and single digit inflation in 2014
given the risks in the horizon will require
extra-ordinary measures. The foregoing
informed the Committee’s decision to
continue on the path of tight monetary
policy in order to consolidate on the
gains in price, exchange rate and
financial system stability in 2014. Other
issues of policy concern related to
frontier markets positioning themselves
to attract higher capital inflows by
raising their policy rates to contain
inflation and also remain competitive.
There were concerns over the sudden
surge in domiciliary account balances
which might offset the gains from
imposing 75.0 per cent CRR on public
sector funds.

While the Committee was unanimous
on further tightening of monetary
policy, opinions were divided on policy
instruments to be adopted. Two policy
options
were
considered;
first,
it
considered an increase in the MPR to
retain and attract more inflows, but


CBN Monetary Policy Review

rejected the option because of the
fears that such increase could impact
negatively on access to credit and
domestic output growth. The second
option was to increase CRR as a tool of
maintaining and consolidating on the
positive achievements in price and
exchange rate stability. Accordingly,
the decisions were to hold the MPR
and its corridor at current levels but
raised the CRR on private sector
deposits by 300 basis points to 15.0 per
cent.

4.2.3
May 2014 MPC meeting

The MPC met against the backdrop of
mixed signals over the prospects for
global growth in advanced, emerging
markets and frontier economies. The
overall
domestic
economic
environment was characterized by
macroeconomic stability with inflation
contained within the target range,
stability
in
the
foreign
exchange
market, stable interbank rates and
strong outlook for growth.

Challenges to monetary policy from
the external environment included the
prospects for increasing yields and
interest rates in the US; and the rather
low level of economic activity in
emerging market economies; both of
which could have repercussions for
foreign capital inflows (private and
official) and stability of the naira
exchange
rate.
While
domestic
concerns included the high systemic
liquidity in the banking sector, elevated
security concerns and anticipated high
election-related spending in the run-up
to the 2015 general elections. High
domestic liquidity could exert sustained
pressure on both the exchange rate
and consumer prices, as well as
accentuate the already high demand
for foreign exchange, further depleting
the country’s external reserves. In
addition, core inflation continued to
send conflicting signals since January
2014. The Committee felt that if the
upward trend continues as observed in
April 2014, it could be a major factor in
the upward trend in price levels. The
Committee was also worried by the
continued erosion of fiscal buffers,
which was capable of exposing the
economy to vulnerabilities arising from
both domestic and external shocks.

Consequently,
the
Committee
decided to retain its tight monetary
policy stance and left all its policy
instruments unchanged.

4.3
Instruments
of
Liquidity
Management

Sustenance
of
the
price
stability
objective of the Bank provided a
guide for the management of liquidity
position in the economy during the
review period.

Consequently, the MPC deployed the
MPR
in
conjunction
with
other
traditional instruments that include the
CRR, Open Market Operations (OMO)


CBN Monetary Policy Review

and Discount Window Operations in
the review period.

4.3.1. Monetary Policy Rate (MPR)

The MPR, the Bank’s benchmark
policy
rate,
remained
the
major
signaling
instrument
for
monetary
policy complemented by the interest
rate corridor (standing lending/deposit
facility rates). However, given the
sustained stability of the exchange rate
and prices during the review period,
the MPC kept the MPR unchanged at
12.0 per cent with a symmetric band of
+/- 200 basis points during the period
under review.

4.3.2. Open Market Operations (OMO)

Open
Market
Operations
(OMO)
remained the major tool of liquidity
management in the review period.
Actual sales during the period under
review amounted to N4,484.94 billion,
compared with N3,348.39 billion in the
second half of 2013 and N7,099.54
billion in the corresponding period of
2013. This represented a decline of
36.83 per cent over the corresponding
period of 2013, and an increase of
33.94 per cent over the second half of
2013 (Table 4.1).


Table 4.1 OMO Bills Auction (January 2009 – June
2014) (N’million)


4.3.3
Reserve Requirements

The use of reserve requirements, Cash
Reserve
and
Liquidity
Ratios,
complement
OMO
and
other
instruments of liquidity management.
As
earlier
mentioned,
the
MPC
increased the CRR on public and
private sector deposits and retained
the Liquidity Ratio at 30.0 per cent in
the first half of 2014. These decisions
were taken against the background of
the relative liquidity surfeit in the
banking system.

4.3.4
Standing Facilities

The DMBs and Discount Houses (DH)
continued to access the standing
facilities (lending/ deposit) to meet
their daily liquidity requirements in the
first half of 2014. The volume of
transactions at the CBN Standing
Lending Facility (SLF) in the first half of
Date

% Change over
the
Previous
Period
Jan
1,756.66
1,091.49
Feb
1,351.59
307.4
Mar
1,265.25
714.57
Apr
1,516.69
285.94
May
1,27.40
905.99
Jun
81.95
1,179.54
1st Half
7,099.54
4,484.94
-36.83
Jul
508.14
Aug
91.72
Sep
150.51
Oct
1,206.86
Nov
791.09
Dec
599.47
2nd Half
3,348.39
33.94
Cumulative
Figure
10,447.93


CBN Monetary Policy Review

stood
at
N2,021.19
billion
compared
with
N6,923.86
billion
recorded in the second half of 2013
and
N5,248.70
billion
in
the
corresponding period of 2013. The
volume of SLF at end-June 2014
represented a decrease of 61.49 per
cent
compared
with
the
corresponding period of 2013. The
significant decrease in the volume of
SLF transactions in the first half of 2014,
reflected
the
liquidity
surfeit
that
persisted in the banking system arising
from
FGN
Bonds
and
NTBs
that
matured in the review period.

A significant increase in the cumulative
volume of transactions at the CBN
Standing Deposit Facility (SDF) window
was however recorded during the
period under review. The cumulative
volume of SDF stood at N46,496.63
billion
in
the
first
half
of
2014,
compared with N26,862.21 billion in the
second half of 2013 and N17,484.78
billion in the corresponding period of
2013. The level of SDF as at end-June
2014 represented 165.93 and 73.09 per
cent increases over the levels in the
corresponding period of 2013 and the
second
half
of
2013,
respectively
(Table 4.2).

The observed increase in the use of the
SDF window reflected an increased
system wide liquidity in the review
period.


Table 4.2 CBN Standing Lending Facility (January
2009 – June 2014) (N’billion)


Table 4.3 CBN Standing Deposit Facility (January
2009 – June 2014) (N’billion)


4.3.5
Foreign Exchange Intervention

Intervention in the foreign exchange
market continued to be a major policy
tool
employed
by
the
Bank
in
sustaining the stability of the Naira. In
the first half of 2014, the total supply of
Date

% Change Over the
Preceding/Correspo
nding Period
Jan
669.75
615.59
Feb
1,115.64
653.74
Mar
993.47
560.27
Apr
778.7
50.29
May
796.89
44.88
Jun
894.25
96.42
1st Half
5,248.70
2,021.19
-61.49
Jul
793.07
Aug
2,465.79
Sep
2,407.54
Oct
263.36
Nov
314.22
Dec
679.88
2nd Half
6,923.86
-70.81
Total
12,172.56
21.58
Date

% Change Over the
Preceding/Correspo
nding Period
Jan
2,132.70
13543.87
Feb
3,047.91
4953.72
Mar
6,101.42
5844.76
Apr
2,817.00
8190.69
May
1,718.53
8061.09
Jun
1,667.22
5902.5
1st Half
17,484.78
46,496.63
165.93
Jul
6,341.59
Aug
5,282.96
Sep
2,905.72
Oct
8,328.91
Nov
5,321.54
Dec
4,003.03
2nd Half
26,862.21
73.09
Total
44,346.99


CBN Monetary Policy Review

foreign exchange by the Bank was
US$20,752
million
compared
with
US$17,728.04 million and US$13,861.67
million in the second half and the
corresponding
period
of
2013,
respectively (Table 4.4).

There was an increase in total supply
compared
with
the
level
in
the
preceding half-year, as well as the
corresponding period of 2013 to douse
the demand pressure during the review
period.

Table 4.4 Foreign Exchange Supply by the CBN
(US$ Million)


4.4
Developments
in
Monetary
Aggregates

The sluggish performance of the
monetary aggregates continued in the
first half of 2014. This is indicative of the
tight monetary policy stance and
reluctance of deposit money banks to
extend credit to the private sector.
Consequently, most of the monetary
aggregates declined while there were
modest
increases
in
some
components, leading to a marginal
increase in the money stock.

4.4.1
Reserve Money

Reserve Money (RM), declined by 15.0
per cent to N4,723.07 billion by endJune 2014, down from N5,558.92 billion
as at end-December 2013. The endJune 2014 value of RM also fell by 22.27
per cent (N1352.94 billion) below the
benchmark value of N6,076.01 billion
for the period.

Figure 4.1: Monthly Reserve Money Benchmark
and Actual (December 2013 – June 2014)

Figure 4.2: Reserve Money and its Components
(Uses)


YEAR
Sales
to
wDAS
Sales to
BDC
Total
Supply
(wDAS +
BDAC)
Sales
to
wDAS
Sales to
BDC
Total
Supply
(wDAS
+
BDAC)
Jan

Feb

Mar

Apr

May

Jun

1st Half
10,414.10 3,447.57 13,861.67 17,233.85 3,518.16 20,752.00
Jul
3298.09
575.3
3,873.39
Aug
2,166.99
466.52
2,633.51
Sep
2,625.22
480.45
3,105.67
Oct
2,387.28
598.35
2,985.63
Nov
2,404.32
522.7
2,927.02
Dec
1,998.02
404.8
2,402.82
2nd Half 14,679.92 3,048.12 17,728.04
Total
25,591.05 6,495.69 32,086.74


Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14
N'Billion
Required Reserve
Currency in Circulation (CIC)
Reserve Money (Actual)

N'Billions
Reserve Money Benchmark
Reserve Money Actual
Deviation from Benchmark (+ Excess/- Shortfall)


CBN Monetary Policy Review

4.4.2
Broad Money (M2)

Broad money at N15,928.38 billion at
end-June 2014 rose by 1.66 per cent
over the end-December 2013 level of
N15,668.95.
This
translated
to
an
annualized growth rate of 3.32 per
cent, compared with 1.42 per cent in
the corresponding period of 2013 and
the benchmark of 14.5 per cent for
end-December 2014. On a year-onyear basis, Broad Money increased by
N335.21 billion or 2.14 per cent, when
compared with the end-June 2013
value of N15,593.17 billion ( Figures 4.4
and 4.5).

Figure 4.4: Money Supply (M1) and (M2) (Dec
2013 – Jun 2014)


Figure 4.5: Growth in Money Supply (M1) and
(M2) (Dec 2013 – Jun 2014)


4.4.3
Narrow Money (M1)

Narrow Money (M1) decelerated by
6.07 per cent to N6,587.28 billion at
end- June 2014 down from N7,012.83
billion as at end-December 2013. On
annualized basis, M1 declined by 12.14
per cent compared with a decline of
12.98 in the corresponding period of
2013 and in contrast to the benchmark
growth rate of 17.44 per cent for endDecember 2014.

On
a
year-on-year
basis,
Narrow
Money increased by N425.55 billion or
5.08 per cent when compared with the
end-June 2013 value of N6,939.55
billion ( Figures 4.4 and 4.5).

4.5
Drivers
of
Major
Monetary
Aggregates

4.5.1
Net Foreign Assets (NFA)

At N7,693.27 billion at end-June 2014,
Net Foreign Assets (NFA) declined by
9.63 per cent below the level of
N8,513.27 billion at end-December
2013.
On
annualized
basis,
NFA
declined by 19.26 per cent compared
with 0.6 per cent in the corresponding
period of 2013. This development was
in contrast to the benchmark growth
rate of 9.3 per cent for end December
2014. (Figure 4.7).

4.5.2
Net Domestic Assets (NDA)

Net Domestic Asset (NDA) as at endJune 2014 stood at N8, 235.10 billion,

N'Billion
Narrow Money (M1)
Broad Money (M2)

Dec-13
Jan-14
Feb-14 Mar-14 Apr-14 May-14 Jun-14
Per cent
M1 Growth (%)
M2 Growth (%)


CBN Monetary Policy Review

representing an increase of 15.0 per
cent over the level of N7,155.68
recorded end-December 2013. On a
year-on-year basis, NDA increased
significantly by 1,806.36 billion or 28.10
per cent when compared with the
end-June 2013 value of N6,428.74
billion. (Figure 4.8).

Figure 4.6: Net Domestic Asset (NDA) (Dec 2013
– Jun 2014)


Figure 4.7: NDA, NDC and Other Assets (net)
(Dec 2013 – Jun 2014)


4.5.3
Net Domestic Credit

Aggregate net Domestic Credit (NDC)
as
at
end-June

stood
at
N15,173.56 billion indicating a marginal
increase of 0.88 per cent over the level
of N15,040.70 billion at end-June 2014.
When annualized, NDC grew by 1.76
per cent at end-June 2014, compared
with 9.4 per cent growth rate in the
corresponding period of 2013 and the
indicative benchmark of 28.4 per cent
for end-December 2014. On a year-onyear basis NDC increased by N2,024.18
billion
or
13.46
per
cent
when
compared with end-June 2013 value
of N13,149.38 billion (see Figure 4.7).

Figure 4.7: Net Domestic Credit (Dec 2013 – Jun
2014)


4.5.4
Credit to the Government (Cg)

Net claims of the banking system on
Government remained negative all
through the review period. It declined
by 21.89 per cent to stand at N1,790.22
billion at end-June 2014 from N1,468.78
billion at end-December 2013. When
annualized,
credit
to
government
declined by 43.78 per cent compared
with the decline of 4.56 per cent in the
corresponding period of 2013. The
development was in contrast to the
indicative benchmark of 31.5 per cent
growth rate for fiscal year 2014. This
indicated
that
the
public
sector
continued to be a net creditor to the
banking system during the review
period. (Figure 4.10).


N'Billion
Net Domestic Assets

N'Billion
N'Billion
Net Domestic Assets (NDA)
Net Domestic Credit (NDC)
Other Assets (Net)

N'Billion
Net Domestic Credit (NDC)


CBN Monetary Policy Review

Figure 4.10: Domestic Credit to Private Sector
(Dec 2013 – Jun 2014)


4.5.5
Credit to the Private Sector(Cp)

Credit to the private sector (Cp) grew
by 2.75 per cent to N16, 963.78 billion
at end-June 2014 from N16,509.47 at
end-December 2013. On annualized
basis, Cp grew by 5.5 per cent at endJune
2014,
compared
with
the
corresponding period of 2013 and the
benchmark of 23.07 per cent for endDecember, 2014. (Figure 4.10).

A summary of the major monetary
aggregates
and
the
provisional
outcome as at end-June 2014, is shown
in Table 4.12 below.

Table 4.12: Monetary Aggregates Outcomes
(Growth in % except otherwise stated)


N'Million
Credit to Private Sector
Key Policy Variables

Provisional
Outcome for
June, 2014
Broad
Money
Growth
(M2)
15.43

16.39

1.20

1.66**
Narrow
Money
Growth
(M1)
21.54

9.59

(5.50)

-6.07**
Base
(Reserve)
Money
(Naira Billion)
2,784.07

3,704.48

5,558.92

4,723.07

Aggregate Credit to the
Domestic Economy (Net)
54.76

(3.46)

18.45

-0.88**
Credit
to
Government
(net)
22.62

138.04

40.14

-21.89**
Credit
to
the
Private
Sector
44.28

6.83

8.96

2.75**
Inflation rate
10.30

12.00

8.00

8.20

Real GDP growth
5.31

4.21

5.49

6.58***


CBN Monetary Policy Review

CBN Monetary Policy Review

Chapter Five

5.0
DEVELOPMENTS
IN
THE
FINANCIAL MARKETS

he Nigerian financial market
was significantly influenced by
global
and
financial
developments,
especially,
the
U.S
expansionary monetary policy in the
first
half
of
2014.
Following
the
announcement on December 18, 2013
of the intention to taper, the tapering
of the U.S. quantitative easing had
tremendous effect on many emerging
and
frontier
market
economies,
including Nigeria. Nigeria had hither-to
enjoyed
substantial
capital
inflows
enhanced by the quantitative easing
and attractive yields prior to the
implementation
of
the
tapering.
Tapering led to a re-orientation of
global capital flows owing largely to
the prospect of favorable interest rate
environment in the U.S.

5.1
Money Market

The money market remained active in
the first half of 2014 with CBN bills and
government securities actively traded
in the market. Liquidity conditions
continued
to
influence
market
activities as well as the increase in
public and private sector CRR during
the review period. The interbank call
and Open Buy Back (OBB) rates
remained locked-in within the policy
rate corridor of MPR +/-200 basis points.
Collateralized lending, Open Market
Operations
(OMO)
and
standing
facilities dominated activities in the
money market. The OBB segment of
the money market was very active, as
it accounted for nearly 100 percent of
interbank
fund
placements.
Uncollateralized interbank and Repo
transactions were moribund as the
patronage for call money and Repo
remained low throughout the period.

5.1.1
Short-term
Interest
Rate
Developments

Money market interest rates exhibited
less volatility, and were mostly around
the lower band of the corridor. The
Bank
conducted
strategic
OMO
auctions to contain the cyclical effects
of liquidity upsurge associated with
FAAC allocations, and maturities of
treasury bills, FGN bonds and AMCON
bonds. The average interbank call rate
ranged between 10.00 and 10.67 per
cent, while the open-buy-back (OBB)
rate was between 10.50 and 12.94 per
cent during the review period.

Table 5.1 Weighted Average Money Market
Interest Rates (Dec 2013 – June 2014)

Month
Interbank
rate
Open
Buy
Back
rate
NIBOR 30Day
MPR
Dec-13

Jan-14

Feb-14

Mar-14

Apr-14

May-14

Jun-14

T


CBN Monetary Policy Review

Figure 5.1 Weighted Average Money Market
Interest Rates ( Dec 2013 – June2014)


(i)
Interbank Call Rate

The weighted average interbank call
rate increased by 67 basis points from
10.0 per cent in January 2014 to 10.67
per cent in May, before declining to
10.50 in June 2014. The lull in the
interbank call activity evidenced by
only few days of transactions in the
market in the review period, resulted in
the call rate being almost flat at 10.50
per cent through the months of
February to June 2014, except for the
marginal rise to 10.67 per cent in May.
Interbank
call
rate
dropped
approximately by 30 basis points in
June 2014 relative to December 2013.

The
decline
in
activities
at
the
interbank segment was attributed to;
(i) DMBs effort to avoid default risks
following the revocation of license of
two discount houses and; (ii) the
launching
of
Real
Time
Gross
Settlement System (RTGS) and the
Scripless Security Settlement System
(S4)
that
transparently
simplifies
settlement of secured transactions,
hence encouraging more transaction
at the Open Buy Back window (Figure
5.2).

Figure 5.2: Daily Interbank Call Rate (January –
June 2014)


(ii)
Open Buy Back Rate

The average (weighted) open buyback rate fell by 72 basis points to
10.52 per cent in June 2014 from 11.24
per cent in December 2013. The rate,
however, rose to 11.94 in March 2014
following the 300 basis point increase in
private sector CRR, but was down to
10.52 per cent at the end the first half
of the year. (Figure 5.3). Transactions in
the OBB segment remained active and
relatively stable in the review period.

The relative stability was attributed to
the liquidity surfeit in the banking
system occasioned by the release of
statutory revenue to the state and
local governments as well as matured
FGN bonds and CBN bills. Activities at
this collateralized segment of the
market reflected the real dynamics of
the interbank market when compared
with
the
uncollateralized
window
which was largely inactive in the first
half of 2014. On a year-on-year basis,

Dec-13
Jan-14
Feb-14 Mar-14 Apr-14 May-14 Jun-14
Per cent
Open Buy Back rate
MPR
Interbank rate
NIBOR 30_Day

Inter-bank Call Rates (%)


CBN Monetary Policy Review

the average OBB rate rose by 20 basis
points, when compared with the level
in June, 2013.

Figure 5.3: Open Buy Back Rate (January – June
2014)


(iii)
Nigeria Interbank Offered Rate
(NIBOR)

Nigeria’s reference rate for tenured
transactions,
the
Nigeria
Interbank
Offered Rate (NIBOR) was relatively
stable in the review period across
tenors with occasional spikes. The
average
weighted
30-day
NIBOR,
which was 11.1 per cent in December
2013 rose to 12.7 per cent in March
owing to the upward review in both
public and private sector CRR in the
first quarter before moderating to 12.2
per cent by June 2014. (Table 5.1)

5.2
Foreign Exchange Market

Amidst pronounced external shock
largely induced by investors’ response
to the Fed tapering, the achievement
of exchange rate stability remained
cardinal to the Central Bank of Nigeria
in the first half of 2014. The Bank’s
policy thrust of stabilizing the exchange
rate around the mid-point of US$/N155
+/-3.0 was sustained through foreign
exchange market interventions.

Figure 5.4: Daily Exchange Rate (January – June
2014)


5.2.1
Average Exchange Rate

The w/rDAS spot rate appreciated
slightly to an average of N157.30/US$ in
the first half of 2014 from N157.32/US$ in
the second half of 2013 indicating an
appreciation
of
0.01
per
cent.
Conversely, at the interbank foreign
exchange market (IFEM), the average
exchange
rate
depreciated
to
N162.56/US$ in the first half of 2014 from
an average of N160.32/US$ in the
second half of 2013, representing a
depreciation of 1.38 per cent. Similarly,
relative to an average of N158.18/US$
and N160.32/US$ in the first and
second half of 2013, the exchange
rate
at
the
interbank
market
depreciated by 2.69 per cent to settle
at N162.56/US$. The rate at the BDC
segment averaged N169.49/US$ in the
first half of 2014 compared with the
average rate of N165.23/US$ in the
second half of 2013. This represented a
depreciation of 2.51 per cent. Also,

Per cent
OBB Rate (%)

N/US$


CBN Monetary Policy Review

when compared with the average of
N159.66/US$ in the first half of 2013, the
rate depreciated by 5.80 per cent. The
mild
appreciation
in
the
w/rDAS
segment of the exchange rate market
reflected efforts by CBN to douse
exchange rate pressure, which was
amplified
by
the
depreciation
witnessed at the interbank and BDC
segments of the foreign exchange
market
in
the
first
half
of

(Table5.2).

Table 5.2: Average Monthly Spot Exchange Rates
(Jan 2013 – Jun 2014) (N/US$)


5.2.2
End-Period (Month) Exchange
Rate

The naira depreciated in the w/rDAS
and interbank segments of the foreign
exchange market at end-June 2014,
but appreciated at the BDC segment,
when compared with end-December
2013.
At
the
w/rDAS,
the
naira
depreciated by 0.02 per cent to
N157.29/US$ at end-June 2014 from
N157.26/US$ at end-December 2013.
When compared with end-June 2013,
the naira appreciated mildly by 0.01
per cent at end-June 2014.

At the interbank market, the naira
depreciated by 1.87 per cent from
N159.90/US$ at end-December 2013 to
N162.95/US$ at end-June 2014. Over
the corresponding period of 2013, it
depreciated by 0.21 from N162.60/US$
at end-June 2013 to N162.95/US$ at
end-June 2014. At the BDC segment,
the naira, however, appreciated by
2.38 per cent from N172.00/US$ at endDecember 2013 to N168.00/US$ at
end-June
2014.
However,
when
compared with the same period a
year earlier, the naira depreciated by
3.57 per cent from N162.00/US$ at endJune 2013 to N168.00/US$ at end-June
2014 (Figure 5.5 and Table 5.3).

Figure
5.5:
End-Month
Exchange
Rates
Movement (Jan 2013-June 2014) (N/U$$)


Strategic interventions by the CBN
through spot and forwards foreign
exchange transactions at both w/rDAS
Date
CBN
IFEM
BDC
Jan-13
157.30

156.96

159.12

Feb-13
157.30

157.52

158.70

Mar-13
157.31

158.38

159.80

Apr-13
157.31

158.20

159.81

May-13
157.30

158.02

159.57

Jun-13
157.31

160.02

160.98

Average
157.31

158.18

159.66

Jul-13
157.32

161.12

162.43

Aug-13
157.31

161.15

162.28

Sep-13
157.32

161.96

163.14

Oct-13
157.42

159.83

165.00

Nov-13
157.27

158.79

167.14

Dec-13
157.27

159.05

171.40

Average
157.32

160.32

165.23

Jan-14
157.29

160.23

171.71

Feb-14
157.31

163.62

169.45

Mar-14
157.30

164.61

171.50

Apr-14
157.29

162.19

170.25

May-14
157.29

161.86

166.85

Jun-14
157.29

162.82

167.17

Average
157.30

162.56

169.49


CBN Monetary Policy Review

and interbank markets contributed
significantly in dousing exchange rate
pressures
experienced
from
the
second half of 2013.

Table 5.3: End-Month Exchange Rates Movement
(Jan 2013 – Jun 2014) (N/US$)


5.2.3
Nominal
and
Real
Effective
Exchange Rate

The Nominal Effective Exchange Rate
(NEER) depreciated on average by
0.05 per cent to 96.01 in the first half of
2014 from 95.96 in the second half of
2013. However, when compared with
the corresponding period in 2013,
average NEER appreciated by 1.48 per
cent from 97.43 in the first half of 2013.
On the other hand, the Real Effective
Exchange Rate (REER) appreciated
significantly by 20.63 per cent from
73.26 in the second half 2013 to 60.73 in
the first half of 2014. Similarly, when
compared with the corresponding
period in 2013, the average Real
Effective Exchange Rate appreciated
by 22.1 per cent (Figure 5.6 and Table
5.4). In general, the trend indicated
that the naira appreciated markedly,
especially in real terms relative to the
currencies of Nigeria’s major trading
partners.

Figure 5.6: Nominal and Real Effective Exchange
Rate


Table 5.4: Nominal and Real Effective Exchange
Rates Indices (Jan 2013 – Jun 2014)

CBN
IFEM
BDC
Jan-13
157.30
157.20
159.00
Feb-13
157.31
158.60
159.00
Mar-13
157.31
158.63
160.00
Apr-13
157.31
157.90
160.00
May-13
157.30
158.10
159.50
Jun-13
157.31
162.60
162.00
Jul-13
157.32
160.55
162.00
Aug-13
157.32
161.90
163.00
Sep-13
157.31
160.65
162.00
Oct-13
157.36
158.85
166.00
Nov-13
157.28
158.52
168.00
Dec-13
157.26
159.90
172.00
Jan-14
157.31
162.50
168.00
Feb-14
157.31
164.70
171.00
Mar-14
157.30
164.90
172.00
Apr-14
157.29
160.63
167.00
May-14
157.29
162.73
167.00
Jun-14

Jan-13
May-13
Sep-13
Jan-14
May-14
N/US$
NEER
REER
Date
NEER
REER
13-Jan
99.05
77.84
13-Feb
98.12
77.08
13-Mar
97.16
76.1
13-Apr
97.88
76.34
13-May
96.56
75.02
13-Jun
95.78
74.15
2013: H1 Average
97.43
76.09
13-Jul
95.83

13-Aug
94.5
72.96
13-Sep
96.08
73.71
13-Oct
96.85
73.79
13-Nov
96.14
72.74
13-Dec
96.34
72.34
2013: H2 Average
95.96
73.26
2013 Average
96.69
74.67
14-Jan
94.96
60.43
14-Feb
95.87
60.96
14-Mar
96.24
61.05
14-Apr
96.42
61.05
14-May
96.29
60.67
14-Jun
96.27
60.22
2014: H1 Average
96.01
60.73


CBN Monetary Policy Review

5.2.4
Demand and Supply of Foreign
Exchange

Total demand for foreign exchange
at the w/rDAS in the first half 2014 rose
by 27.65 per cent to US$23,905.81
million
at
end-June

from
US$18,727.85 million at end-December
2013. Similarly, demand for foreign
exchange in the w/rDAS window rose
by 122.41 per cent when compared to
US$10,748.71
million
in
the
corresponding period of 2013. The
development was attributable to the
effects of the slowdown in portfolio
inflows and the effects of the U.S.
tapering, which encouraged capital
reversal during the period. In addition,
uncertainties
associated
with
the
change in the leadership of the Bank,
and the possibility of a change in
policy
stance
fuelled
temporary
speculative
demand
for
foreign
exchange in the first half of 2014. The
total supply of foreign exchange at the
w/rDAS increased by 16.34 per cent
from US$14,813.51 million in the second
half of 2013 to US$17,233.85 million in
the first half of 2014. When compared
with US$10,711.03 million in the first half
of 2013, supply in the first half of 2014
increase by 60.90 per cent (Figure 5.7
and Table 5.5).

The Bank continued to implement
measures to moderate the demand
pressure
in
the
foreign
exchange
market.
These
measures
included
continued implementation of rDAS,
cap on purchases by BDCs, prohibition
of importation of foreign currency bills
by authorized dealers without prior
CBN approval and stringent returns
requirement on forex utilization. In
addition, the Bank introduced new
measures, which included the ample
supply of foreign exchange to the
market, the revival of the interbank
foreign exchange forwards market,
and foreign exchange swaps among
authorized dealers.

Figure 5.7: Demand and Supply of Foreign
Exchange at r/wDAS


Table 5.5: Foreign Exchange Demand and Supply
(Jan 2013 – Jun 2014) (US$’Million)


Jan-13
Mar-13
May-13
Jul-13
Sep-13
Nov-13
Jan-14
Mar-14
May-14
US$'Million
w/rDAS Demand
w/rDAS Supply
Date
w/rDAS Demand
w/rDAS Supply
Jan-13
836.39
713.5
Feb-13
1,164.28
1,072.82
Mar-13
1,911.29
1,801.54
Apr-13
2,156.22
2,154.47
May-13
2,019.20
2,318.70
Jun-13
2,661.33
2,650.00
2013: H1 Tota
10,748.70
10,711.04
Jul-13
3,325.56
3,000.00
Aug-13
2,179.38
2,437.08
Sep-13
2,660.13
2,297.82
Oct-13
3,541.93
2,274.38
Nov-13
3,095.32
2,796.47
Dec-13
3,925.53
2,007.76
2013: H2 Tota
18,727.85
14,813.51
Jan-14
6,236.67
2,989.43
Feb-14
4,096.46
3,101.87
Mar-14
4,320.04
3,151.59
Apr-14
3,045.49
2,663.92
May-14
2,805.74
2,928.49
Jun-14
3,401.41
2,398.55
2014: H1 Tota
23,905.82
17,233.85


CBN Monetary Policy Review

5.2.5
Foreign
Exchange
Flows
through the CBN

Gross
foreign
exchange
inflows
through the CBN rose to US$22,888.75
million in the first half of 2014 from
US$21,322.85 million in the second half
of 2013 and US$19,747.47 million in the
corresponding
period
of
2013,
indicating increases of 7.34 and 15.91
per cent, respectively. Gross foreign
exchange
outflows
rose
to
US$28,501.98 million in the first half of
2014 from US$23,456.99 million in the
second half of 2013 and US$18,856.14
in the corresponding period of 2013,
reflecting increases of 21.51 per cent
and 51.15 per cent, respectively.

In the review period, foreign exchange
flows through the CBN resulted in a net
outflow of US$5,613.24 million in the first
half of 2014, compared with a net
outflow of US$2,134.04 million in the
second half of 2013 but in contrast to a
net inflow of US$891.32 million in the first
half of 2013 (see Table 5.6 and Figure
5.8).


Table 5.6: CBN Monthly Foreign Exchange Flows
(Jan 2013 – Jun 2014)


Figure 5.8: CBN Monthly Foreign Exchange Flows
(Jan 2013 – Jun 2014)


Date
Inflow
Outflow
Net Flow
13-Jan
3,320.80 1,538.10 1,782.70
13-Feb
3,681.10 2,103.40 1,577.70
13-Mar
3,302.64 2,671.54 631.10
13-Apr
3,238.83 3,369.37 (130.55)
13-May
3,095.50 3,233.68 (138.18)
13-Jun
3,108.60 5,940.05 (2,831.45)
2013: H1 Total
19,747.47 18,856.14 891.32
13-Jul
5,778.32 4,891.29 887.02
13-Aug
3,132.99 3,467.97 (334.97)
13-Sep
2,946.00 4,308.10 (1,362.00)
13-Oct
3,175.31 3,177.75 (2.44)
13-Nov
3,125.46 3,837.85 (712.39)
13-Dec
3,164.77 3,774.03 (609.26)
2013: H2 Total
21,322.85 23,456.99 (2,134.04)
2013 Total
41,070.32 42,313.13 (1,242.72)
14-Jan
2,543.55 4,652.19 (2,108.65)
14-Feb
2,797.57 6,612.99 (3,815.41)
14-Mar
4,880.32 4,430.48 449.83
14-Apr
3,779.45 4,155.76 (376.31)
14-May
3,171.28 4,819.22 (1,647.94)
14-Jun
5,716.58 3,831.34 1,885.24
2014: H1 Total
22,888.75 28,501.98 (5,613.24)


CBN Monetary Policy Review

5.2.6
Foreign Exchange Flow through
the Economy

Gross foreign exchange inflow to the
economy rose by 2.33 and 4.87 per
cent to US$75,966.99 million in the first
half of 2014 from US$74,234.57 million in
the
second
half
of

and
US$72,436.22 million in the first half of
2013. Similarly, gross foreign exchange
outflow rose to US$29,092.92 million in
the first half of 2014 from US$24,579.59
million in the second half of 2013 and
US$19,058.02 million in the first half of
2013, indicating increases of 18.32 and
52.65 per cent, respectively.

In the first half of 2014, foreign
exchange flows through the economy
resulted in a net inflow of US$46,874.06
million compared with US$49,654.99
million in the second half of 2013 and
US$53,378.30 million in the first of 2013,
representing a decline of 5.60 and
12.19
per
cent,
respectively.
The
decline in the net inflow for the period
reflected the effect of U.S. tapering,
which induced capital reversal (Table
5.7 and Figure 5.9).


Table 5.7: Monthly Foreign Exchange Flows
through the Economy (Jan 2013 – Jun 2014) (US$
Million)


Figure 5.9: Monthly Foreign Exchange Flows
through the Economy (Jan 2013 – Jun 2014) (US$
Million)


Net Flow
13-Jan
12,154.30 3,320.80 8,833.60 1,561.20 1,538.10 23.10 10,593.10 1,782.70 8,810.40
13-Feb
10,972.70 3,681.10 7,291.70 2,130.10 2,103.40 26.70 8,842.70 1,577.70 7,265.00
13-Mar
11,141.76 3,302.64 7,839.12 2,712.82 2,671.54 41.28 8,428.94 631.10 7,797.85
13-Apr
12,149.85 3,238.83 8,911.02 3,430.09 3,369.37 60.72 8,719.76 (130.55) 8,850.30
13-May
13,264.84 3,095.50 10,169.35 3,252.14 3,233.68 18.46 10,012.70 (138.18) 10,150.89
13-Jun
12,752.77 3,108.60 9,644.17 5,971.67 5,940.05 31.62 6,781.10 (2,831.45) 9,612.55
2013:H1
Total
72,436.22 19,747.47 52,688.96 19,058.02 18,856.14 201.88 53,378.30 891.32 52,486.99
13-Jul
15,980.58 5,778.32 10,202.27 4,941.04 4,891.29 49.75 11,039.54 887.02 10,152.52
13-Aug
10,007.30 3,132.99 6,874.31 4,020.74 3,467.97 552.77 5,986.57 (334.97) 6,321.54
13-Sep
12,506.90 2,946.00 9,560.80 4,397.00 4,308.10 88.90 8,109.90 (1,362.00) 9,471.90
13-Oct
11,704.37 3,175.31 8,529.07 3,236.63 3,177.75 58.89 8,467.74 (2.44) 8,470.18
13-Nov
11,549.56 3,125.46 8,424.10 3,880.79 3,837.85 42.94 7,668.77 (712.39) 8,381.16
13-Dec
12,485.86 3,164.77 9,321.09 4,103.39 3,774.03 329.36 8,382.47 (609.26) 8,991.73
2013:H2
Total
74,234.57 21,322.85 52,911.64 24,579.59 23,456.99 1,122.61 49,654.99 (2,134.04) 51,789.03
2013 Total 146,670.79 41,070.32 105,600.60 43,637.61 42,313.13 1,324.49 103,033.29 (1,242.72) 104,276.02
14-Jan
12,126.18 2,543.55 9,582.63 4,756.04 4,652.19 103.85 7,370.13 (2,108.65) 9,478.78
14-Feb
11,057.50 2,797.57 8,259.93 6,745.36 6,612.99 132.38 4,312.14 (3,815.41) 8,127.55
14-Mar
13,327.08 4,880.32 8,446.76 4,526.49 4,430.48 96.01 8,800.58 449.83 8,350.75
14-Apr
13,610.72 3,779.45 9,831.27 4,245.80 4,155.76 90.04 9,364.93 (376.31) 9,741.23
14-May
11,711.73 3,171.28 8,540.45 4,895.44 4,819.22 76.22 6,816.29 (1,647.94) 8,464.23
14-Jun
14,133.78 5,716.58 8,417.20 3,923.79 3,831.34 92.45 10,209.99 1,885.24 8,324.75
2014:H1
Total
75,966.99 22,888.75 53,078.24 29,092.92 28,501.98 590.95 46,874.06 (5,613.24) 52,487.29
Outflow
(Autono
mous)
Net Flow
(CBN)
Net
Flow
(Autonom
ous)
Date
Total Inflow
Inflow
(CBN)
Inflow
(Autonom
ous)
Total
Outflow
Outflow
(CBN)

Jan-13
May-13
Sep-13
Jan-14
May-14
US$'Millions
Net Flow
Total Inflow
Total Outflow


CBN Monetary Policy Review

5.3
Capital Market

The
capital
market
witnessed
improved performance in the first half
of 2014, compared with the second
half of 2013 and the corresponding
period of 2013. This development was
due largely to improved earnings,
favourable
market
sentiments
and
confidence
in
macroeconomic
management. Despite the improved
performance, the stock market was
weighed down in the early part of the
year by the effects of QE3 tapering, as
declines were observed in market
performance in January and April
2014, compared with December 2013.

5.3.1
Equities Market

The All-Share Index (ASI) increased by
2.8 per cent to 42,482.48 at end-June
2014, from its end-December 2013
figure of 41,329.19, and by 17.5 per
cent, when compared with 36,164.31
recorded at end-June 2013. Market
Capitalization (MC) for equities also
increased by 6.1 per cent to N14.03
trillion at end-June 2014 from N13.23
trillion at end-December 2013, and by
22.8 per cent when compared with the
N11.43 trillion recorded at end-June
2013 (Table 5.8 and Figures 5.10a and
5.10b).

The 2.8 per cent year-to-date increase
in ASI was driven mainly by strong
performance in the oil and gas, and
banking indices. The NSE Oil and Gas
and Banking Indices rose by 172.96
and 7.59 per cent, respectively, over
their levels at end-June 2013. The
performance of two other sectoral
indices,
the
NSE
Insurance
and
Consumer
Goods
Indices,
also
increased by 6.00 and 3.90 per cent,
respectively.

Table 5.8: NSE All-Share Index (ASI) and Market
Capitalization (MC) (June 2013 – June 2014)
Source: NSE

Figure 5.10a: NSE ASI and MC (Jan. 2014 – Jun.

MC (Equities)
(N’ Trillion)
Jun-13
36,164.31
11.43
Jul-13
37,914.32
12.01
Aug-13
36,248.53
11.50
Sep-13
36,585.08
11.65
Oct-13
37,622.74
12.02
Nov-13
38,920.85
12.45
Dec-13
41,329.19
13.23
Jan-14
40,571.62
13.01
Feb-14
39,558.89
12.71
Mar-14
38,748.01
12.45
Apr-14
38,485.48
12.67
May-14
41,474.40
13.69
Jun-14
42,482.48
14.03
Date
ASI

Jan-14
Mar-14
May-14
ASI
All-Share Index
Market Capitalisation (N' Trillion)
(MC) Trillion)


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Figure 5.10b: NSE ASI and MC (June 2013 – June
2014)


5.3.2
Market Turnover

Aggregate stock market turnover in
the first half of 2014 decreased by
59.34 per cent to 43.32 billion shares,
valued at N466.93 billion, in 505,324
deals, compared with 106.54 billion
shares valued at N1,043.31 billion, in
1,380,789 deals in the second half of
2013. Relative to the first half of 2013,
market turnover decreased by 25.75
per cent from 58.34 billion shares
valued at N591.56 billion, in 763,974
deals.

5.3.3
Sectoral Contribution to Equities
Market

The building materials sub-sector was
the most capitalized sector in the
period under review. Its share in overall
market capitalization rose to 32.3 per
cent at end-June 2014, from 31.6 per
cent at end-December 2013. Other
leading
sub-sectors
were
banking,
breweries and food & beverages, with
market shares of 20.3, 12.1 and 10.9 per
cent respectively, at end-June 2014
(Figures 5.11 and 5.12).

Figure 5.11: NSE Market Capitalisation by Sector
as at End-June 2014
Breweries
12.1%
Banking
20.3%
Food &
Beverages
10.9%
Conglomerates
2.3%
Insurance
1.1%
Oil and Gas
7.6%
Building
Materials
32.3%
Other Sectors
13.3%
Source: NSE

Figure 5.12: NSE Market Capitalisation by Sector
as at End-December 2013

Source: NSE

5.3.4
Warren Buffett Valuation Metric
and Equities Market

The Warren Buffett valuation metric is
applied to evaluate the performance
of the Nigerian stock market. The index
applies
the
ratio
of
market
capitalisation to GDP to determine the

Jun-13
Jul-13
Aug-13
Sep-13
Oct-13
Nov-13
Dec-13
Jan-14
Feb-14
Mar-14
Apr-14
May-14
Jun-14
(MC) Trillion
ASI
All-Share Index
Market Capitalisation (N' Trillion)
Breweries
14.4%
Banking
22.5%
Food & Beverages
12.5%
Conglomerates
1.3%
Insurance
1.4%
Oil and Gas
2.0%
Building Materials
30.4%
Other Sectors
15.4%


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level of performance of the stock
market vis-a-vis its equilibrium value
(see Box 4.2 for further details). Table
5.9 below presents the trend of Warren
Buffett Valuation Metric in Nigeria, from
the first quarter of 2013 to the second
quarter of 2014. The trend reveals that
the
Nigerian
stock
market
is
undervalued, with the exception of the
first and second quarters of 2013,
where the market was fairly valued.
The average valuation metric for the
entire period was 63.72, which showed
that
the
market
was
generally
undervalued.

Table 5.9: Trends in Warren Buffett Valuation
Metric in Nigeria (2013Q1-2014Q2)

Source: NSE and NBS.

The trend explains the increase in
capital inflows into the Nigerian equity
market, especially foreign portfolio
investment. This has projected the
growing prominence of the equity
segment of Nigeria’s capital market as
a
source
of
funds
for
portfolio
investment, in addition to individual
and institutional investors’ appetite for
better yields. The cumulative effect of
QE tapering and the favourable rate of
returns (from the observed increase in
the Buffet metric in the first and second
quarters of 2013) suggests fair market
valuation.
However,
given
the
perceived sovereign risk surrounding
the

general
elections
and
increased insurgencies in some parts of
the country, foreign portfolio investors
are likely to factor in sovereign risk
above net yields between the Nigerian
market and other frontier markets.

5.3.5
Bonds Market

The fixed income securities market in
Nigeria continued to be dominated by
the Federal Government of Nigeria
(FGN) bonds. Sub-national government
and corporate bonds witnessed some
activities, with the corporate bonds
segment having the least share by
market volume. In the review period
three new issues were made (10-year
FGN bond valued at N331.35 billion, 7year State government bond valued at
N4.79 billion and 5-year corporate
bond valued at N4.5 billion) totaling
N340.64 billion.

5.3.5.1 FGN Eurobond

Yields
on
the
dollar-denominated
assets decreased to 4.80 per cent at
end-June 2014, from 5.33 and 5.83 per
cent at end-December 2013 and endJune 2013, respectively (Figure 5.13).
This development indicated investor
confidence
in
Nigeria’s
sovereign
instrument during the review period


Period
Market Capitalization
Gross Domestic Product
(Rebased GDP)
Warren Buffet
Indicator
2013Q1
14,535,420,950,000
16,410,495,123,940
1.13
2013Q2
15,096,763,550,000
17,434,643,062,653
1.15
2013Q3
16,454,372,460,000
17,803,108,823,996
1.08
2013Q4
17,132,164,770,000
19,164,918,186,463
1.12
2014Q1
15,438,679,500,000
12,445,691,016,787
0.81
2014Q2
16,084,622,310,000
14,027,606,317,874
0.87


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Figure 5.13: 10-Year U.S. Dollar-denominated
Bond Yields for Nigeria (June 28, 2013 – June 30,
2014)
Source: Bloomberg

Consequently, the FGN bonds yield
curve
at
end-June

trended
downwards
by

basis
points,
compared with the position at endDecember 2013, and 204 basis points
compared with the position at endJune 2013 (Figure 5.14). Furthermore,
FGN bonds yields were positive and
well above the June 2013 – June 2014
rates of inflation.

Figure 5.14: FGN Bonds Yield Curves: End-June
2013 vs. End-December 2013 vs. End-June 2014

Yield
Years to Maturity
Jun 30, 2014
Jun 28, 2013
Dec 31, 2013


5.3.5.2 State/Local Government Bonds

Activity in the sub-national bonds
market segment was at low ebbs
during the review period. The total
value
of
outstanding
state/local
government bonds at end-June 2014
was N528.87 billion compared with
N558.5 billion in the second half of
2013. In the period under review, only
one N5 billion, 7-year tenor bond was
issued
by
the
Nasarawa
State
Government
on
January
6,
2014,
compared with two bond issues by the
Niger State Government (N12 billion 5year
bonds)
and
Lagos
State
government
(N87.5
billion,
7-year
bonds) in the second half of 2013.

5.3.5.3 Corporate Bonds

In the first half of 2014, the value of
outstanding
corporate
bonds
was
N163.45 billion, compared with N571.24
billion recorded in the second half of
2013. There was only one new 5-year
bond valued at N4.5 billion issued by
DANA on April 1, 2014. The general
slowdown of activities in the corporate
bond market may be explained by the
preference
for
equities
given
the
perceived
undervaluation
of
the
equities market.

5.3.5.4 Overall
Analysis
of
Fixed
Income Securities

The value of FGN bonds increased by
9.5 per cent to N4.346 trillion at endJune 2014 from N3.970 trillion at endDecember 2013 and by 3.8 per cent at
end-June 2013. FGN bonds accounted
for 22.8 per cent of the aggregate
market
capitalization
at
end-June

28-Jun-13
28-Jul-13
28-Aug-13
28-Sep-13
28-Oct-13
28-Nov-13
28-Dec-13
28-Jan-14
28-Feb-14
31-Mar-14
30-Apr-14
31-May-14
30-Jun-14
Yields (%)


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2014.
Also,
the
value
of
the
state/municipal bonds and corporate
bonds closed at N528.87 billion and
N169.90 billion, accounting for 2.8 per
cent
and
0.9
per
cent
of
the
aggregate
market
capitalization,
respectively.
The
value
of
supranational
bonds
remained
constant at N12.00 billion, accounting
for 0.1 per cent of the aggregate
market
capitalization.
The
equity
market capitalization accounted for
73.5 per cent of the aggregate market
capitalization as at June 2014, while
the combined share of FGN bonds,
state/municipal
bonds,
corporate
bonds
and
supranational
bonds
accounted for the remaining 26.5 per
cent
of
the
aggregate
market
capitalization. (Figure 5.15).

Figure 5.15: Structure of the Nigerian Capital
Market (June, 2014)


5.4
Global
Financial
Market
Development

Recent developments in the global
financial markets increased doubt as
to the resilience of the economic
recovery following the global financial
crisis. Monetary policy continued to
face
the
twin
challenges
of
maintaining a stable exchange rate
and low inflation in developing and
emerging market economies.

5.4.1 African Region

The volatility of exchange rate across
five African countries presented in
Table 5.10 and Figure 5.11 indicated
that the naira appreciated slightly on
two occasions by 0.01 per cent
between
December,

and
February, 2014. However, between
March and June, 2014, it depreciated
twice and remained flat in other
months.

Similarly,
the
South
African
rand
appreciated
between
December,
2013 and January 2014; and from April
to
June,
2014,
but
depreciated
significantly between January and
March, 2014. The Kenyan Shilling also
showed a similar trend, appreciating
against the U.S Dollar in most of the
months. Conversely, the Ghanaian
cedi
depreciated
throughout
the
review period and the Egyptian pound
depreciated against the U.S. Dollar in
four out of six months during the review
period (Table 5.10 and Figure 5.16).


FGN Bonds
22.8%
State/Municipal
bonds
2.8%
Corporate bonds
0.9%
Supranational
bonds
0.1%
Equities
73.5%


CBN Monetary Policy Review

Table 5:10: Changes (MTM* % App/Dep) in
Foreign Exchange Rates Across Selected African
Countries


Figure 5:16: Changes (MTM* % App/Dep) in
Foreign Exchange Rates Across Selected African
Countries


5.4.2
North American Region

In
the
North
American
region,
exchange
rates
experienced
significant fluctuations in Canada, but
moderated in Mexico in the review
period. The
Canadian dollar rate
varied widely from an appreciation of
4.72 per cent to a depreciation of 0.92
per
cent
in
January
and
May,
respectively. On the other hand, the
Mexican Peso, which experienced mild
volatility, appreciated in January, April
and June 2014, but depreciated in
February, March and May, 2014 (see
Table 5:11 and Figure 5:17).

Table 5.11: Changes (MTM* % App/Dep) in
Foreign Exchange Rates in Nigeria and Selected
North America


Figure 5.17: Changes (MTM* % App/Dep) in
Foreign Exchange Rates in Nigeria and Selected
North America


5.4.3
South American Region

In the South American region, there
was exchange rate volatility against
the U.S dollar in the review period. The
computed
monthly
changes
in
exchange
rate
indicate
that
the
Brazilian real depreciated against the
U.S dollar between January and May
2014, but appreciated in the remaining
four
months.
Likewise,
while
the
Argentine peso depreciated against
the US dollar by 23.01 per cent
Dec
2013/Jan

MTM%
App/Dep
Jan
2014/Feb

MTM%
App/Dep
Feb
2014/Mar

MTM%
App/Dep
Mar
2014/Apr

MTM%
App/Dep
Apr
2014/Ma
y 2014
MTM%
App/Dep
May
2014/Jun

MTM%
App/Dep
South
Africa
(Rand)

Kenya
(Shilling)

Egypt
(Pound)

Ghana
(Cedi)

Nigeria
(Naira)

Dec
2013/Jan

MTM%
App/Dep
Jan
2014/Feb

MTM%
App/Dep
Feb
2014/Mar

MTM%
App/Dep
Mar
2014/Apr

MTM%
App/Dep
Apr
2014/May

MTM%
App/Dep
May
2014/Jun

MTM%
App/Dep
Canada
(Dollar)

Mexico
(Peso)

Nigeria
(Naira)

App/Dep of Exchange Rate (%)
Canada (Dollar)
Mexico (Peso)
Nigeria Naira


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between December 2013 and January
2014, it moderated in the later part of
the review period and appreciated in
February 2014. In general, the Nigerian
naira appeared to have performed
better than the Brazil and Argentina
currencies, given the relative stability of
the Naira against the U.S dollar owing
to
the
effectiveness
of
monetary
policies applied in the review period
(Table 5.12).

Table 5.12: Changes (MTM* % App/Dep) in
Foreign Exchange Rates in Nigeria and Selected
South America


Figure 5.18: Changes (MTM* % App/Dep) in
Foreign Exchange Rates in Nigeria and Selected
South America


5.4.4
The European Region

During the period under review, the
British
pound
fluctuated
mildly,
depreciating in January, February,
April and June 2014, but appreciated
in May and remained unchanged in
March 2014. The Euro also fluctuated
as the British Pound, depreciating in
February and April 2014, appreciated
in January, March and May, but
remained unchanged in June 2014.
The changes in exchange rates in the
UK and Euro Area currencies mirrored
each other during the period under
review.
In
Russia,

the
rubble
appreciated against the US dollar in
January,
February
and
April,
but
depreciated in March, May and June
2014. Again, comparatively, the Naira
exchange rate appeared to be more
stable than the European currencies
throughout the period (see Table 5.13
and Figure 5.13).

Table 5.13: Changes (MTM* % App/Dep) in
Foreign Exchange Rates in Nigeria and Selected
European Countries


5.4.5
The Asian Region

In the period under review, the
Japanese yen depreciated in most of
the months, except in March by 1.25
per
cent.
The
Chinese
yuan
appreciated by 0.17, 1.49, 1.14 per
cent and 0.64 per cent at the end of
January, February, March and April
respectively.
However,
the
rate
Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14
Brazil
(Real)

Argentina
(Peso)

Colombia
(Peso)

Nigeria
(Naira)

Jan-14
Feb-14
Mar-14
Apr-14
May-14
Jun-14
Brazil (Real)
Argentina (Peso)
Colombia (Peso)
Nigeria (Naira)
Dec
2013/Jan

MTM%
App/Dep
Jan
2014/Feb

MTM%
App/Dep
Feb
2014/Mar

MTM%
App/Dep
Mar
2014/Apr

MTM%
App/Dep
Apr
2014/May

MTM%
App/Dep
British
Pound

The
EURO

Russia
Rubble

Nigeria
Naira


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depreciated by 0.16 and 0.80 per cent
in May and June, respectively. In India,
the rupee experienced fluctuations,
appreciating at the end of January,
April and June, but depreciated in the
remaining months of the review period.
The naira’s relative stability compared
favourably with selected currenices of
the Asian Region (see Table 5.14 and
Figure 5.20).

Table 5:14: Changes (MTM* % App/Dep) in
Foreign Exchange Rates Across Selected Asian
Countries


Figure 5.20: Changes (MTM* % App/Dep) in
Foreign Exchange Rates in Nigeria and Selected
Asian Countries


Date
Dec/Jan

MTM*
%
App/Dep
Jan/Feb

MTM*
%
App/Dep
Feb/Mar

MTM*
%
App/Dep
Mar/Apr

MTM*
%
App/Dep
Apr/May

MTM*
%
App/Dep
May/Jun
2014 MTM*
%
App/Dep
Japan
(Yen)

China
(Yuan)

India
(Rupee)

Nigeria
(Naira)

App/Dep Exchange Rates (%)
Japan (Yen)
China (Yuan)
India (Rupee)
Nigeria Naira


CBN Monetary Policy Review

Box 5.1
Foreign Portfolio Investment (FPI) in the Nigerian Equities Market

The management of foreign portfolio flows is central to international business transactions in an
economy. Globalization and greater integration provided the impetus for several developing
and emerging market economies to relax restrictions, among other measures, to attract
international capital. These economies require foreign capital in order to ensure economic
development. Developing countries are characterized by low level of domestic savings, and in
order to attain the desirable level of investments, foreign capital is required to bridge the savinginvestment gap. These countries therefore stand to benefit from increased foreign capital.
Capital inflows are expected to foster economic activities in less developed countries in
particular, and promote economic growth and development in general. While portfolio
investment has been a notable feature of developed economies, in recent times, it has become
a very important component of the balance of payments of many emerging and frontier
economies such as China, Hong Kong, India, Singapore, Taiwan, Brazil, South Africa, etc.
Recently, portfolio investment has gained prominence in Nigeria.

Despite the importance of FPI, surges in inflow are associated with macroeconomic imbalances
such as high inflation, exchange rate fluctuations and high domestic interest rates. The adverse
impact of reliance on FPI becomes more pronounced during economic crisis or recession, such
as the Asian financial crisis of 1997 and the global financial and economic crisis of 2007. During
the 2007 crisis, Nigeria and many other countries experienced reduction in FPI, as investors fled to
safety to mitigate the impact of the crisis on their portfolios. In addition, inward remittances
declined as the impact of the recession hit Western economies, driving up unemployment. The
need for increased foreign portfolio divestment and repatriation of dividends by foreign investors
worsened pressure on the exchange rate, leading to a significant drawdown on the nation’s
external reserves. As a result, the naira depreciated at the wDAS/rDAS window from about
N117.97/US$ at end-December 2007 to N132.56/US$ at end-December 2008. The depreciation of
the naira was further accentuated by adverse terms of trade, occasioned by oil price
fluctuations, which again impacted negatively on the country’s external reserves.

A review of capital controls in Nigeria reveals a systematic reduction of restrictions on capital
flows of the economy. For instance, the 1-year minimum tenor on purchases of FGN Bonds and
Nigerian Treasury Bills by foreign investors was removed. Foreign investors were also allowed to
invest directly in private equity as well as in the capital market. In addition, investors were
guaranteed unrestricted repatriation of their capital. Moreover, foreign investors have unfettered
access to non-government instruments such as Bankers Acceptances, etc. Furthermore, foreign
investors were allowed to extend loans to private Nigerian entities, without restrictions. Such loans
could either be in the form of capital importation, evidenced by the issuance of a Certificate of
Capital Importation (CCI), or supplier’s credit, in order to facilitate repayment of
principal/interest. However, the loans were without government guarantees. It is important to
state that in the case of investment in government securities, foreign investors can divest the
investment before maturity by transferring the underlying CCI to a new investor.

Aggregate inflow to Nigeria has expanded remarkably in the last ten years. Some prominent pullfactors for this expansion included an improved macroeconomic environment, increased


CBN Monetary Policy Review

confidence in macroeconomic management, investor-friendly investment policies, and
comparatively robust returns on investment. In the last 5 years, the Nigerian economy has
recorded stable and relatively better outcomes, underpinned by sound economic and financial
reforms. The financial system has remained resilient and stable. Overall growth has averaged
over 6.0 per cent, with inflation stabilizing in the single digit range since 2013. The exchange rate
has also maintained relative stability, accompanied by a fairly robust external reserve level.

Foreign portfolio investment (FPI) in bonds and equities constituted the bulk of foreign inflows to
Nigeria. However, it is important to note that the structure of capital importation is skewed
towards investment in equities, leading to the growing prominence of the equity market in
Nigeria. Between January and December, 2013, FPI in equities accounted for 71.75 per cent of
total inflows, against 5.13 per cent in the bonds market. As at June 2014, FPI in equities
accounted for 63.20 per cent as against 12.51 per cent in the bonds market.

At end-June 2014, total equity transactions at the Nigerian Stock Exchange stood at N225.51
billion (about $1.45 billion), representing an increase of 58.54 per cent compared with endDecember, 2013. Total foreign transactions increased by 69.61 per cent from N69.57 billion at
end-December 2013 to N118.00 billion at end-June 2014. As at end-June 2014, FPI accounted for
30.50 per cent of total transactions, while the outflows accounted for 21.83 per cent. In
comparison to the same period in 2013, total FPI inflows decreased by 23.70 per cent, while total
FPI outflows decreased by 18.09 per cent. Overall, there was a 21.46 per cent decrease in total
foreign transactions in comparison to the position at end-June 2013.

In terms of market share, foreign transactions in the Nigerian equities market as a percentage of
total transactions stood at 52.32 per cent, while domestic transactions accounted for the
balance of 47.68 per cent as at end-June 2014, demonstrating a minimal dominance of foreign
portfolio investment over its domestic counterpart. The near-equivalent share of domestic players
in the capital market in relation to their foreign counterparts increases the risk of major shocks in
the event of a sudden drawdown by foreign investors.


CBN Monetary Policy Review

Box 5.2
Warren Buffett Valuation Metric

Ratio of Market
Capitalisation
to GDP
Valuation
Expected
Investment
Behaviour
Ratio<50%
Significantly
Undervalue
d
Rush to buy if
the
fundamental
s are right
50%<Ratio<75
%
Modestly
Undervalue
d
Buy more
75%<Ratio<90
%
Fairly
Valued
Trade at
current level
90%,Ratio<115
%
Modestly
Overvalued
Sell of
Ratio>115%
Significantly
Overvalued
Massive sell
of

The Warren Buffett Valuation Metric (BVM) is
an indicator employed in determining the
state of a stock market to establish whether it
is trading above or below its equilibrium value
relative to the GDP of the economy. The BVM
which is computed as the ratio of market
capitalization to GDP, is one of the best
measures
of
stock
market
valuation.
It
provides a perspective on the position of the
stock market in the economic cycle, and is
also thought of as an economy wide price to
sales
ratio. Indeed,
one
of
the
major
challenges confronting policymakers in recent
times is determining if stock markets are
appropriately priced in order to provide
relevant policy response to emerging issues.

The Table above shows the Warren Buffett
Valuation Metric. From the Table, if the
percentage relationship between market
capitalization and GDP is less than 75 per
cent, this is an indication that traded securities
are
undervalued,
giving
room
for
appreciation based on market participants’
correct
interpretation
of
equity
prices.
However, if the ratio is over 115 per cent, the
stock market is considered overvalued. In
such a situation, the market may soon
become bearish as market participants take
profits, leading to market correction. This has
consequences for savings and investment
behaviour in the economy.


CBN Monetary Policy Review

Box 5.3
QE3 Tapering

One of the major developments in the global
economy in the past few years was the
implementation of quantitative easing (QE) as
a result of the failure of conventional
monetary
policy
instruments
to
address
anomalies in macroeconomic indicators. This
measure involves the purchase of both public
and private sector assets by central banks,
and extension of credit to commercial banks
among others. By this action, funds are
injected into the economy to stimulate
nominal spending necessary for economic
recovery.

On May 22, 2013, ‘Tapering’ was introduced
into the financial lexicon. The then Fed
Chairman, Ben Bernanke, while testifying at
the Congress, stated that the Fed may taper –
i.e. reduce - the size of the asset acquisition
programme
referred
to
as

QE.
The
programme,
designed
to
stimulate
the
economy, had served the secondary purpose
of supporting financial market recovery. The
tapering tantrum led to substantial turmoil in
the financial markets of emerging and
developing
economies.
However,
the
commencement of the implementation was
delayed until December 18, 2013, when the
programme reduced asset holdings from its
original level of US$85.0 billion to US$75.0
billion. The justification for this action was that
the economy had become strong enough for
the Fed to feel confident in reducing the level
of stimulus. Further tapering continued on
January 29, 2014, when the Fed announced
that continued improvement in economic
conditions had resulted in the need to further
reduce QE. As at end-June 2014, the monthly
asset purchase had been reduced from
US$85.0 billion to US$35.0 billion with a promise
to continue the downward trend till the
programme is brought to a close as the
economy improve.

Tapering received significant attention from
investors and policy makers, particularly in
emerging markets due to the role it played in
the revival of global capital markets. The
continued decision of the Fed to reduce asset
purchases
threw
up
sovereign
risks
in
emerging markets, as margins improved in the
US, thus heightening the risk of capital
reversal. Emerging market currencies such as
the South African rand and the Turkish lira
depreciated sharply in response to this new
trend.

In anticipation of capital reversals, central
banks in emerging and developing market
economies responded swiftly by raising policy
rates to curtail possible outflows. In Nigeria,
the
Monetary
Policy
Committee
(MPC)
reacted by maintaining its tight monetary
policy stance, keeping its policy rate (MPR) at
12.0 per cent and increasing its cash reserve
ratio (CRR) for both public and private sector
funds from 50.0 and 12.0 per cent to 75.0 and
15.0 per cent, respectively, in the first half of
2014.

The tapering exercise and its impact on the
Nigerian financial sector help to highlight the
need
to
improve
the
macroeconomic
fundamentals. With right fundamentals, the
economy would attract foreign capital more
in the form of Foreign Direct Investment (FDI)
that has the advantage of irreversibility at
short notice.


CBN Monetary Policy Review

CHAPTER 6
ECONOMIC OUTLOOK

6.1
OVERVIEW

he
growth
in
the
global
economy moderated to 2.75
per cent in the first quarter of
2014, making it imperative for the IMF
to mark down world output forecast for
2014 by 0.35 percentage point to 3.4
per cent from 3.75 per cent in the
second half of 2013 (World Economic
Outlook (WEO) update in July 2014).

The
upside
economic
surprises
in
selected
advanced
countries
notwithstanding, lackluster outcomes
in the United States, Russia and China,
inventory correction in some countries
and less optimistic outlook in many
emerging economies weighed heavily
on global economic activity. With
somewhat stronger growth expected
in some advanced economies, the
global growth projection for 2015
remains at 4 per cent (Table 6.1).

In
the
United
States,
the
strong
correction
after

inventory
overhang, dampened demand due to
a harsh winter, sharp decline in exports,
and contraction in output in the first
quarter of 2014 were moderating
factors. In China, the moderation in
domestic demand was accounted for
by the authorities’ effort to rein in credit
growth, coupled with a correction in
the real estate sector. In Russia,
geopolitical
tensions
accentuated
already weakened demand, leading
to sharp deceleration in activity.

Global growth is, however, expected
to rebound from the second quarter of
2014, as some drivers of first quarter
weakness began to wane and others
offset
by
policy
reforms.
The
anticipated recovery would be driven
largely
by
highly
accommodative
monetary policy and moderating fiscal
consolidation
in
most
advanced
countries.
Structural reforms should
help
to
close
infrastructure
gaps,
strengthen
productivity,
and
lift
potential growth in many advanced
and emerging market economies. In
general, some aspects of the demand
weakness in the first quarter, such as
the inventory correction in the United
States, appear to be more perennial,
and are expected to result in lower
global growth in 2014.

In the advanced economies, growth is
projected to increase to about 2.25
per cent in 2014–15, an improvement
of
about
1.0
percentage
point
compared
with
2013.
Highly
accommodative
monetary
policies
and a reduction in fiscal tightening
(except in Japan) are expected to
drive growth in those economies.

In the euro area, an uneven recovery
across
countries
is
expected
to
continue
in
2014,
with
growth
expectation of 1.2 per cent. There are
pockets of stronger growths in the
region, with growth projection of about
T


CBN Monetary Policy Review

1.5 per cent in the medium term. The
key drivers of recovery are stronger
external demand, a smaller fiscal drag,
and expectations of improving credit
conditions in many countries.

Growth
is
projected
to
pick
up
gradually from 4.7 per cent in 2013 to
about 5 per cent in 2014 and 5.25 per
cent in 2015 in emerging market and
developing
economies.

Stronger
exports to advanced economies are
expected to drive growth, although
tighter
financial
conditions
will
continue
to
moderate
domestic
demand on the other hand.
In Sub-Saharan Africa, the IMF has
projected acceleration of economic
activities to remain same at 5.4 per
cent in 2014, but to increase to 5.8 per
cent in 2015 due to positive domestic
supply-side developments and the
strengthening global recovery.

In Nigeria, growth continues to be
strong owing to relatively high oil
prices, despite security challenges in
the North-Eastern part of the country.
Nigeria’s GDP is projected to grow by
7.0 per cent, as production in the nonoil sectors continues to expand and oil
production improves.

6.2
Outlook of Global Output

Overall, global economic growth was
projected to rise to 3.4 per cent in 2014
and 4.0 per cent in 2015 from an
annual rate of 3.2 per cent in 2013.
Data from the IMF WEO (July 2014
Update) indicates that the projected
annual output growth for 2014 and
2015 in advanced economies would
be 1.8 and 2.4 per cent; emerging
markets and developing economies
(EMDEs), 4.6 and 5.2 per cent; SubSaharan Africa, 5.4 and 5.8 per cent,
respectively (see Table 6.1 below). The
bulk of the acceleration is expected to
come from high income countries
(notably the US and the Euro Area), as
the
drag
on
growth
from
fiscal
consolidation, weak labour market
conditions
and
pent-up
demand
improve remarkably in those countries
during the first quarter of 2014.

In the US, growth is projected at 1.7 per
cent in 2014, rising to 3.0 per cent in
2015. In the Euro Area, the projection
for 2014 is 1.1 per cent and 1.5 per cent
in 2015. Overall growth is expected to
remain uneven across the region,
stronger in the core countries but
weaker in those with high debt profile
(both
public
and
private),
and
financial fragmentation, all of which
will
weigh
on
domestic
demand,
resulting
in
high
levels
of
unemployment. In the United Kingdom,
growth is forecast at 3.2 and 2.7 per
cent in 2014 and 2015, respectively.

Growth in Japan is forecast at 1.6 and
1.1 per cent in 2014 and 2015,
respectively.
The
pessimistic
expectation in 2015 is mainly attributed
to the planned unwinding of fiscal
stimulus. In China, growth is forecast at


CBN Monetary Policy Review

7.4 and 7.1 per cent in 2014 and 2015,
respectively. The IMF has advised
China to refrain from further stimulating
measures
aimed
at
driving
the
economy beyond the growth target of
6.5 – 7.0 per cent in 2015. India’s
growth is forecast at 5.4 and 6.4 per
cent for 2014 and 2015, respectively.

Brazil’s
growth
forecast
is
revised
downwards to 1.3 per cent in 2014 and
2.0 per cent in 2015, owing to tighter
financial conditions and continued
weakness in business and consumer
confidence. Growth in South Africa is
put at 1.7 and 2.7 per cent in 2014 and
2015,
respectively.
The
modest
improvement expected in South Africa
would come mainly from stronger
external demand as the domestic
economic condition is plagued by
electricity
constraints
and
labour
conflicts.

In
the
Sub-Saharan
Africa,
the
projected 5.4 and 5.8 per cent growth
rates in 2014 and 2015 respectively, are
expected
to
be
driven
by
the
commodities
market,
as
domestic
currencies
have
depreciated
substantially in recent times. In the
Middle East and North Africa (MENA),
regional growth is projected at 3.1 per
cent in 2014 and 4.8 per cent in 2015.
The projected growth is expected to
be led by the oil-exporting economies
in the region, where high public
spending will buoy non-oil activities
and oil supply difficulties are expected
to be partly alleviated in others.
6.3
Downside
Risks
to
Global
Outlook

Many downside risks still attend the
modest improvement in economic
projections for 2014. Primarily, the
geopolitical risks have intensified in
many fronts. Recent developments in
the Middle East and Ukraine pose
serious risks of oil price distortions. The
global financial markets on the other
hand face potential risk of a renewed
rise in longer-term interest rates due to
the long-awaited normalization of the
US monetary policy.

In the Euro area, the persistently low
inflation will feature in the radar of
policy makers and analysts. Although
growth potentials are very high in
emerging market economies, they are
perennially plagued by issues arising
from
domestic
weaknesses
and
external vulnerabilities, which could
cause a sudden worsening of their
financial
conditions
and
capital
reversals.

In the Sub-Saharan Africa, many oilimporting
economies
continue
to
struggle with difficult sociopolitical and
security conditions, which weigh on
confidence and economic activity.

To
overcome
the
downside
risks,
advanced economies may have to
retain their accommodative monetary
policies. In addition, there should be a
renewed focus on financial system
stability,
using
macroprudential


CBN Monetary Policy Review

guidelines and the implementation of
financial regulatory reforms. Emerging
market and developing economies
may have to allow exchange rates to
respond
to
changing
market
fundamentals. Furthermore, they need
to address inflationary pressures and
policy
credibility.
In
general,
all
economies should focus on closing
infrastructural
gaps,
strengthening
productivity
and
raising
growth
potential.

Table 6.1: Global Output and Inflation Outlook
Source: IMF WEO Update, July 2014

6.4
Outlook
for
Domestic
Output
Growth

The GDP growth rate for 2014 is
projected at 6.21 per cent by the
National Bureau of Statistics, down
from 6.77 per cent recorded in 2013.
This compares favourably with the
International Monetary Fund’s (IMF)
projection of a higher growth rate in
output of 7.1 per cent for the rest of
2014. This positive outlook for the
coming months is due to a number of
reasons. They include a sustained
implementation
of
the
on-going
economic
reforms,
a
successful
implementation
of
the
Growth
Enhancement
Scheme
(GES),
designed to guarantee timely supply of
inputs to farmers, leading to increased
agricultural
activities.
Others
are
continued power sector reforms and
renewed efforts to curb crude oil theft.
The projected growth in output is
expected to be driven principally by
developments in the non-oil sector,
especially
the
agricultural,
trade,
services,
telecommunication
and
industrial sectors.

The upside risks to these projections
include
the
weak
infrastructural
facilities and security challenges in the
north east of the country.

6.5
Global Inflation Outlook

World inflation pressure is expected to
remain subdued in 2014 through 2015,
given the persistent negative output
gaps in advanced economies, weaker
domestic demand in several emerging
market
economies,
and
falling
commodity prices. In particular, recent
decline in headline inflation across the
globe has been due to decreases in

A. World Output
World Output
3.5
3.2
3.4

Advanced
Economies

USA
2.8
1.9
1.7

Euro Area

Japan

UK

Canada
1.7

2.2
2.4
Other
Advanced
Economies

2.3

3.2
Emerging
&
Developing
Economies

Commonwealth
of
Independent States

Latin
America
and
the Caribbean
2.9
2.6

2.6
Middle
East
and
North Africa

Sub-Saharan Africa

B. Commodity Prices
(US' Dollars)
Oil

-0.9
0.1
-4.3
Non-fuel

C. Consumer Prices
Advanced
Economies

1.4
1.6
1.7
Emerging
&
Developing
Economies


CBN Monetary Policy Review

the prices of commodities, especially
fuels and food.

In advanced economies, inflation is
projected at 1.5 per cent in 2014 and
1.6 per cent in 2015. The US inflation
forecast for 2014 and 2015 is projected
to
be
1.4
and
1.6
per
cent,
respectively. In the Euro Area, it is
expected to rise to 1.2 per cent in 2015
from 0.9 per cent in 2014. The forecast
for Japan is 2.8 and 1.7 per cent in

and
2015,
respectively.
The
relatively subdued projections in the
advanced economies are mainly due
to their persistent output gaps, which
should encourage expansion in their
economic activities.

Inflation
in
Emerging
Market
and
Developing Economies is forecast at
5.5 and 5.2 per cent in 2014 and 2015,
respectively. China’s forecast is 3.0 per
cent in 2014 and 2015, while the
forecast for India is 8.0 per cent in 2014
and 7.5 per cent in 2015. As in previous
review period, slower demand growth
and consistent fall in commodity prices
continue to moderate inflation in those
economies.

Sub-Saharan Africa (SSA) price level is
forecast at 6.1 and 5.0 per cent in 2014
and 2015, respectively. The forecast for
South Africa is 6.0 and 5.6 per cent in
2014 and 2015, respectively, while that
of Ghana is put at 13.0 and 11.1 per
cent over the same period. Recent
regional insurgencies and the Ebola
Virus Disease (EVD) epidemic and their
impact
on
food
production
notwithstanding,
the
use
of
appropriate
monetary
policy
measures, along with the continuous
moderation
in
commodity
prices,
should help to calm inflation surprises in
the region.

6.6
Outlook for Domestic Inflation

Inflation
continues
to
moderate,
though there was an uptick to 8.2 in
June 2014 from 8.0 in December 2013.
The
NBS
projected
that
headline
inflation lies between 8.39 and 8.82
between July and December 2014.
Staff
estimates,
however,
suggest
headline inflation at the end of 2014
and 2015 to be 8.40 and 8.10 per cent,
respectively (Figure 6.1). Given existing
economic fundamentals, along with
the potential external and domestic
shocks to the economy, the headline
inflation forecasts are in the range of
5.5 and 10.1 per cent between July
2014 and December 2015. This implies
that
headline
inflation
may
be
breaking through to a double digit
range, as against the CBN set target of
6-9 per cent, and calls for monetary
policy
action
to
curtail
inflation
surprises.


CBN Monetary Policy Review

Figure 6.1: Fan Chart for Inflation from 2012:m3 -
2015:m12


6.7
Outlook for Monetary Policy In

Nigeria’s
monetary
policy
environment in the first half of 2014 was
characterised by liquidity surfeit; output
was robust and inflation increased
moderately despite upward pressure
exerted by food inflation in the second
quarter of 2014. Fuel supply remained
stable
but
agricultural
production
declined slightly, in response to the
security threat in some parts of the
Northern region.

The sustained tight monetary policy
stance of the CBN contributed to
macroeconomic stability. The relatively
high rate of return in the economy
contributed
to
the
inflow
and
sustenance of portfolio investments,
which buoyed the reserve level and
assisted in ensuring exchange rate
stability, robust asset prices as well as
increased
external
reserves.
It
is
anticipated that the monetary policy
stance in the second half of 2014 will
continue to be tight. This will help to
curtail expected inflationary pressure
that may arise as the 2015 general
elections approach and the end-ofthe-year spending activities by both
the
private
and
public
sectors.

2012m3
2012m12
2013m9
2014m6
2015m3
2015m12

Central path
Confidence Interval


CBN Monetary Policy Review

Appendices

Central Bank of Nigeria Communiqué
No. 93 of the Monetary Policy
Committee Meeting of Monday 20 and
Tuesday 21 January, 2014

The Monetary Policy Committee (MPC)
met on January 20 and 21, 2014
against the backdrop of uncertainties
in the global economy, especially
arising from the commencement of
the QE3 tapering by the Fed. In
attendance were eight (8) out of the
ten
(10)
members
following
the
retirement of Mr. Tunde Lemo, Deputy
Governor, on January 11, 2014 and Mr.
John Oshilaja, an external member of
the MPC, who completed his term on
December 31, 2013. The Committee
reviewed key global and domestic
economic developments in 2013 and
re-assessed the short- to medium-term
risks to inflation, domestic output and
financial stability and the outlook for
2014.

International Economic Developments

The global economy is expected to
continue recovering from the global
financial crisis, as growth is projected
to accelerate in 2014. The International
Monetary Fund (IMF) projected global
growth at 3.4 and 3.5 per cent in 2014
and 2015, respectively, up from 2.4 per
cent in 2013. Some other sources,
however,
have
produced
less
optimistic projections of global growth
for 2014; for example, the United
Nations Department for Economic and
Social Affairs’ (UNDESA) has projected
3 per cent growth. The decision by the
US Federal Reserve to reduce its
monthly asset purchases from USD85
billion to USD75 billion left most markets
stable having already priced-in the
development. The quantitative easing
measures by the US Federal Reserve
had helped to restore momentum to
the US economy and also contributed
to the improvement of the Eurozone
economy in 2013. Europe is forecast to
return to growth in 2014 after two years
of contraction. Greece, which has
been at the centre of the Bloc's
banking and debt crisis, is expected to
record its first economic expansion in
six years. Emerging markets that were
major beneficiaries of cheap money
from the Fed stimulus could experience
financial market instability as tapering
begins, although the US authorities
have made it clear that they remain
sensitive
to
the
impact
of
their
domestic policies on global markets
and will therefore aim to minimize
disruptions.

Global inflation is projected to rise to
2.71 per cent in 2014, up from about
2.30 per cent in 2013. Favorable
developments in food and fuel supply
would moderate upward pressure on
prices of major commodities, despite
the expected acceleration in global
activity. The US recorded inflation of 1.5
per cent in December, up from 1.2 per
cent in November, 2013. Most central
banks maintained a cautious posture
in 2013, retaining or varying policy rates


CBN Monetary Policy Review

only slightly. The financial markets
expect
monetary
authorities
to
continue
with
policies
aimed
at
supporting growth in 2014. In effect,
monetary
conditions
are
likely
to
remain
easy
in
key
advanced
economies over the short- to mediumterm on the back of the forward
guidance that monetary authorities in
these economies have given, with
regard to the conditions that must be
met before any change in policy
stance comes into effect.

Domestic
Economic
and
Financial
Developments Output

The National Bureau of Statistics (NBS)
estimated real Gross Domestic Product
(GDP) growth rate of 7.67 per cent for
the fourth quarter of 2013, which was
higher than the revised figure of 6.81
and 6.99 per cent recorded in the third
quarter, and the corresponding period
of 2012, respectively. Overall, growth
rate for fiscal 2013 was estimated at
6.87 per cent up from 6.58 per cent in
2012. The non-oil sector remained the
major driver of growth, recording 8.73
per cent in the fourth quarter of 2013.
The growth drivers in the non-oil sector
remained agriculture; wholesale and
retail
trade;
and
services
which
contributed 1.64, 2.34, and 2.66 per
cent, respectively. The relatively robust
growth performance despite sluggish
global
recovery
reflected
the
continuing
favourable
climatic
conditions for increased agricultural
production,
sustained
outcome
of
banking
sector
reforms
and
macroeconomic stability.

Prices

The moderation in inflationary pressure,
which began in the fourth quarter of
2012, continued in 2013. The year-onyear headline inflation fell consistently
from 9.0 per cent in January to 8.6 and
8.4 per cent in March and June,
respectively, before ending the year at
8.0 per cent. Also, food inflation, which
constitutes 51.8 per cent of the CPI
basket, declined from 10.1 per cent in
January to 9.5, 9.6, 9.4 and 9.3 per cent
in
March,
June,
September,
and
December 2013, respectively.

However,
core
inflation
initially
declined to 7.2 and 5.5 per cent in
March and June from 11.3 per cent in
January, but rose during the second
half of the year to 7.4 and 7.9 per cent
in September and December, 2013,
respectively.
The
moderation
in
domestic price level was largely due to
the
tight
monetary
policy
stance
coupled with the relatively stable
exchange rate regime during the
period, which resulted in single digit
inflation in the three measures for the
whole year. This is the first time the
country has achieved this since 2007.
The Committee noted with satisfaction
that the year-on-year headline inflation
remained within the indicative target
range of 6-9% in the second half of
2013. However, the Committee noted
the
underlining
pressure
on
core
inflation,
which
may
not
be


CBN Monetary Policy Review

unconnected
with
the
widening
spread between official and BDC
exchange rates. In order to head off
the spectre of rising inflation in 2014,
concrete actions will be needed to
stabilize the currency and minimize the
divergence
between
the
two
segments of the foreign exchange
market.

Monetary, Credit and Financial Market
Developments

Broad money supply (M2) contracted
by 4.82 per cent in December 2013
over the level at end-December 2012,
in contrast to the growth of 16.39 per
cent in the corresponding period of
2012. M2 was also below the growth
benchmark of 15.20 per cent for 2013.
Aggregate domestic credit (net) grew
by 11.11 per cent in December 2013,
over the end- December 2012 level.
The aggregate domestic credit (net) at
end-December 2013 was, however,
below the provisional benchmark of
22.98 per cent for 2013. The decline in
M2 was due mainly to the decrease in
Net Foreign Assets by 5.86 per cent.
Interest rates in all segments of the
money market reflected the liquidity
conditions in the banking system. At
the MPC meeting of November 18- 19,
2013, the Monetary Policy Rate (MPR)
was retained at 12.00 per cent with a
symmetric corridor of +/- 200 basis
points, thus effectively maintaining the
SLF and SDF rates at 14.00 and 10.00
per cent, respectively. Alongside the
existing
Cash
Reserve
requirement
(CRR) of 12.0 per cent, the 50.0 per
cent CRR on public sector deposits
was retained to address excess liquidity
in the banking system. Consequently,
both the weighted average inter-bank
call and OBB rates opened at 11.73
per cent in December 2012 but closed
at 10.86 and 10.46 per cent in
December
2013,
respectively.
The
capital market continued its rally with
the equities market providing the lead.
The All-Share Index (ASI) increased by
47.2 per cent from 28,078.81
on
December 31, 2012 to 41,329.19 on
December
31,
2013.
Market
Capitalization (MC) increased by 47.4
per cent from N8.97 trillion to N13.23
trillion
during
the
same
period.
Improved
earnings
and
investor
confidence
in
macroeconomic
management contributed to the rise in
stock prices.

External Sector Developments

The
end-period
exchange
rate
remained stable at the w/rDAS and
interbank segments but depreciated
significantly at the BDC segment. The
exchange rate at the w/rDAS-SPT in
2013 opened at N157.33/US$ (including
1%
commission)
and
closed
at
N157.26/US$,
representing
an
appreciation of N0.07k or 0.04 per
cent.
The
inter-bank
selling
rate
opened at N156.25/US$ and closed at
N159.90/US$,
representing
a
depreciation of N3.65k or 2.34 per cent
for the period. However, at the BDC
segment of the foreign exchange
market, the selling rate opened at
N159.50/US$
and
closed
at


CBN Monetary Policy Review

N172.00/US$,
representing
a
depreciation of N12.50k or 7.84 per
cent. Gross external reserves as at
December 31, 2013 stood at US$42.85
billion, representing a decrease of US$
0.98 billion or 2.23 per cent compared
with
US$
43.83
billion
at
end-
December 2012. The Committee noted
that the decrease in the reserves level
resulted largely from a slowdown in
portfolio and FDI flows in Q4 2013
resulting in increased funding of the
foreign exchange market by the CBN
to
stabilize
the
currency.
The
Committee again expressed concern
over the continued depletion of the
Excess Crude Account (ECA) which
balance stood at less than US$2.5
billion on January 17, 2014 compared
with about US$11.5 billion in December
2012. This absence of fiscal buffers
increased our reliance on portfolio
flows thus, constituting the principal risk
to exchange rate stability, especially
with uncertainties around capital flows
and oil price.

The Committee’s Considerations

The MPC welcomed the sustained
stability of the exchange rate and
single digit inflation in 2013. It, however,
identified four (4) key concerns for
policy in the short- to medium-term:

1.
Depletion
of
fiscal
buffers
following the continuing decline
in
oil
revenue,
rundown
of
reserves and depletion of excess
crude oil savings;

2.
Falling portfolio and FDI inflows;

3.
Widening
gap
between
the
official and the BDC exchange
rates; and
4.
Creeping
increase
in
core
inflation.

On the depletion of fiscal buffers, the
Committee decried the continuous fall
in revenue from oil despite stable price
of oil and production in 2013. Although
the Committee acknowledged output
losses due to theft and vandalism, this
could
not
wholly
explain
the
magnitude of the shortfall in revenue.
As
a
consequence,
accretion
to
external reserves remained low while
much of the previous savings have
been depleted, thereby undermining
the ability of the Central Bank to
sustain exchange rate stability. The
Committee therefore, urged the fiscal
authorities to block revenue leakages
and rebuild fiscal savings needed to
sustain confidence and preserve the
value of the naira. The MPC also noted
the reduction in portfolio inflows driven
by the commencement of the QE3
tapering
by
the
Fed,
transition
concerns at the CBN and continued
depletion of the ECA, thus dampening
investor confidence. The reduction of
the US stimulus especially, could in
addition, trigger capital flow reversals
and put greater pressure on the naira
exchange rate. The Committee also
expressed
concern
about
the
widening gap between the official
and the BDC exchange rates, noting


CBN Monetary Policy Review

that this could precipitate speculation
and round-tripping. Though, the BDCs
represent a small component of the
foreign
exchange
market,
the
widening spread appeared to have
fed into creeping increases in core
inflation. The Committee re-affirmed its
commitment to a stable exchange
rate regime while urging the fiscal
authority
to
provide
support
by
reducing fiscal leakages, improving
controls
around
oil
revenues
and
reviewing terms around production
sharing
agreements
with
oil
companies,
while
awaiting
the
passage of the Petroleum Industry Bill
(PIB). The Committee also noted the
necessity
for
a
complementary
monetary policy response to ensure
sustained exchange rate stability and
convergence
of
rates
in
various
segments. In the light of this, two
options were considered: a) Allowing a
depreciation of the currency to avoid
further tightening and depletion of
reserves;
and
b)
Maintaining
our
commitment to currency stability while
stressing that monetary policy is almost
at its limits and needs support from the
fiscal side in the form of excess crude
savings if currency stability is to be
maintained
in
the
future.
The
Committee decided that the costs of a
weaker naira far outweigh the benefits
to the Nigerian economy and the core
mandate of the CBN. It therefore
opted to maintain its commitment to
currency stability. Furthermore, having
looked
at
all
the
options,
the
Committee decided against excessive
reliance on external reserves to support
the exchange rate and opted for
monetary tightening until fiscal buffers
are rebuilt.

Decision

Having considered all the issues above
the Committee decided as follows:

All
members
voted
for
an
increase in CRR on public
sector deposits from 50 per
cent to 75 per cent with effect
from February 4, 2014


Five (5) members voted for a
retention of CRR on private
sector deposit at 12 per cent
while three (3) voted for an
increase in this component to
15 per cent


One (1) member voted for
allowing
the
currency
to
depreciate by either shifting
the mid-point or widening the
band.

The decision is therefore as follows:

1.
MPR remains at 12 per cent +/-
200 basis points and liquidity ratio
(LR) at 30 per cent
2.
Public sector CRR increased from
50 per cent to 75 per cent
3.
Private sector CRR retained at 12
per cent
4.
The CBN to take immediate step
to redress the supply-demand
imbalance in the BDC segment
while maintaining its focus on


CBN Monetary Policy Review

anti-money
laundering
(AML)
activities.

Sanusi Lamido Sanusi, CON
Governor
Central Bank of Nigeria
21st January, 2014


PERSONAL
STATEMENTS
BY
THE
MONETARY POLICY COMMITTEE
MEMBERS:

1.0
ALADE, SARAH
This first MPC of the year is coming at a
time of some uncertainties in the world
economy. The world’s four largest
economies are currently undergoing
transitions with the United State of
America struggling to boost growth in
a
fractured
political
environment.
China is moving from a growth model
based on investment and exports to
one led by internal demand. Europe is
struggling to preserve the integrity of its
common currency while resolving a
multitude of complex institutional and
debt issues, and Japan is trying to fight
two
decades
of
deflation
with
aggressive
and
unconventional
monetary policies. All these have
implications for the Nigerian economy,
with deep dependency on export
earnings and external demand. These
development coupled with internal
domestic dynamics during an election
year, which are discussed below will
require
careful
maneuvering
and
appropriate policies to safeguard the
stability of the economy. Against this
background, I support a no change in
Monetary Policy Rate (MPC), a 75 per
cent increase in public sector deposits
Cash Reserve Requirement (CRR) and
a
review
of
the
exchange
rate
midpoint to safeguard the economy.

Headline inflation increased slightly to
8.0 per cent in December compared to


CBN Monetary Policy Review

7.9 per cent recorded in November
2013.

Notwithstanding the slight increase in
inflation in December 2013, the goal of
single digit inflation was achieved in
2013 with average headline inflation
for the year at 8.52 per cent. In the
same period, core inflation rose slightly
to 7.9 per cent in December from 7.8
per cent recorded in November 2013,
while
food
inflation
remained
unchanged at 9.3 per cent from the
previous month. Despite this downward
trend in inflation, there are still pockets
of risks in the short term. These include
the upcoming planting season and the
fiscal risk through increased election
spending.
Additional
risks
include
reduction to the fiscal buffers and its
impact
on
the
investors/consumer
confidence
and
exchange
rate
stability. Based on this, monetary policy
should remain restrictive to forestall the
anticipated impact of fiscal risks and
food seasonality.

Although
there
is
likelihood
of
heightened fiscal spending as the
electioneering season commence, the
late passage of the bill give room to
maneuver in the first quarter.

The 2014 national budget submitted to
the National Assembly has a deficit of
1.9 per cent, which is lower than 2.17
per cent recorded in 2013 and even
lower than the 3 per cent stipulated in
the Fiscal Responsibility Act. The late
passage of the bill will mean that
expenditure
would
be
delayed
suggesting dampened risk for frontloading of expenditure in the first
quarter. Monetary policy will have to
expect an increased spending later in
the
year
due
to
electioneering
activities.

There has been intense pressure on
exchange rate as the spread between
the official and Bureau de change
(BDC) rates has widened.

As
at
December,
2013,
foreign
exchange reserves stood at $42.85
billion, mainly on the back of foreign
inflows
and
reduced
government
revenue.
Government
oil
revenue
declined throughout 2013 on the back
of oil theft and pipeline vandalism,
resulting in the depletion of Excess
crude Account (ECA) and pressure on
the exchange rate. In the face of
planned sustained tapering from the
United States, it is important that an
appropriate exchange rate policy is
adopted to balance the objective of
stable
currency
without
unduly
depleting the accumulated reserves.
Effort should be intensified at rebuilding
the fiscal buffers in anticipation of exit
as cheap money dries up. Otherwise,
the exit could pose downside risk to the
domestic economy through exchange
rate pressure and reserve depletion if
not
managed
properly.
Already,
available data suggest that Gross
Foreign Direct Investment (FDI) and
portfolio inflows decreased significantly
in the last quarter of 2013. Given that
monetary policy is approaching its


CBN Monetary Policy Review

limit, there is need to allow for more
flexibility in the exchange rate.

Gross
Domestic
Product
(GDP)
although robust is trending below
forecast.

The 2013 third quarter GDP grew by
6.81 and the projection for the fourth
quarter is expected to be higher due
to reforms in the agricultural sector
which drove the growth in non-oil
sector to 7.95 per cent in the third
quarter. The oil sector’s contribution to
GDP declined by -0.58 per cent in the
third quarter attributable to oil theft
and pipeline vandalism in the Niger
Delta
that
have
resulted
in
the
shutdown
of
some
oil
wells
and
reduced
oil
production.
Although
National Bureau of Statistics (NBS)
projections suggest a GDP growth of
7.27 per cent for 2014, its achievement
will
require
careful
planning
and
maintenance
of
stable
macroeconomic
environment.
Precaution
should
be
taken
to
safeguard the Naira, suggesting that
monetary
easing
at
this
time
is
premature, however to guarantee
growth, increasing rate could dampen
the projections. It is therefore important
to manage the inflation-growth nexus
in the face of high level of poverty in
the country. Base on this, focus must
be
on
striking the
right
balance
between interest rate and flexible
exchange rate in the management of
inflation.

The banking system continues to show
high level of liquidity, suggesting that
monetary easing at this time may be
counterproductive.

Banking system deposits at the CBN
deposit facility has consistently been
high. Even with OMO operations,
Interbank and OBB rate still traded
below the standing deposit facility rate
at 10.54 per cent and 10.23 per cent
respectively as at January 10, 2014.
However, lending rates remained high
at over 23 per cent, suggesting that
care must be taken to manage the
structural liquidity and the structural
impediments
to
credit
growth.
In
addition, pressure on the exchange
rate window is impacting the foreign
exchange
reserves
negatively.
Therefore,
a
balance
between
defending the naira and saving the
reserve must be struck for economic
stability.

Global economic growth projection is
showing some improvements boosted
by
recovery
in
major
economies
especially in the United States.

The
IMF
upgraded
the
global
economic outlook to 3.6 per cent form
2.9 per cent projected in the April
World Economic Outlook (WEO) citing
stronger US economy and return to
positive but subdued growth in the
euro
zone.
The
Federal
Reserve
Quantitative Easing (QE) have helped
channel cheap funds to emerging
markets such as Nigeria helping to
drive
equity
market
growth
and


CBN Monetary Policy Review

reserve build up. However, the Federal
Reserve policymakers decided last
month to cut the monthly bond
purchases to $75 billion from $85 billion
and suggested it would further trim its
buying in future meetings if conditions
continue to improve. Most analysts are
of
the
opinion
that
economic
conditions are positive enough to
suggest that the Fed will continue
reducing its bond purchases in 2014.
This has implications for foreign inflows,
reserve build up and exchange rate
stability in emerging countries. There is
also a possibility that as the cheap
money from quantitative easing dries
up, foreign investors could exit the
country with consequences for the
domestic
economy.
Therefore
to
remain competitive and attract foreign
investors, tight monetary policy stance
should be maintained. Based on the
above,
with
benign
inflationary
outlook, high structural liquidity and
sustained pressure
on the foreign
exchange, I will support a no increase
in Monetary Policy Rate, a 75 per cent
increase in public sector deposits Cash
Reserve Requirement (CRR) and a
review of the midpoint in exchange
rate band.

2.0
BARAU, SULEIMAN

i.
REVIEW
OF
SIGNIFICANT
DEVELOPMENTS

The estimated GDP growth rate of
6.87 for 2013 is impressive and is an
indication of a rebound in growth
statistics as it is higher than 6.58%
recorded in 2012. The 7.67% recorded
in Q4 2013 did not only show a very
strong
rebound
over
growth
performance in earlier quarters of 2013
but it is also higher than 6.99%
recorded in corresponding period (Q4)
of 2012.

The robust growth recorded in 2013 is
inspite of the tight monetary measures
implemented by the CBN. A point may
be made that this is below Nigeria’s
potential but we must also state that
this development shows that what is
required to spur radical growth in the
real sector is the implementation of
significant reforms that would make
credit to gravitate towards that sector.
The second point to make is that
Nigeria’s GDP growth is taking place at
a time that other emerging economies
such as India have not reversed recent
trends in GDP decline effectively since
the beginning of the global financial
crises. Finally, Nigeria’s GDP growth is
substantially and consistently higher
than Sub-Saharan African estimate of
5% in 2013.

The global economy is showing
strong signs of recovery. The IMF
expects global growth to accelerate
from 2.9% in 2013 to 3.6% in 2014. While
the US economy has shown signs of
strong growth going into 2014, China
and
other
emerging
market
economies are projected to continue
to grow at levels that are higher than
those of the advanced economies.
Europe is also forecast to return to


CBN Monetary Policy Review

strong growth in 2014 after over two
years of crisis. Overall the rebound in
global growth would on balance be
positive
to
developing
economies
including Nigeria.

Financial markets around the world
were not significantly jolted by the
“tapering”
announcement
of
December 18, 2013 by the US Federal
Reserve System reducing monthly Asset
Purchase program from $85 billion to
$75 billion monthly. This is because
markets had anticipated and largely
factored in the expected “tapering”.
Latest job figures released in the US
shows that targets have been missed
and informed opinion suggest that
‘’tapering’’ would continue to be
gradual perhaps in magnitude of $10
billion reduction until end2014. What is
very clear is that the Quantitative
Easing
measures
of
the
Federal
Reserve
have
helped
the
strong
rebound of the US, reversal of slide in
Europe and have supported recent
modest growth in developing and
emerging economies.

Domestic inflation remains largely
subdued. All measures of inflation
remained at single digit. HeadIine
Inflation (YoY) inched up marginally to
8.0% from 7.8% in December and
November
respectively.
The
Core
measure
continued
its
marginal
upswing
from
7.75%
to
7.87%
in
November
and
December
respectively. However Food Inflation
moderated to 9.25% in December
compared to 9.31% in November. It is
important to highlight that month on
month measures for the three broad
measures of inflation have shown
increasing tendencies.

Money markets rates were relatively
stable during review period.
With average interbank call rate at
12.24% and OBB at 11.98%, rates were
largely within the corridor throughout
2013. However, the sustained high
spread between deposit and lending
rates remain a source of concern for
policy.

Exchange rates remained largely
stable
particularly
in
the
Wholesale/Retail
(w/r)
DAS
and
Interbank segments. The rate at w/r
DAS witnessed appreciation of 0.04 in
2013 while interbank and BDC rates
depreciated by 2.34% and 7.84%. Of
concern is the premium between rDAS
and BDC rates which has widened to
9.38% due largely to measures taken to
check the uncontrolled outflow of
funds at the BDC window.

The
level
of
external
reserves
declined to $42.85 billion but they
remain
largely
at
decent
levels,
capable of supporting over 10 months
of import. There has been substantial
downward pressure on the reserves
due to a combination of declining
revenues from sale of crude oil due to
leakages and increased demand that
is driven by the liquidity in the system.


CBN Monetary Policy Review

ii. CHALLENGES/RISKS
The following (not in any particular
order of importance) are the key
pressure points facing the MPC;

Keeping inflation at single digit in
view of the forecasts for 2014 and
the upward trend of the Core Inflation
measure.

Reversing the declining levels of
foreign reserves particularly in view of
the observed reduction in and likely
reversal of foreign portfolio inflows
following reversal of QE by the Fed of
the USA.

Containing demand and supply
issues at the Foreign Exchange market.
The supply issues are largely as a result
of reduced revenues due to oil theft
and other possible sources of leakages.
Demand pressure is driven largely by
the evidence of sustained liquidity,
fiscal spending and market sentiment.

Checking the premium between
rDAS and BDC rates. The immediate
cause for the sharp rise in premium is
traceable to the recent measures
taken
by
CBN
to
curb
money
laundering. This was aggravated by
activities of clients who may have
been forced to recourse to the use of
foreign currencies to avoid charges
associated
with
Naira
cash
withdrawals.

Preparing for the effect of capital
outflows/’’tapering’’ The newly
appointed
US
Fed
Chief
Yallen’s
statement
that
QE
will
continue
through 2014 is a good development.
The pattern of tapering is still a source
for concern. A sudden and drastic
reversal will lead to massive reversal of
portfolio flows. It is gratifying that a
survey of financial experts in the US
suggests that ‘’tapering’’ may be in
monthly equal amounts of N10b.

Narrowing the spread between
Deposit
and
Lending
rates.
While
market rates have remained stable,
the spread between deposit and
lending
rates
have
remained
disturbingly high. The shared services
initiative of the banking industry when
fully
implemented
would
help
to
narrow spreads. Nigerian banks also
have one of the highest costs of doing
business but the weak state of the fixed
income
segments
of
the
capital
market, have also reduced options
available to borrowers and this has led
to the distortion in pricing the cost of
capital by banks who now literally play
in quasioligopolistic market scenario.

Pre—election year/fiscal spending –
liquidity injection is expected to be
stepped up. This is perhaps responsible
for the recent substantial reduction in
the Excess Crude
Account
(ECA)
balances. Further depletion of the ECA
will increase the liquidity risk to the
system
and
impact
price
stability
negatively.


CBN Monetary Policy Review

Oil
price/international
oil
demand/global
growth
in
oil
production; staff reports indicating that
growth in production will marginally
outstrip demand growth in spite of the
shale oil developments make the oil
price outlook, at least in the short run,
to be positive. The crises in South Sudan
and Syria though unfortunate, appear
helpful. Strong oil price forecast should
help or at least reduce the effect of oil
revenue leakages and will impact
portfolio flow risk but oil price collapse
is still a risk we must keep in view given
the volatile current state of the global
economy.

iii.
FOREIGN
EXCHANGE,
MARKET
STABILITY AND FISCAL ISSUES

Out of the above challenges, the
issue of currency stability (exchange
rate and smooth functioning of the
foreign exchange market) should now
take the centre stage in view of recent
commentary advocating some form of
depreciation or devaluation to address
the strong demand and exchange
rate premium between rDAS and BDC
rates. I have the following comments
on this matter;


I am aware of the recurring
debate as to whether the Naira is
overvalued
or
not
at
the
moment. The jury is still out there
on this matter.


The increased foreign exchange
demand
we
have
witnessed
recently is driven by established
high level of liquidity in the system
which itself is caused by past
accelerated fiscal spending.


Depreciation of the Naira will
have significant pass through
effect on domestic prices and
obviously wipe out the gains we
have made in taming inflation.
Besides,
being
an
import
dependent
economy,
depreciation will not benefit the
economy unless we see structural
reforms that will help diversify the
economy,
make
our
products/exports
internationally
competitive
and
stimulate
exports.


The
aggravated
demand
for
foreign
exchange
(for
transfers/Letters of Credit, valid)
that we have seen in 2013 is
largely in the area of invisibles
which has increased by 23.8%
from 2012 to 2013 or 24% ($13.3b)
and
48.2%
($26.1b)
of
total
outflows.


Total
Demand
for
Foreign
Exchange in 2013 was $35 billion
while total accretion to reserves
from
purchase
of
foreign
exchange
from
Government
excluding autonomous sources
was
$45billion.
At
current
estimated level of supply and
demand, it is difficult to justify a
depreciation. In this regard, it is
difficult
to
rationalize
market


CBN Monetary Policy Review

sentiment beyond saying that we
should
depreciate
simply
because
other
emerging
economies,
with
less
strong
market fundamentals, have also
depreciated.


In assessing the Naira/ dollar
exchange rate, there are two
levels of analysis that is required.
Whether
the
demand/supply
interplay
is
driven
by
fundamental or technical factors.
In my view demand is not driven
by fundamental but by technical
factors and market sentiments
which we could address. The
second
level
is
whether
our
response should be strategic or
tactical. In terms of strategy, I
recommend
that
currency
stability is important given the
consequence of depreciation on
the
economy
unless
it
is
absolutely necessary. We have a
large
number
of
tactical
measures that we could take to
contain
some
of
the
demand/supply pressures and by
extension, the exchange rate.
These have started and should
be sustained. In addition to these,
we need to take out further
liquidity from the system so as to
reduce the demand pressure. We
should
consider
depreciation
after these measures have failed.


iv.
RECOMMENDATIONS

It is in view of the foregoing issues,
challenges and pressure points that I
voted as follows;


That we maintain the current
tight policy regime


That we increase Cash Reserve
Rate (CRR) to 15% and Public
Sector CRR to 75%

That we keep Monetary Policy
Rate (MPR) at 12%


That we maintain the corridor
around MPR at plus and minus 2%
on the Standing Lending and
Standing Deposit Facilities.


That we keep minimum Liquidity
Ratio at 30%


That we keep the Net Open
Position
limit
at
1%
of
Shareholders Funds

3.0
GARBA, ABDUL-GANIYU

MY VOTE
i.
I vote for (i) an increase in the
CRR on public sector deposit from 50%
to 75% and (ii) holding CRR on private
sector deposit at 12%; MPR at 12% and
the asymmetric corridor of ±2%.

JUSTIFICATION
ii.
Given the structure of the
Nigerian economy and, the inflation
process
in
particular,
a
stable
exchange rate is critical to the primary


CBN Monetary Policy Review

goal
of
price
stability.
Available
evidence links the downward trend of
the headline inflation from 12% in
December 2012 to 8% in December
2013 to a stable exchange rate
regime.

iii.
Yet, a stable exchange rate
regime
has
been
achieved
by
sacrificing
monetary
policy
independence
a
point
that
is
theoretically
obvious
from
the
impossible trinity thesis. Ideally, the
maintenance of stable exchange rate
regime ought to make fiscal policy a
more potent instrument for achieving
growth
and
employment
goals.
However, the fiscal policy regime is yet
to take advantage of the stable
exchange rate and price stability to
develop
national
economic
competitiveness. Also, a non-forward
looking
and
non-strategic
management of oil and gas resources
is failing to sustain inflows of forex
revenue to support monetary policy in
stabilizing the exchange rate with
minimal tightening. iv. It is clear to me
that (i) a forward looking fiscal policy
regime is critical to the attainment of
macroeconomic goals in Nigeria; (ii) a
forward looking fiscal policy depends
on a commitment to the fiscal rules in
the Fiscal Responsibility Act of 2007
and (iii) a strategic and forward
looking management of oil and gas
resources is critical to building the forex
reserves required to support a stable
currency.
v.
The
macroeconomic
management in Nigeria as I indicated
in my last personal statement faces
two key structural challenges that
need urgent attention. The first is the
global challenge that is rooted in the
low interest rate and quantitative
easing trap that the major western
economies have dug themselves into.
The
trap
has
(i)
weakened
the
transmission mechanisms of policies
(monetary and fiscal) and (ii) distorted
financial-real
economy
relationships
while causing financial markets to
malfunction in the allocation and
pricing
of
financial
assets.
As
a
consequence, global financial flows
are threatening the financial and
economic
stability
of
emerging
markets. The danger is acute for
economies committed to exchange
rate stability and free capital flows. This
is because the monetary policy of such
an emerging market could easily be
trapped in a high interest rate regime
because easing in such a regime will
exert downward pressures on the
exchange rate. A stable exchange
rate and price regime could very easily
unravel.

vi.
To
the
extent that
exchange rate stability is necessary for
the attainment of the primary goal of
price stability, and given the pressures
that
rising
yield
in
developed
economies
are
exerting
on
an
expanding set of emerging countries,
monetary policy has to be forward
looking.
Therefore,
a
monetary
response
to
emerging
dangers
is
necessary. vii. I have always argued
consistently for a creative mix of
policies
and
institutional
changes


CBN Monetary Policy Review

because institutions and the incentives
they
embed
are
critical
to
the
strategies and outcomes of the games
that economic agents play in Nigeria.
For instance, while simplistic analysis will
narrow policy options to that defined
by
the
impossible
trinity,
creative
analysis expands the choice set and
enables a not only an informed choice
but, a wise one. We now know from
past experiences and evidence that a
creative mix of policies works. We also
know from studies and past experience
that a regime of (i) lowering supply to
BDC and (ii) rDAS creates arbitrage
opportunities
that
rational
players
exploit and widens regardless of the
fundamentals.
Whereas,
a
positive
current account balances and a
positive balance on the financial flow
account
should
lead
to
upward
pressures
on
the
exchange
rate
appreciation, arbitrage opportunities
works
contrariwise.
In
2011,
we
confronted a similar situation that was
effectively
checkmated
by
appropriate
reaction
functions
–
policy/institutional. viii. Of the options
evaluated, the CRR on public sector
deposits
has
proven
to
be
very
effective as an instrument of monetary
policy. As we have argued since the
July MPC, the increase in the CRR on
public deposit is a game changer for
monetary policy, for fiscal policy, for
Nigerian financial markets and, for
Nigerian banks. Personal Statements
have
been
providing
forward
guidance about the policy direction
on public deposit. Forward looking
fiscal policy operators ought to be
working speedily towards a Treasury
Single Account (TSA) while forward
looking deposit money banks ought to
be changing (i) their business model
hence, (ii) the composition of their
liabilities and assets. ix. The increase in
public sector CRR to 50% in July 2013
was
complemented
by
financial
system stability supportive measures.
We now know as anticipated that the
rise in OBB and interbank rate was
short-lived. Also, that the short term
interest rates (maximum and prime
lending rates) were flat while the
treasury
bills
rate
has
trended
downwards.
In
addition,
the
composition of the deposits of the
DMBs has been shifting significantly in
favour of public sector deposits which
rose by 148% to N5.9 Trillion by ending
of December 2013. x. In voting to
increase the CRR on public sector
deposit to 75%, I expect the fiscal
authorities to speed up the process
towards the Treasury Single Account
(TSA) which I have consistently argued
is “indispensable (i) to avoiding a high
interest rate trap and (ii) to preparing
the economy to soften the likely
adverse effects of the low interest rate
trap
imploding.”
xi.
I
have
also
anchored my vote on the premise that
with “a more efficient and effective
cash management that a Treasury
Single
Account
will
facilitate;
the
federal government would be a net
lender to the economy. This will have
several
positive
effects:
(i)
less
dependence of DMBs on government


CBN Monetary Policy Review

securities; (ii) improved efficiency in the
pricing and allocation of credit; (iii)
transition from crowding-out effects of
borrowing to crowding-in effects of
government lending; (iv) rise in money
multiplier
through
increased
intermediation by DMBs; (v) potentially
lower
interest
rates;
(vi)
less
dependence on portfolio flows; (vii)
more efficient pricing and allocation of
financial assets and (viii) reduced risks
of financial contagion.”

4.0
MOGHALU, KINGSLEY CHIEDU

The Monetary Policy Committee meets
at a time of significant uncertainty in
which
the
immediate
horizon
for
monetary policy is faced with strong
challenges. In arriving at my vote I
have taken into consideration the
following factors:


The role of fiscal factors in the
current difficulties, marked by a
severe decline in the Excess
Crude Account over the past
year, thus leaving the country
dangerously
vulnerable
to
external shocks as a result of the
lack of fiscal savings. There is no
indication that this situation will
change in the near to medium
term.


Sharp declines in Foreign Direct
Investment and portfolio inflows
as
a
result
of
the
commencement of a tapering of
quantitative easing (QE) by the
United States Federal Reserve
Bank, but also partly owing to the
depleting ECA.


The difficulties that have buffeted
the naira as an anchor of price
stability, with the increased gap
in rates between the official and
parallel
markets
owing
to
bottlenecks in supply to bureau
de change.


The rise of core inflation, headline
inflation, and staff projections of

inflation heading upwards in the
next six months. These forecasts
are based largely on BDC rates
for the naira, net credit to the
government,
and
on
the
quantum
of
reserve
money.
Against
this
background,
the
options before the MPC appear
to
be
mainly
between
an
intervention
in
monetary
conditions through the Monetary
Policy rate and\or the Cash
Reserve Ratio by increasing either
of both, or depreciating the naira
while
maintaining
monetary
conditions.

In favour of a currency depreciation
we have the argument that the
difference between the official and
parallel rates has persisted for the past
few months, and the CBN has spent
significant
amount
of
reserves
to
maintain the value of the currency,
suggesting that perhaps the exchange
rate may be artificial and there is a
need
to
“bite
the
bullet”
of


CBN Monetary Policy Review

depreciation. This is especially so when
we consider that the CBN has for the
last few years defended the value of
the naira not in terms of seeking a fixed
exchange rate but of a predictable
band within which the naira can be
traded,
thus
facilitating
effective
currency
planning
by
economic
actors. In this context the question
becomes not if, but when will the CBN
depreciate the naira – most likely by
moving the mid-point of the band. But
the other side of this debate is question
of whether, beyond the gap between
the
parallel
and
official
markets,
caused mainly by supply-side factors
owing to controls imposed by the CBN
on the importation of US dollars and
restrictions on sales by banks to BDCs,
there has been any change in the
economic fundamentals to support a
depreciation of the naira. In this
context I note that the price of oil, the
most important factor, has remained
strong. And the role of the naira as an
anchor of stability and its characteristic
as a major pass through channel of
inflation,
the
need
to
manage
expectations for the year 2014 - a
sensitive year in Nigeria’s political
economy- and the unpredictability of
the fallout of a naira depreciation, all
argue
for
a
response
through
monetary conditions and not the
exchange rate at this time. In the
absence of a fundamental change of
circumstance in the fundamentals that
support the value of the naira, a
depreciation of the currency is not
called for at this time and devaluation
should be a last option.

Monetary tightening through the CRR
will help control liquidity and contribute
further to structural reform of bank
lending to the real sector instead of
the pursuit of public sector deposits. It
will
also
help
conserve
declining
foreign reserves. Here, however, it is
important to keep concerns about
financial stability in mind, as banks and
bank borrowers have long borne the
brunt
of
fundamental
structural
problems in the
decision-making
paradigm
of
the
MPC.
Based on the foregoing considerations,
I vote to:


Increase the
CRR
for
public
sector deposits from 50 per cent
to 75 per cent, and the CRR for
private sector deposits from 12
per cent to 15 per cent.


Maintain
the
MPR
and
the
minimum Liquidity ratio at their
present levels of 12 per cent (with
the corridor at plus or minus 2 per
cent)
and

per
cent
respectively.


Maintain the present band of the
naira exchange rate and take
administrative measures to close
the gap between the RDAS and
BDC rates of exchange of the
naira.


CBN Monetary Policy Review

5.0
ORONSAYE, STEPHEN OSAGIEDE

Statistics from the National Bureau of
Statistics (NBS) since the last Monetary
Policy Committee (MPC) meeting in
November

projected
fourth
quarter Gross Domestic Product (GDP)
for 2013 to grow by 7.67 per cent
compared to 6.58 recorded in the
corresponding
period
of
2012.
Although all measures of inflation
remained within single digit, headline
inflation appears to be on the rise. The
Naira has continued to enjoy a great
deal
of
stability
because
of
the
intervention of the CBN, however, the
Bank may not be able to sustain this for
a long time unless certain structural
challenges are addressed There is
huge disparity between the official
exchange rate of the Naira and the
rate at Bureaux de Change (BDCs),
which needs to be addressed to avoid
the pass-through inflation. Therefore,
we need to take appropriate steps to
check the wide gap in the exchange
rates.
While
we
must
remain
committed to a stable exchange rate,
I do not support depreciation in the
value of the Naira. For me, the
fundamentals
on
ground
do
not
support such a move: oil prices are still
high
and
there
are
no
threats
presently. I believe that the cost of a
weaker currency far outweighs the
benefits to the economy.

The MPC noted that Broad money
supply (M2) shrunk by 4.82 per cent in
December 2013 compared to the
growth of 16.39 witnessed during the
corresponding period of 2012. We also
noted that the aggregate domestic
credit at the end of December 2013
was below the provisional benchmark
of 22.98 per cent for 2013. The decline
in Broad money supply is attributable
to a fall of 5.86 per cent in the
country’s net foreign assets. This calls
for
greater
fiscal
discipline
and
monetary tightening.

The bulk of public sector funds are still
in Deposit Money Banks (DMBs) and I
do not think there is any reason why all
public sector funds should not be back
to the CBN. I am of the view that the
CBN
should
have
a
deliberate
constructive engagement with the
Federal Ministry of Finance in order to
address areas of concern, if any. We
have consistently held MPR at 12% and
achieved stability. Those conditions for
maintaining the rate at that figure
have still not changed. Therefore I
support the view that we do not
tamper with the rate at this point in
time.

On the Cash Reserve Requirement
(CRR) on deposits from the Public
Sector, I think that the impact has
been positive on the financial system.
Consequently, I am persuaded to
support an increase in the CRR on
public sector deposits from 50% to 75%.

Votes
Based on the foregoing, I voted for the
following:


CBN Monetary Policy Review

a)
Holding the MPR at 12%;

b)
Retaining the symmetric corridor
of 200 basis point around the
MPR;

c)
Retaining
the
Cash
Reserve
Requirement (CRR) at 12% for
deposits from the private sector;

d)
Increasing
the
Cash
Reserve
Requirement (CRR) on deposits
from the Public Sector from 50%
to 75%; and

e)
Maintaining
Liquidity Ratio
at
30%.

I also voted that the Central Bank of
Nigeria
urgently
addresses
the
imbalance in the BDC segment while
also
stepping
up
its
anti-money
laundering (AML) activities.

6.0
SALAMI, ADEDOYIN

Headline inflation in December 2013
ended the year at 8 per cent, which,
though marginally higher than the 7.9
per cent reported for the previous
month, took the average for the year
to 8.5 per cent a position much better
than the 12.2 per cent average for
2012. Notwithstanding the continuous
deterioration in Core inflation from its
mid‐year low of 5.5 per cent to 7.9 per
cent at year end, its average for the
year of 7.7 per cent also marks an
improvement on the 13.9 per cent in
the previous year. The satisfaction of
that
position
is
however
slightly
undermined by realization that Core
inflation continued to edge higher
since
July
2013.
The
nature
of
challenges
to
confront
monetary
policy making in Nigeria this year
began to define themselves last year. It
had already been apparent before
the close of 2013 that the key factors
to take shape the direction and nature
would include –


Pace of and reaction to the
tapering of Quantitative Easing
by the Federal Open Markets
Committee of the US Federal
Reserve;


Fiscal Dominance arising from
dwindling
revenues
and
its
implication
for
Reserves
and
currency management;

The dynamics and impact of risks
related to the electoral cycle.

It was already clear that 2014 would
be a challenging year for making
monetary policy. Whilst the questions
already suggested themselves, the
most pervasive being around currency
rates and the implications for policy
credibility, there were few answers. The
wall of data provided for this meeting
provided
cold
comfort.
The
first
conclusion
from
the
data
is
a
worsening outlook for inflation. Six
month forecasts provided by Bank Staff
for
the
meeting
in
November
suggested would drop from 8.3per
cent in December 2013 to 7.2 per cent
in March 2014 before rising to 8.1 per


CBN Monetary Policy Review

cent the following month. Bank Staff
now expect Headline inflation to be
8.4 per cent in April 2014 and further
increase to 9.2 per cent by June 2014.
A similar trend is expected for Core
and Food inflation. Indeed, the rate of
increase in food prices is expected to
cross into ‘double digits’ in May 2014.
Beyond the worsening prospects for
inflation,
available
data
show
a
continuing
deterioration
in
fiscal
performance. A sharp increase in
expenditure, especially ahead of an
election, is the typical fear on the fiscal
side. Available data shows continuing
revenue weakness. Data from the
Office of the Accountant General of
the Federation (OAGF), the Central
Bank of Nigeria (CBN) and the National
Bureau of Statistics (NBS) show that
between 2011 and 2013, average
crude
oil
prices
and
production
dropped by 1.02 per cent and 5 per
cent respectively. In the same period
the average annual decline in revenue
from Crude oil dropped almost 12 per
cent. In consequence of this, our fiscal
savings, represented by the Excess
Crude
Account,
dropped
from
NGN1.551trn
in
Dec

to
NGN0.434trn
in
Dec
2013.
A
continuation
of
this
trend
almost
certainly
implies
higher
levels
of
government
borrowing
putting
worsening the challenge of ‘crowding
out’ amongst others. Failure to rebuild
fiscal buffers is also reflected in the
FOREX Reserve data. At US$43.8bn in
mid‐Jan 2014, forex reserves are almost
10 per cent lower than the 2013 high of
US$47.8bn in March. Furthermore, the
Federation
Reserves
component,
which represents Excess Crude savings,
amounted to US$42.48bn – down from
US$11.46bn in December, 2012. The
deterioration
in
Foreign
Reserve
position also reflects a slowdown in
inflows from Foreign Portfolio investors
(FPI). Whilst FPI inflows, at US$19.182bn
in 2013, accounted for approximately
82 per cent of capital importation in
2013,
there
was
a
noticeable
slowdown in the Q3‐2013. Indeed, both
FPI and Foreign Direct Investment (FDI)
slowed significantly. It is not unlikely
that QE tapering by the US Federal
Reserve is a contributory factor in the
slowdown of FPI flows. Recent pressure
on the Naira at the Foreign Exchanges
reflects a combination of restricted
supply to the Bureau de Change (BDC)
segment
of
the
market
and
heightened expectations of currency
depreciation. From the perspective of
economics theory, a persistent surplus
on our current account, resulting from
high oil price, should see the Naira
strengthen. However, the failure to
build
reserves
has
resulted
in
strengthening expectation of that the
Naira will lose value. This expectation
has been manifested in a continuing
switch from Naira to foreign currency
denominated deposits – a trend I had
previously
described
as
‘retail
hedging’. Unless the Fiscal side shows
significant
improvement
imminently,
the options for monetary policy may
become glaringly inconsistent with the
objectives and policy direction for the


CBN Monetary Policy Review

economy in Nigeria. For monetary
policy, the challenge of managing the
internal and external value of the Naira
is a core element of its mandate.
Achieving inflation rate of 6‐9 per cent
in 2014 requires a stable currency. The
model
articulated,
in
various
documents,
for
the
growth
and
development of the larger economy in
Nigeria
is
predicated
on
Import
substitution. Similar to attainment of the
mandate that the Central Bank of
Nigeria (CBN) achieve price stability,
import substitution requires a stable,
even strong currency!!

Given the data and information laid
before my colleagues and I on this
occasion – in particular, the immediate
and emerging build‐up of banking
system liquidity, it is clear that there is a
need to respond to the pressure on the
currency and forestall the build‐up of
further pressure.

The measures which I have supported,
further sterilizing government deposits
by raising the Cash Reserve Ratio to 75
per cent and easing the constraint on
supply to the BDC segment of the forex
market, should, in the short term,
achieve the objectives set. However, it
is increasingly clear that we are
approaching the limits for using the
cost of credit as a management tool
without
inflicting
damage
on
the
growth and development aspirations
of the economy.


7.0
UCHE, U. CHIBUIKE

In previous MPC meetings, I have
consistently argued that poor fiscal
management
remains
the
major
impediment to the promulgation of
effective
monetary
policy
in
our
country. In the past, such poor fiscal
management practices which include
increasing levels of oil theft and
excessive and sometimes unnecessary
borrowings have contributed materially
to monetary tightening by MPC. While
such tightening may have helped
achieve the desired single digit interest
rate which has lasted for some time
now, the fact remains that this has to a
great extent been done at the cost of
growing
the
real
sector
of
the
economy.
Government
has
for
instance
increasingly,
directly
and
indirectly, crowded out the private
sector in the market for loans and
advances.
The
primary
goal
of
monetary
stability,
which
is
the
promotion of real sector economic
development,
has
therefore
been
subordinated to funding government
fiscal indiscipline. At the November
2013 MPC meeting, for instance, I
explicitly asserted thus: The danger
fiscal policy poses to development of
effective monetary policies in Nigeria
becomes stark when one considers the
mechanism of cash management by
government. For over one decade, all
parties are in agreement that a
Treasury Single
Account (TSA) will
provide the most effective platform for
managing government funds. At the
very least, the incessant practice of


CBN Monetary Policy Review

unnecessary borrowings at high interest
rates
while
simultaneously
holding
huge balances in non interest yielding
deposits
will
be
greatly
curtailed.
Despite this simple logic, government is
yet to implement the TSA. This has led
to widespread allegations that private
interests
within
government
policy
making circles are colluding with banks
and benefitting handsomely from the
status quo through the receipt of
deposit brokerages. It was because of
my above view that I voted for an
increase in CRR on public sector
deposits at the said meeting. Although
I was in the minority at the time, I still
believe that this is the way to go.
Available evidence from our decision
to increase CRR on public sector
deposits to 50 per cent in July 2013, for
instance, show that this is one form of
monetary tightening that has led to
increased lending to the real sector by
banks. This is so because the incentive
for banks to earn rent income by simply
colluding with government officials to
privately place government deposits in
such banks has been reduced. Banks
have therefore been forced to focus
more on their intermediation function
which is what leads to economic
development.

Another way of making the above
point is to argue that increasing CRR
on public sector deposits will reduce
the incentive for government officials
to make suboptimal decisions in the
management of government funds for
personal interests. In other words,
increasing
CRR
on
public
sector
deposits will have a direct impact on
government fiscal management. An
obvious consequence of the above
will be the reduction in government
debts.

I am aware that some stakeholders are
very critical of the use of CRR because
of its blunt nature and direct impact on
the cash-flow of banks. It is however
important to note that the use of CRR
on public sector deposits is in itself an
anomaly. If, for instance, a TSA is in
place and all government deposits
domiciled in the CBN which is the
official banker to Government, the
issue of using CRR on such public
sector deposits will not arise in the first
place. It is also pleasing to note that
the tightening of monetary policy
through increasing CRR on public
sector funds at the present time is
unlikely to attract further speculative
foreign capital. This is especially so
given the fact that available statistics
suggests
that
recent
international
developments have already ensured a
slowdown
in
the
inflow
of
such
speculative capital. Despite this, I find it
prudent to continue to express my
concern about speculative capital.
This is because the vulnerability of the
value of our currency in recent times
has at least in part been as a
consequence of the unstable nature of
such speculative FDI. The earlier we
begin to discourage such capital flows,
the better. Admittedly, this has to be
gradually and skillfully done to prevent


CBN Monetary Policy Review

sudden capital flight. While FDI is
desirable, it only makes sense when it is
invested in the real sectors of our
economy.
As
already
mentioned,
increasing
CRR
on
public
sector
deposits will make banks to focus more
on their intermediation function. An
obvious consequence of this will be
enhanced competition amongst the
banks which will at least in the medium
term
begin
to
reduce
the
unacceptable wide spread between
deposit and lending rates in the
country. Another issue of concern for
me is the widening gap between the
r/wDAS exchange rate and the Bureau
de Change exchange rate for the
Naira. This creates huge incentives for
banks and regulators to exploit the
system and earn arbitrage profits. This is
even more troubling in an import
dependent economy like ours where
the BDC rate is gradually becoming
the benchmark for prices of imported
commodities. This might explain why
core inflation is gradually inching up. I
therefore believe that the time has
come for us to rethink our BDC policies
with the objective of reducing the gap
between BDC and r/wDAS exchange
rates. Surely there must be effective
ways of curtailing money laundering in
our
economy
without
materially
affecting
the
supply
of
foreign
exchange to Bureau de Changes. In
conclusion, I am convinced that the
greatest threat to effective monetary
policy in the country is the way
government conducts its fiscal policy.
Government
fiscal
management
problems have increasingly made it
difficult for monetary policy to be
effective. Thankfully, monetary policy is
not
altogether
helpless.
Using
monetary policy to force government
to implement the TSA will, at least to
some
extent,
help
improve
government
fiscal
policy
management. Equally important is the
fact that it will help to refocus banks on
their intermediation function which is
central
to
promoting
economic
development. In the light of the above
factors, I hereby vote as follows: (1) to
retain MPR at 12 per cent with interest
rate corridor of + 200/- 200 basis points;
(2) to retain CRR at 12 per cent but
increase CRR on government deposits
from 50 per cent to 75 per cent; and
(3) to retain Liquidity Ratio at 30 per
cent.

8.0
SANUSI
LAMIDO
SANUSI,
GOVERNOR AND CHAIRMAN,
MONETARY

POLICY COMMITTEE
Barely a few weeks before this MPC
meeting, one was looking forward to a
very routine meeting at which we
would
review
the
economic
environment
and
outlook,
congratulate ourselves for a job welldone,
and
leave
everything
unchanged. The sense of calm is not
entirely without basis. GDP growth has
remained robust in spite of high interest
rates. Inflation remained firmly in singledigit range for the entire year 2013, the
first time this has happened since 2007.


CBN Monetary Policy Review

The equity market is doing extremely
well and is performing almost as well as
it
did
before
the
financial
crisis.
AMCON has reduced its indebtedness
by about N1trillion. As we predicted,
there was no disruption to the market
despite
the
unfounded
but
understandable alarm raised by many
analysts. Yet, complacency and selfcongratulation
are
extremely
dangerous and if unchecked could
turn stability into the calmness before a
storm. Our task is to always look out for
red flags and anticipate the possible
impact on stability. The most obvious
red flag is the fiscal space. In January
2014, we are yet to have a budget
approved, and there is no end in sight
to
high
recurrent
spending.
The
Federation has squandered its Excess
Crude Savings, from $11.5billion at the
beginning of 2013 to under $2.5billion
today. This, moreover, has happened
in a period of high and stable oil prices
and high levels of production and
crude lifting, in spite of losses due to oil
theft and vandalism. Clearly, huge
fiscal leakages continue to exist in the
oil sector as will become manifest at
the conclusion of ongoing debates
around
NNPC
remittances
to
the
Federation Account. To compound the
problem, we saw in Q4:3 a significant
collapse in portfolio and FDI flows as a
result of QE tapering in the US,
concerns over leadership transition at
the Bank and alarm at the rate of
depletion of fiscal savings. As a result of
the above, the Bank has had to
increase funding of the forex market to
avoid currency depreciation. But this
has also meant a return to the era of
attrition of foreign exchange reserves.
On
the
monetary
side,
measures
aimed at curbing money laundering
disrupted the equilibrium in the BDC
market
through
curbs
on
supply,
leading
to
the
emergence
and
widening of a gap between exchange
rates in the inter-bank and BDC
segments. The weak naira at BDC has
fed into costs and creeping inflation
and threatens to reverse some of the
progress made in the recent past. The
BDC rate is also not helped by illadvised tariff regimes which force
eligible demand onto the parallel
market
thus
compounding
the
shortage in that segment. It is therefore
not entirely surprising that exchange
rates, reserves and fiscal leakages
formed the fulcrum for our discussions
these past two days. We have had to
deal
with
a
number
of
difficult
questions: Do we need a monetary
response now, or do we wait until next
MPC? If we chose to respond, should
we allow the Naira to depreciate or
reaffirm our commitment to keeping it
stable within current range? If we
opted for the latter in the wake of
declining foreign currency inflows and
savings, how could we best defend the
Naira? Do we deplete our reserves and
expose the economy to greater risk; or
tighten money at the risk of a big
public and political outcry? These
decisions are never easy.


CBN Monetary Policy Review

My position is as follows:
On the exchange rate, I continue to
maintain that stability must continue to
be the lodestar of monetary policy and
a weak naira will wipe out investor
profits, lead to a bearish run on the
stock exchange, stoke up inflation and
ultimately result in even more extreme
tightening
without
offering
any
tangible benefits. For me, letting the
naira depreciate is an absolute last
resort after all attempts at stabilizing it
have failed, or where the cost of
supporting
the
currency
becomes
unbearable. I also do not see any
wisdom
in
depleting
reserves
to
support the currency. In any case, this
strategy fails once reserves fall to a
level where investors believe we do not
have the ammunition to support the
currency.

I have never believed we were at the
end of our tightening cycle. Pushing up
interest rates may not be a priority
given the already high yields in our
market and given that only about 10%
of portfolio flows are in fixed income
instruments. But we need to continue
attacking the structural liquidity surfeit
in the system. By tightening monetary
conditions and increasing the supply of
dollars to the BDC segment we can
stabilize the currency and achieve
convergence.

My vote is
i.
To increase CRR on Public Sector
to 75% for now, with a view to
getting to 100% if need be later in
the year;

ii.
I also vote with the minority for
increasing Private Sector CRR to
15% as this reduces incentive for
arbitrage and adds bite to the
tightening measures;

iii.
I support retention of MPR and LR
at current levels;

iv.
Administrative measures should
be taken to restore equilibrium to
the
BDC
segment.
I
vote
accordingly.


CBN Monetary Policy Review

Central Bank of Nigeria Communique
No. 94 of the Monetary Policy
Committee Meeting, March 24-25,

The Monetary Policy Committee (MPC)
met on March 24 and 25, 2014 against
the backdrop of challenging monetary
policy environment; particularly, in the
emerging markets and developing
economies; coupled with the unfolding
risks
to
stability
in
the
domestic
economy.
In
attendance
were

members. The Committee reviewed
key developments in both the global
and domestic economies up to March
2014, and the outlook for the rest of the
year.

International Economic Developments

The
Committee
noted
that
the
recovery of the global economy could
accelerate further in 2014 relative to
2013 as a result of increased domestic
demand in the advanced economies
and
the
rebound
of
exports
in
emerging
markets.
The
IMF
has
projected global growth to increase
from 3.0 per cent in 2013 to 3.7 per
cent in 2014 and then to 3.9 per cent in
2015. In the US, growth is expected to
be 2.8 per cent in 2014, compared with
1.9 per cent in 2013, driven by
increased domestic demand as well as
reduction in the fiscal drag due to the
recent deal brokered on the Federal
Budget. Although, the euro area has
continued to adjust to a high level of
indebtedness
and
financial
fragmentation
in
some
countries,
growth is expected to recover in the
coming years. Thus, growth is expected
to rise from 0.4 per cent in 2013 to 1.0
per cent in 2014. This is buoyed by
easier
credit
conditions,
increased
investor confidence, and expansion in
exports. Tight financial conditions since
mid-

as
well
as
political
uncertainty were a drag on growth in
most of the emerging markets and
developing economies.

Notwithstanding, overall growth in this
group of countries is expected to
increase from 4.7 per cent in 2013 to
5.1 per cent in 2014. Reflecting the
expansion in economic activities, an
upward pressure is expected in global
price levels in 2014. Global inflation is
projected at 2.71 per cent in 2014,
representing an increase of about 40
basis points in relation to the estimates
for 2013. It is expected, however, that
favorable developments in the prices
of food and fuel will help contain the
upward movement in the prices of
major commodities. The Committee
observed
an
emerging
variance
between advanced and emerging
market economies (and developing
economies) in terms of monetary
policy stance since the beginning of
2014. While central banks in a number
of advanced economies maintained
the cautious posture adopted in 2013
and in Q1 of 2014, the emerging
economies and developing countries
have apparently switched to more
aggressive monetary policy tightening
to support domestic currencies and


CBN Monetary Policy Review

retain foreign investments by raising
interest rates. South Africa, Ghana,
Brazil and Russia were among countries
that tightened monetary policy to
address concerns over rising risks to
inflation and exchange rate stability.

Domestic
Economic
and
Financial
Developments Output

Growth remains robust. The National
Bureau of Statistics (NBS) has estimated
real Gross Domestic Product (GDP)
growth rate at 7.72 per cent for the
fourth quarter of 2013, which was
higher
than
the
6.81
per
cent,
recorded in Q3, 2013 and 6.99 per cent
in the corresponding period of 2012.
Thus,
in
2013,
GDP
grew
at
an
estimated 6.89 per cent, up from 6.58
per cent in 2012. In line with recent
trends, the non-oil sector continued to
be the main driver of growth in Q4,
2013, recording 8.76 per cent. The
growth drivers in the non-oil sector in
Q4, 2013 remained wholesale and
retail
trade,
agriculture
and
telecommunications
which
contributed
2.57,
2.27
and
1.97
percentage points, respectively. Based
on the 2013 favorable performance,
output growth has been projected at
7.7 per cent for fiscal 2014. The
Committee observed that the relatively
robust growth projections, despite the
sluggish global recovery, reflected the
continuing favorable conditions for
increased
agricultural
production,
sustained outcome of the banking
sector reforms as well as the initiatives
of the government to stimulate the real
economy. In particular, the Committee
noted with satisfaction the rise by
about 10 per cent in the national
average electricity generation in Q4,
2013; a development which provided
impetus
for
improved
economic
activities during the period.

Prices

Inflation has remained in the target
range. The downward trend in inflation,
which commenced in December 2012
continued up to February 2014. The
year-on-year
headline
inflation
fell
consistently from 9.5 per cent in
February 2013 to 7.9 per cent in
November 2013, but rose marginally to
8.0 per cent in December 2013 and
January
2014.
In
February
2014,
however, it moderated to 7.7 per cent.
The deceleration was largely due to
the moderation in food inflation, which
moved from 9.3 per cent in January
2014 to 9.2 per cent in February 2014.
Core inflation, on the other hand,
exhibited a fair degree of volatility
during the period; having declined up
to the first half of 2013. It commenced
an upward trend in the latter half of
the period but declined 7 to 6.6 per
cent in January 2014, before inching
up to 7.2 per cent in February 2014.
Noting the continued commitment of
price stability within the CBN range, the
Committee; emphasized the need to
maintain the current monetary policy
stance.
In
all,
the
Committee
expressed
satisfaction
over
the
sustenance
of
single
digit
of
all
measures of inflation. The Committee,


CBN Monetary Policy Review

therefore, restated its commitment to
sustaining the price stability objective.

Monetary,
Credit
and
Financial
Markets’ Developments

Broad money supply (M2) contracted
by 2.24 per cent in February 2014 over
the level recorded at end-December
2013, which, on annualized basis,
translated to a contraction of 13.42 per
cent as against a growth target of
15.52 per cent for fiscal 2014. Net
domestic credit grew marginally by
0.86
per
cent
in
February
2014,
translating to an annualized growth
rate of 5.15 per cent. The annualized
growth in net domestic credit is
significantly lower than the provisional
benchmark of 28.5 per cent for fiscal
2014. The sluggish growth in aggregate
credit was traced mainly to the
decline
in
Federal
Government,
borrowing which contracted by 2.02
per cent in February 2014 or 12.14 per
cent on an annualized basis. During
the review period, money market
interest rates remained within the MPR
corridor, oscillating in tandem with the
level of liquidity in the banking system.
The average interbank call rate for the
period was 10.17 per cent while the
OBB rate was 11.01 per cent. The
weighted average inter-bank call and
OBB rates which closed at 10.86
and10.46 per cent in December 2013,
respectively, rose to 11.27 and 10.5 per
cent in February 2014. Activities in the
capital market, however, were bearish
as the All-Share Index (ASI) moderated
from 41, 329.19 at end-December 2013
to 39,269.4 on March 11, 2014 with
market capitalization exhibiting similar
trends.

External Sector Developments

The
end-period
exchange
rate
remained stable at the rDAS window
but depreciated at the interbank
appreciated at the BDC segment of
the market. The exchange rate at the
rDAS-SPT during the review period
opened at N157.61/US$ 10 (including
1%
commission)
and
closed
at
N157.26/US$,
representing
an
appreciation of N0.35k or 0.22 per
cent.
At
the
Interbank
foreign
exchange market, the rate opened at
N158.83/US$
and
closed
at
N164.90/US$, averaging N161.89/US$,
representing a depreciation of 3.68 per
cent or N6 for the period. At the BDC
segment of the foreign exchange
market, the selling rate opened at
N173.00/US$
and
closed
at
N172.00/US$,
representing
an
appreciation of 0.58 per cent or
N1.00k. The BDC segment averaged
N170.44/US$,
representing
an
appreciation of 0.06 per cent. Gross
official reserves as at March 2014 stood
at US$37.83 billion compared with
US$42.85
billion
at
end-December
2013. The decrease in the reserves level
was driven largely by the increased
funding
of
the
foreign
exchange
market in the face of intense pressure
on the Naira and the need to maintain
stability.


CBN Monetary Policy Review

The Committee’s Considerations

The Committee unanimously agreed
that
a
continuation
of\a
tight
monetary
policy
was
needed
to
consolidate
recent
gains.
Recent
resurgence of core inflation in spite of
the
downward
trend
in
headline
inflation reinforces this position. Thus,
prudent monetary stance would also
facilitate better reserve and exchange
rate management in an environment
where Fed tapering increases pressure
on
emerging
economies
financial
markets. The MPC welcomed the
growth expectations but expressed
concern that the industrial sector has
continued
to
lag
behind.
The
Committee
noted
that
growth
remained consistently in favour of the
agricultural sector, noting that the
continued achievement of relative
exchange rate stability and single digit
inflation in 2014 given the risks in the
horizon
will
require
extra-ordinary
measures.
The
Committee
viewed
some of the developments as positive
optimism by the market relative to
other emerging market economies.
While tension in Ukraine over Russia’s
claims to Crimea remained serious,
direct
trade
and
financial
links
between
Nigeria
and
the
duo
remained largely limited. Thus, the risk
premia could come from rising oil and
gas
prices
which
were
deemed
positive shocks. On the other hand, the
Committee noted that the recent
pressure
in
the
foreign
exchange
market
was
in
response
to
key
developments in the US over the Fed’s
unwinding
of
its
assets
purchase
programme. In addition, the pressure
on external reserves was deemed to
be consistent with the seasonal annual
payment
of
dividends
to
foreign
investors. On a positive note, inflation
forecasts indicate that food inflation
may not grow beyond current levels,
especially
with
bumper
harvests
expected in 2014. However, core
inflation could rise. The Committee
noted
that
frontier
markets
were
positioning themselves to attract higher
capital inflows by raising their policy
rates to contain inflation and also
remain
competitive.
Oil
prices
remained
relatively
high
while
production was improving, and there
were signs of accretion to external
reserves.
The
Committee
also
expressed concern over the sudden
surge in domiciliary account balances
which may offset the gains from
imposing 75 per cent CRR on public
sector
funds.


The
Committee
commended the Bank for its continued
commitment to exchange rate stability
in the face of undue pressure on the
Naira. It noted with satisfaction the
calm in the foreign exchange market
and
the
relative
stability
in
the
interbank exchange rate after the
initial
turbulence.
The
Committee
acknowledged that while this stability
was at a high cost, safeguarding short
run macroeconomic stability under the
circumstance required firm and bold
measures. In the light of the foregoing,
the MPC considered the success of
Monetary Policy in attaining price and


CBN Monetary Policy Review

exchange rate stability; the potential
headwinds in 2014; the ultimate goal of
transiting to a truly low – inflation
environment; and the need to retain
portfolio
flows.
The
Committee
unanimously
voted
for
further
tightening of monetary policy but were
divided on the instruments. While some
voted for an increase in the MPR to
retain and attract more inflows, other
members felt that such increase could
impact access to credit and domestic
growth negatively. Consequently, the
Committee voted as follows:

(1)
Five (5) members voted to keep
MPR
at
12%,
while
four
(4)
members voted for an increase in
MPR.

(2)
Seven (7) members voted to
retain the MPR corridor at +/-2%,
while two (2) members voted for
an asymmetric corridor.

(3)
Seven (7) members voted to
increase CRR on private sector
deposits by 300 basis points to
15%, while two (2) members
voted to retain the CRR on
private sector deposits at 12%.
The
Committee,
therefore,
decided by a majority vote of 5
to 4 to hold the MPR and its
corridor at current levels but
raised the CRR on private sector
deposits by 300 basis points to 15
per cent.


Sarah O. Alade
Acting Governor
Central Bank of Nigeria
25th March, 2014


CBN Monetary Policy Review

PERSONAL
STATEMENT
BY
THE
MONETARY
POLICY
COMMITTEE
MEMBERS:

1.0 ALADE, O. SARAH, AG. GOVERNOR
AND CHAIRMAN, MONETARY
POLICY COMMITTEE

This MPC is coming at a period of
increased
uncertainties
in
most
emerging market economies amidst
tapering of quantitative easing in the
United States. Most emerging market
currencies have seen some level of
depreciation,
and
for
the
BRICS
countries,
the
depreciation
has
ranged from 0.93 percent in China to
about 9.22 percent in Brazil since June
2013.
In
Nigeria,
the
Naira
has
remained
relatively
stable
depreciating by less than 2 percent
since June 2013 in the interbank
market. These developments coupled
with
other
domestic
environment
discussed below calls for appropriate
policies to safeguard the stability of
the economy. Based on the above, I
support an increase in Monetary Policy
Rate (MPC), maintenance of a 75
percent increase in public sector
deposits Cash Reserve Requirement
(CRR) and a 15 percent increase in
private sector deposits to maintain
stability.

There are some uncertainties in the
domestic and international market
environment. Although some pressure
has reemerged in the last couple of
weeks, the Central Bank’s resolve to
defend the currency has brought
some level of stability to the market. In
addition, the bond yields have seen
some improvement, with a positive
yield of over 5 percent, making
Nigerian assets more attractive. With
this development, the expectation is
that foreign interest in Nigeria assets
will start rising again as the foreign
exchange
market
stabilizes.

In
advanced economies, some stability
in
the
US
with
improved
unemployment numbers and investors’
confidence is directing the pace of
tapering even in an uncertain political
environment. In the Euro zone, the
political disagreement over Crimea
Peninsular with Russia could have far
reaching
consequences
for
the
economy of the zone, and their
trading
partners
if
not
handled
diplomatically.

Global economic growth projection is
showing some improvements boosted
by recovery in major economies
especially in the United States. The IMF
upgraded
the
global
economic
outlook
to
3.6
percent
form
2.9
percent projected in the April World
Economic
Outlook
(WEO)
citing
stronger US economy and return to
positive but subdued growth in the
euro zone. However, growth in
emerging markets could be impacted
negatively due to capital reversal on
the back of tapering in the United
States. As unemployment numbers
continue to improve in the US and
tapering continues unabated, their


CBN Monetary Policy Review

effects in emerging market countries
are already being felt. Each country
will have to find an orderly way to
manage the capital reversal, and
remaining competitive should be one
of the options. This suggests that tight
monetary policy stance should be
maintained.

Headline inflation softened to 7.7
percent in February compared to 8.0
percent recorded in January 2014. This
number is within the Central Bank
target of between 6- 9 percent and
the goal of single digit inflation. Core
inflation rose slightly to 7.2 percent in
February from 6.6 percent recorded in
January, 2014, while food inflation
decreased slightly to 9.2 percent from
9.3 percent recorded in the previous
month. The decrease in food index is
driven mainly by slowdown in prices of
locally
produced
foods
such
as
potatoes, yams, other tubers, prices of
other
items
such
as
fruits
and
vegetables rose at a faster pace.
Despite
this
downward
trend
in
inflation, there are still pockets of risks
in the short term. These include the
upcoming planting season and the
fiscal risk as a result of pre-election
spending.
Additional
risks
include
reduction of the fiscal buffers and its
impact
on
the investors/consumer
confidence
and
exchange
rate
stability. Based
on this,
monetary
policy should remain restrictive to
forestall the anticipated impact of
fiscal risks and food supply seasonality.
It is important to note that the
downward
trend
in
inflation
was
achieved as a result of past monetary
tightening and other reform measures
and letting go of these measures at
this time could be counterproductive.
Therefore monetary policy should do
all it can to safeguard stability.

Like in other emerging markets, the
Naira exchange rate has witnessed
increased pressure, but some level of
stability has returned to the market. As
at March 21, 2014, foreign exchange
reserves stood at $37.83 billion, as
foreign
investors
repatriate
their
investments in the face of improved
investment climate in the US. Most
emerging market economies have
witnessed capital reversal in the last
couple of months in the face of
sustained tapering from the United
States. Nigeria is no exception albeit
with less depreciation in the currency
when compared to other emerging
market currencies. Given these trends;
it
is
important
that
efforts
are
intensified at rebuilding the fiscal
buffers to forestall the downside risk to
the
domestic
economy
through
foreign
reserve
depletion.
This
is
already
starting
to
happen
as
Government increased the Excess
Crude account by $1.0 billion this
month and plans to be building up
more buffers in the months to come.
Therefore better coordination is all that
is required to manage this temporary
shock to the macroeconomic stability.


CBN Monetary Policy Review

Gross
Domestic
Product
(GDP)
although
robust
is
forecasted
to
improve in 2014. The 2013 fourth
quarter GDP is projected to grow by
7.72
higher
than
6.87
percent
recorded in the third quarter. In
addition, the projection for the 2014 at
7.7 percent is expected to be higher
than the growth in 2013 due to reforms
in the agricultural and power sectors
which drove the growth in non-oil
sector to 8.76 percent in the fourth
quarter. The forecast for 2014 ranged
from 6.75 percent to 7.75 percent and
will
require
careful
planning
and
maintenance
of
stable
macroeconomic
environment
to
achieve. Precaution should therefore
be taken to safeguard the stability of
the
currency.
This
suggests
that
monetary easing at this time may be
premature,
therefore,
further
tightening is required.

Tight monetary policy stance seem to
be having effect on liquidity condition
in the system as monetary policy rates
edged upwards, although persistence
pressure in the foreign exchange
market
continues.
Rates
at
the
Interbank and Open Buy Back (OBB)
rate rose sharply in February, from
10.54 percent and 10.23 percent
respectively as at January 10, 2014 to
17.3
percent
and
18.4
percent
recorded on March 14, 2014. In
addition, lending rates remained high
at over 23 percent, suggesting that
care must be taken to manage the
structural liquidity and the structural
impediments to credit growth in the
economy. In addition, pressure on the
exchange rate window is impacting
the
foreign
exchange
reserves
negatively;
therefore
efforts
at
rebuilding the fiscal buffers must be
intensified.

Based
on
the
above,
sustained
pressure on the foreign exchange and
high structural liquidity in the system, I
will support an increase in Monetary
Policy Rate, the maintenance of 75
percent increase in public sector
deposits Cash Reserve Requirement
(CRR) and a 15 percent increase in
private
sector
Cash
Reserve
Requirement.

2.0
BARAU, SULEIMAN
Nigeria witnessed a robust GDP growth
in 2013. At a GDP growth rate of
6.89%, in 2013, the economy has
demonstrated resilience in the face of
security challenges, tight monetary
conditions and slow levels of structural
reform when compared with 6.58%
GDP growth rate achieved in 2012.
The growth estimate for 2014 clearly
surpassed
the
average
for
SubSaharan Africa of 5.0% and those of
some
of
the
major
emerging
economies like India and Russia.

Headline Inflation declined relative to
its level in January 2014. With Headline
Inflation (HI) at 7.7% in February,
marginally down from 8% in January,
inflation has largely been subdued at
single digit over a very comfortable


CBN Monetary Policy Review

period. The decline in HI was largely as
a result of the decline in Food and Non
Alcoholic
Beverage,
Clothing
and
Footwear, Housing, Water, Electricity,
Gas and other Fuel segments. Food
Inflation (FI) also showed a decline
from 9.27% to 9.21% in January and
February
respectively.

The
Core
measure however increased over the
same period from 6.65% to 7.17%.
However, the mixed signals in the
different inflation measures and Staff
Report indicating the upside risk to
inflation in the medium term is a source
of concern.

Money Market rates remained stable
during review period. The spread
between deposit and lending rates
remain a source of concern. The
absence of inter-bank call trade since
February 2007 till date is a disturbing
development. As is sometimes the
case, this is perhaps as a result of
wrong perception of the financial
health
of
some
counter
parties
particularly due to recent challenges
faced by some Discount Houses that
were decisively resolved by the CBN.

Declining reserves remain a source for
concern.

External
reserves
have
continued to come under substantial
pressure. It declined from $42.86 billion
as
at
end
December
2013,
to
$39.27billion as at March 20, 2014, a
reduction
of
$3.59billion
in
three
months or 9.14%.

There was sustained pressure on rates
at the interbank foreign exchange
market. Naira depreciated by N5.25 or
3.29% from N159.55 to N164.80/USD
between January 17 and March 20,

respectively.

Rates
have
remained largely stable at the RDAS
window.

However,
the
Naira
appreciated at the BDC segment
particularly following the relaxing of
limits on the sale of foreign exchange
by Banks to BDCs. Accordingly, BDC
rate appreciated by N1.00 or 0.58% to
N171 from N173 during the same
period.

Global growth forecast for 2014 is
optimistic. Global recovery at 2.1% in
2013 was remarkable but growth was
also uneven. The global output is
estimated at 2.4% for QI. The US
economy, which grew at 1.9% in 2013,
is estimated by the IMF, to accelerate
to 2.8% in 2014. Similarly, in the Euro
Area, GDP is projected to rise by 1.2%
from -0.4% in 2013. In Sub Saharan
Africa, the picture is also optimistic with
GDP projected to grow by 6.1% in 2014
from 5.1% recorded in 2013.

CHALLENGES
The key challenges requiring the urgent
attention of the MPC are as follows;

Reversing the declining trend in
the level of foreign reserves

Keeping
the
exchange
rate
stable

Managing the upside risk to
inflation.


CBN Monetary Policy Review

DISCUSSIONS
The key questions to answer relating to
declining level of foreign reserves and
the mounting pressure on exchange
rate of the Naira are broadly two;

Should the Naira be allowed to
radically
depreciate/officially
devalue?

Should
the
depreciation
be
orderly or measured?

In responding to the first question, I like
to restate my earlier position that the
pressure
on
the
Naira
is
largely
supported
by
the
existence
of
substantial liquidity in the system, the
tapering
of
QE
in
the
US
and
consequent
reduction
in
portfolio
inflows, and market expectation that
the Naira would depreciate. These
have made end users to bring forward
their demand for foreign exchange
and currency speculators to see a
window
for
making
substantial
exchange gains. This has therefore put
undue pressure on the level foreign
reserves, a development that has
further
driven
market
sentiments
unfavourably. I am therefore still
convinced that developments at our
foreign exchange market are not
driven by fundamental factors in the
economy but by substantial market
liquidity and observed change in
market sentiment regarding the ability
of the Naira to hold out at current rate.

With respect to the second question, I
think the time is not appropriate to
elicit a radical depreciation. Besides,
MPC
should
ensure
orderly
and
structured depreciation of the Naira
that is driven by fundamentals, given its
effect
on
inflation
and
other
macroeconomic variables.

On the issue of the upside risk to
inflation, it is important that we take
out more liquidity from the system to
enable us to keep within the 6-9%
target band. MPC has overtime been
confronting the effect of several years
of unprecedented quantitative easing
in Nigeria particularly following the
second round effects of the global
financial crisis in 2008 and all through
to 2011.

This situation has been compounded
by the increased fiscal spending over
the years. The successive tightening
stance of policy since 2012 has been
the
right
prescription
aimed
at
unwinding QE of several prior years.

It is in this regard that I voted for the
continuation of the tight monetary
measures.

RECOMMENDATION

In the light of the foregoing, I voted for;

Increase in MPR

Increase in private sector Cash
Reserve Ratio (CRR) to 15%

Maintaining Public Sector CRR at
75%.

Maintaining the Corridor at minus
and plus 2% around the MPR.

Maintaining
the
Net
Open
Position at current level.


CBN Monetary Policy Review

3.0
DANIEL-NWAOBIA, ANASTASIA

Developments in 2013 indicated that
the domestic economy recorded an
impressive growth of 6.87 per cent
during the year, up from 6.58 per cent
in 2012, despite continuing security
challenges,
and
weak
external
environment.
The

Federal
Government
Budget
Proposal
was
based on a projected GDP growth
rate of 6.75 per cent, and the IMF
projected a strong growth forecast of
7.4 per cent for 2014, indicating the
continued resilience of the Nigerian
economy.

The moderation in inflationary pressure,
which began in the fourth quarter of
2012,
continued
in
January
and
February,

indicating
the
effectiveness
of
sustained
tight
monetary policy of the Bank. However,
inflation outlook remains high in the
coming months given the liquidity
surfeit in the banking system and the
pressure on the Naira exchange rate
with its potential for exchange rate
transmission
on
imported
finished
goods.

The fear being expressed on possible
increased government spending in this
pre-election year may be misplaced
after all. Sequel to the dwindling
Government revenue induced by both
global
and
domestic
factors,
the
Government has developed a tight
2014 Budget aimed at optimizing value
for its spending and controlling the cost
of
governance.
The
planned
net
borrowing for 2014 (N571.99 billion) is
lower than that of 2013 (N577.07
billion). Consequently, the implication
of
the

Budget
for
liquidity
management may be similar to that of

which
is
supportive
of
the
monetary policy stance of the Bank.

Furthermore, the Federal Government
has earmarked $1 billion for the
implementation of a comprehensive
programme to check crude oil theft
and
vandalism
of
oil
and
gas
infrastructure. Further action is being
taken to enhance the security of
pipelines
and
other
oil
industry
infrastructure.
The
programme
will
undoubtedly address fiscal leakages,
increase Government revenue, help
rebuild the fiscal buffers and impact
positively on accretion to the external
reserves.
The
Government
is
also
making
efforts
at
diversifying
the
economy with the recent reforms in
key sectors of the economy such as
Agriculture,
Solid
Mineral
and
Manufacturing in order to reduce
reliance on the oil sector and broaden
its revenue base.

The naira exchange rate generally
remained stable, giving credence to
the
effectiveness
of
the
current
exchange rate policy. However, giving
the rising demand in the foreign
exchange market in recent times; the
slow accretion to foreign reserves; the
high inflation outlook coupled with the
inflation target of 6-9% adopted by the


CBN Monetary Policy Review

Bank, it is advisable to sustain the
current policy stance.

1.
In view of the above, I vote as
follows:
(i)
The Monetary Policy Rate (MPR)
to be retained at the current
level of 12% and corridor of +/-
2% for the intervening period in
order to maintain price stability.

(ii)
The Private Sector CRR to be
increased from 12% to 15% in
order to strengthen the tightening
measures.

(iii)
The current policy on foreign
exchange
(midpoint
and
exchange
rate
band
of
N155/US$1 +/- 3%) should be
sustained for the next two months
when another review will be due
for consideration in order to
consolidate the relative stability
achieved thus far in the market.
The
Federal
Government
is
already
making
efforts
at
rebuilding
the
fiscal
buffers
required to sustain the exchange
rate stability.

4.0
GARBA, ABDUL-GANIYU
At this March 2014 MPC, five key issues
were
critical
for
me:
(1)
implementation
effectiveness;
(2)
policy impacts (general equilibrium,
macro and game theoretic -strategic
response
of
players
to
AMCON
payments and 75% CRR on Public
Sector Deposits); (3) initial conditions
and outlook (national and global); (4)
short-term and medium term policy
issues (national and global) and (5)
implications of the monetary policy
framework MPC has committed itself
to. My vote is anchored in (1) the
empirical evidence on implementation
and impacts; (2) analysis of key short
term and medium term issues and (3)
cost-benefit analysis of policy options.

The initial conditions and the analysis of
outlook (national and global) indicate
that tightening is necessary. This is
because of (1) the AMCON effects
that is, the increase in liquidity due to
the payments of one trillion Naira for
matured AMCON Bond in December
2013, (2) the response of banks to the
AMCON effects and to the 75% CRR on
Public Sector Deposits and (3) the short
to medium term consequences of the
responses of the key players.

The key issues generated by the
responses of banks to the AMCON
effects and to the 75% CRR on Public
Sector Deposits are: (1) decreased
activities in the interbank market, (2)
uptick in Standing Deposit Facility (SDF)
placements, (3) some growth in loans
albeit to non-growth driving sectors
and (4) negative growth in money
supply (M1, Quasi Money and M2) and
in the money multiplier. Because the
increased liquidity is not raising money
supply, it is not inflationary. Neither is it
growth or employment generating.
Moreover, it is not enhancing the


CBN Monetary Policy Review

proper functioning of Nigerian financial
markets.

I am convinced therefore, that an
increase in CRR is the most effective
and least costly policy option relative a
hike in the MPR. A rate hike has
negative implications for short and
medium term Financial System Stability.
A rate hike will also increase the direct
costs of monetary policy. Moreover,
because interest on Treasury Bills is paid
up front, a rate hike creates its own
liquidity -an MPC colleague drew my
attention to.

Given that the interbank rate is the
operating target, an active interbank
market is critical to the effectiveness of
monetary policy. However, an SDF rate
of
10%
has
been
progressively
crowding-out the interbank market.
Adjusting the incentive in favour of the
interbank
market
is
therefore
imperative. I have argued in previous
personal statements for an asymmetric
corridor based on the evidence and
the
analysis
that
suggested
that
reduction in the SDF rate is necessary
to (1) the growth of the interbank
market and (2) to strengthening the
transmission
mechanism
and
effectiveness of monetary policy.

The data suggests that the pressure on
the
Naira
is
not
driven
by
fundamentals:
net
exports,
current
account balances and net financial
flows are all positive despite the
negative growth in portfolio flows in
recent
months.
The
evidence
is
indicates that a significant part of the
demand for forex is speculative and
that it is this speculative component
that is volatile. Devaluation is not the
right response in the circumstance of
Nigeria for at least two reasons. First, it
easily
becomes
a
self-fulfilling
prophecy
hence,
self-propelling.
Second, devaluation will not solve an
institutional problem. Rather it will
simply shift the problem to a new
band. The fundamental problem I
believe is institutional. The key solution
therefore, is to eliminate the arbitrage
opportunities
being
exploited
by
rational
agents.
The
appropriate
response obviously is mechanism redesign as a key part of a creative
package.

These are challenging times for all
monetary authorities all over the world
primarily because the world is in
unfamiliar
territories
in
which
unconventional
monetary
policy
instruments have been deployed in the
post-2007 global financial crisis by the
most powerful Central Banks. In the
process, they have created financial
and
economic
challenges
of
unprecedented depths, scope and
length.
While
some
monetary
authorities
face
a
low
interest
rate/quantitative easing trap, others
face
a
high
interest
rate
trap.
Fortunately, the two traps are linked as
I have argued in previous personal
statements. Unfortunately, many global
players do not (1) see the linkages and


CBN Monetary Policy Review

the medium term strategic implications
and/or (2) have no interest in the
global commonwealth. For such shortsighted
players,
exploiting
the
asymmetries at the nexus points is fair
game (rational) regardless of the
resulting turbulence and the social,
political and economic consequences.
Yet, unless many Central banks and
market players see, understand and
submit to the good of the global
commonwealth, the turbulence in the
global economy and its disturbing
consequences will persist for a very
long time to come. A beggar thy
neighbour
policy
environment
is
globally
inferior
to
a
mutually
beneficial cooperative environment.

The two traps demand (1) a forward
looking monetary policy process within
a broader space-time horizon and (2)
greater
mutually
beneficial
policy
coordination between monetary and
fiscal authorities and between Central
Banks
regionally
and
globally.
Otherwise, exiting the abnormalities of
the last few years will be painful for
most and unsettling for all.

The main implication for Nigeria is the
urgency
of
monetary-fiscal
policy
coordination.
This
is
critical
to
minimizing the short to medium term
trade-offs (between inflation, growth
and employments) and the scope and
length of disinflation policies and the
adverse consequences –the sacrifice
of growth and employment. Even
more fundamentally, fiscal-monetary
coordination is urgent to prepare
Nigeria for the global turbulence that
may be generated by (1) the ending
of stimulus and (2) particularly from a
shift from easing to disinflation policies
by the US Fed, the European Central
Bank and the Bank of England. There is
already conversation about the likely
effects of various options for disposing
the toxic assets (mortgage backed
securities)
that
the
US
Fed
has
accumulated on its balance sheet.
Every option is fraught with dangers for
monetary policy, for global financial
markets (asset prices, interest rates and
yields), for the housing markets and for
growth and employment. Apart from
building buffers, fiscal-monetary policy
coordination will link fiscal policy and
monetary in ways that improve the
effectiveness of both monetary and
fiscal policies in Nigeria.

It has been repeatedly argued that a
Treasury Single Account (TSA) has the
potentials to make public finance
more efficient and more effective and
to lower public deficit, debt and debt
service
as
well
as
reducing
the
crowding-out
effects
(fiscal
and
monetary) of public debt which from
the first quarter of 2002 has been
doubling within 12 to 13 quarters. By
reducing public debt, a TSA is likely to
promote the functioning of financial
markets
as
deposit
money
banks
improve their intermediation roles of
mobilizing the private savings and
channeling
the
savings
to
viable
investment outlets.


CBN Monetary Policy Review

It has been suggested that with the
required liquidity ratio at 30% and a
public deposit CRR at 75%, banks have
a net liquidity of -5% on public sector
deposit. This implies that it is already
costly for banks to hold public sector
deposits.
With
about
22%
spread
between maximum lending rates and
savings, I expect to see some signs of a
restructuring in the deposit structure in
favour of private savings and time
deposits. At this time, therefore, I
believe it is reasonable to keep the
CRR on Public Sector Deposit at 75% to
allow banks to respond rationally and
orderly.

My vote therefore is for:

1.
A 15% increase in the CRR on
private deposits.

2.
An asymmetric corridor of -5 and
+2 for Special Deposit Facility and
Special
Lending
Rate
respectively.

In addition, I am convinced of the
critical
need
for
greater
fiscalmonetary policy coordination to build
the needed buffers, to improve the
financial
intermediation
roles
of
financial
institutions
and
financial
markets; to re-connect finance with
real sector activities and to enhance
access
of
real
sector
players
to
relatively low cost capital needed to
create jobs and generate growth. I am
also convinced of the urgency of
mechanism
re-design
to
eliminate
arbitrage opportunities in the financial
markets more especially, in the forex
market.

5.0
MOGHALU, KINGSLEY CHIEDU

Considerations

The
following
considerations
are
relevant in arriving at a decision on
monetary policy at this time.


Global economic climate. The
global economic climate at this
time is marked by the impact of
continued
tapering
of
the
quantitative easing programme
of the U.S. Federal Reserve Bank
and the negative implications of
this trend for investment and
capital flows to emerging and
frontier market economies such
as Nigeria’s. Continued tapering
has led to marked declines in
portfolio inflows and increased
outflows as investors move their
money to what they perceive to
be safer markets. Combined with
a projected rise in global inflation
to 2.71% in 2014 (IMF) and
indications that the outlook for
the global economy will be one
of tight monetary conditions over
the medium term, it becomes
clear that there is a competitive
context
in
which
several
emerging markets are tightening
monetary
policy
in
order
to
contain
or
prevent
massive
reversals of capital flows. Ghana
has raised its monetary policy


CBN Monetary Policy Review

rate to 18% while its inflation rate
is 14%, South Africa’s MPR was
increased to 5.5% while inflation is
5.9%; Kenya’s MPR has remained
at 8.5% since May 2013, Brazil
raised its MPR to 10.75% in
February

from
10%
in
January 2014. India raised its
policy rate to 8% in February 2014
while inflation is 4.68%.


Foreign reserves and exchange
rate pressures. Nigeria’s foreign
reserves have suffered a sharp
decline
over
the
past
three
months, dropping from US$42.85
billion at end – December 2013 to
US$37.83 billion as of March 20,
2014. This erosion has been
brought about by pressures on
the naira and the determination
of the Central Bank of Nigeria to
maintain
foreign
exchange
stability
through
repeated
interventions in the forex market.
This pressure on the naira has
been
sustained
for
several
months now, raising questions
about whether or when the
currency
should
be
officially
depreciated,
ideally
through
adjustments to its trading band.


Leadership transition in the CBN.
This
consideration
has
also
contributed
to
a
certain
nervousness in the global investor
community in the wake of the
suspension of the Governor of the
CBN. However, while it raises the
stakes
for
consistency
in
monetary
policy,
the
Bank’s
senior
management
has
successfully
calmed
investors’
nerves through communication
and policy actions that suggest a
strong institutional continuity and
consistency in monetary policy
that is based less on individual
actors than many investors had
perceived. This therefore, is a
time for the MPC to demonstrate
clearly its commitment to stability,
a tight monetary policy, and its
independence, in a clear and
decisive manner.


Fiscal
outlook.

Revenue
leakages from oil theft have
continued,

and
uncertainty
remains over the fate of the yetto-be
adopted
Petroleum
Industry Bill. The Excess Crude
Account
has
been
severely
depleted
in
recent
months,
resulting in marked domestic and
international concerns over the
absence of safety buffers for the
Nigerian economy in the event of
any shocks. The factors are
balanced,
however,
even
if
tentatively at this time, by higher
oil revenues and new inflows to
the
ECA,
accompanied
by
increased crude oil production
by 30,000 barrels per day in
February 2014 to 1.928 million
barrels per day compared to
1.898 million barrels per day in
January 2014. These increases


CBN Monetary Policy Review

would have to be sustained over
a significant period if confidence
levels are to be restored.


Domestic
Inflation.
While
headline
inflation
in February
2014 fell to 7.7 % from 8% in
January 2014, core inflation has
inched higher from 6.65% in
January 2014 to 7.17% in February
2014. Moreover, staff estimates
project headline inflation at a
range between 8% and 10% over
the next six months, based on
factors including fiscal spending
and the impact of the planting
season. This projection clearly
indicates
that
an
inflationary
threat remains real, and the
beast of inflation is yet to be slain
decisively. The policy implication
is that the MPC must maintain a
tight monetary policy at this time.
This is more so when we consider
the
global
conditions
noted
earlier.


Expectations. This is a vital
consideration, in particular at a
time such as this. Considering the
transition in the CBN leadership
and the recent demand pressure
on forex combined with weak
fiscal savings and falling reserves,
there clearly is an expectation
that the naira will depreciate in
the near-to-medium term. But,
given
the
absence
of
any
change in fundamentals in light
of the price of crude oil, this
expectation need not become a
self-fulfilling prophecy. Rather the
MPC should confront and reverse
these expectations with strong
policy actions that attack the
basis for such expectations. This
means policy action that makes
Nigeria’s economy an attractive
destination for capital, in the
medium term, while attracting
not just hot money but more real
investments in the economy that
should
reduce
the
country’s
reliance on portfolio flows in the
longer term. Dealing effectively
with expectations means, as I see
it,
going
beyond
merely
maintaining the status quo in
monetary policy.


Financial Stability. It is important
always to weigh the impact of
monetary policy actions on the
banking
system
if
financial
stability is not to be sacrificed at
the alter of price stability. This
means that, while I will vote for
continued
tightening,
the
question is: how do we do so
without maiming the banks? The
path
to
balance
is
not
to
continue
to
raise
the
Cash
Reserve Ratio on public sector
deposits beyond the present 75%,
but rather to focus on tightening
liquidity
through
the
private
sector CRR and addressing the
concerns about the level of
reserves and the exchange rate
through the MPR.


CBN Monetary Policy Review

Conclusion.

The
Nigerian
economy remains a promising
one in the longer term when
structural reforms reach a more
advanced stage based on a
deepening of the power sector
reforms and the construction of
private sector refineries – and
perhaps even new possibilities
that may arise from the ongoing
National Conference that may
have
far-reaching
economic
implications. For now, however,
while we work on the longer term,
we need to maintain price and
forex stability in the face of
recent challenges. I note the
simulated options for the MPR
contained in the report of the
CBN Macroeconomic Model of
the Nigerian Economy (CBN MAC
II) prepared by the Center for
Econometric and Allied Research
(CEAR)
at
the
University
of
Ibadan, Nigeria, and the “Policy
Simulation for MPR and CRR”
prepared by the CBN Research
Department.

The
CEAR
study
demonstrates
the
impact of MPR increases of differing
steepness on both output growth and
on lending rate. As is always the case
with monetary policy, hard choices
have to be made by the MPC between
achieving exchange rate appreciation
or at least ensure stability, or lowering
the lending rate. I believe the focus at
this
time
should
remain
that
of
attracting and retaining foreign capital
and maintaining a healthy level of
foreign reserves. The CEAR study also
indicates that even the most radical
hike in MPR would have only a marginal
impact on output growth, which in itself
is a valid concern, but one wrongly
understood by many in terms of the
correlation between policy rates and
output growth rates. I continue to
believe that, while high lending rates
are a Faustian bargain to achieve a
tight monetary policy that remains
essential for now, and that lending rates
need
to
move
downward
in
the
medium to longer term, infrastructural
and other constraints are a more
important restraint on real sector activity
and output growth in the Nigerian
economy.

Vote
Against
the
backdrop
of
all
the
foregoing, I vote to:


Increase the MPR

Maintain symmetric corridor of
plus or minus 2%

Increase the private sector CRR
by 300 basis points to 15%;

Maintain the public sector CRR at
75%; and

Maintain the Liquidity Ratio at
30%.

6.0
ORONSAYE,STEPHEN OSAGIEDE

Figures from the National Bureau of
Statistics
(NBS)
indicate
that
our
domestic economic outlook remains
healthy in the face of certain risks to
development in emerging economies


CBN Monetary Policy Review

across the globe. According to the NBS
statistics,
Gross
Domestic
Product
(GDP) grew at an estimated 6.89 per
cent in 2013, compared to 6.58 per
cent in 2012. The Bureau indicated that
the non-oil sector retained its status as
the main driver of growth in Q4, 2013,
recording 8.76 per cent. Relying on
these figures, the Bureau has projected
a 7.7 per cent growth for the 2014
year.

The
decrease
in
Nigeria’s
foreign
reserves from US$42.85 billion at endDecember 2013 to the current levels of
US$37.83 is attributed to the increased
funding
of
the
foreign
exchange
market in the face of intense pressure
on the Naira and the need to maintain
stability. As it was in January, there is
still an enormous disparity between the
official exchange rate of the Naira and
the rate at Bureaux de Change (BDCs).
The question remains: how long can
the CBN continue to bridge this gap in
defence of the Naira?

The MPC noted that inflation has
remained within single digit due to the
moderation in food inflation. While this
is commendable, the risks posed by
structural challenges, which I noted
during the last MPC in January, remain
potent
triggers
of
inflation.
These
structural
challenges
need
to
be
addressed because the crude oil
prices remain relatively high and there
is no reason why there should not be
accretion to the foreign reserve. One
is, however, hopeful that there will be
accretion to the reserves as crude oil
production is reported to be improving.
Even though there is pressure on the
exchange, this is not the time to cause
devaluation on the currency. With
Government
now
determined
to
implement the Treasury Single Account
(TSA), the question of increasing the
Cash Reserve Requirement (CRR) on
deposits from the Public Sector does
not arise at this time.

Despite these challenges, it is critical
that we support moves to sustain the
health of the Naira through effective
and resolute policy implementation. It
is in the light of this that I do not think it
is right to devalue the Naira.

As a Committee, we agreed on the
point that a tight monetary policy was
greatly required to consolidate recent
gains made by the CBN. This is
particularly so as we have witnessed a
rise
in
core
inflation
despite
the
headline
inflation
decreasing.
Although we have held MPR at 12%
and achieved stability, I still think that
we need to further tighten liquidity to
build on the successes recorded in that
regard. Therefore I am of the view that
we increase MPR.

On the Cash Reserve Requirement
(CRR) on deposits from the Public
Sector, I do not see the reason for any
increase at this time considering the
fact that the fiscal authorities have
concluded on implementing the Single
Treasury Account. The Committee also


CBN Monetary Policy Review

expressed concern over the sudden
surge in domiciliary account balances
which may offset the gains from
imposing 75 per cent CRR on public
sector funds.

Votes
Based on the foregoing, I voted for the
following:
a.
Increase in the MPR;
b.
Increase in the Cash Reserve
Requirement (CRR) for deposits
from the private sector from 12%
to 15%; and
c.
Retention of the Cash Reserve
Requirement (CRR) on deposits
from the Public Sector at 75%.

7.0
SALAMI, ADEDOYIN

At 7.7percent in February 2014 –
declining from 8 per cent the previous
month, the average value for Headline
inflation in the 1st two months of 2014 is
265 bps below the same period last
year.
For
the
other
measures
of
inflation, the rate of increase in Food
prices eased only marginally, from 9.3
per cent to 9.2 per cent, over the same
period. Core inflation, unlike the other
two measures, accelerated from 6.6
per cent to 7.2 per cent.

By
commencement
of
the
MPC
meeting for March, the implications of
easing inflationary pressure in February
had
been
drowned
out.
The
background for this meeting had been
framed by the noise generated from a
potent combination of factors – the
on‐going leadership transition at the
Central Bank; devaluation of the Naira
since
the
meeting
in
January;
diminished Forex Reserves as inflows
declined whilst outflows rose very
sharply;
and
continuing
currency
substitution.

I had noted in my Personal Statement
at the end of the meeting in January
that the direction of monetary policy in
Nigeria this year would be shaped by,
amongst other factors, the pace of
tapering of Quantitative Easing (QE) by
the Federal Open Markets Committee
(FOMC) of the US Federal Reserve and
our reaction to it. Although, I had at
that
point,
expected
that
further
reduction
in
the
FOMC’s
Asset
purchase programme would come at
the end of Q1‐2013, there has been
additional reduction since our last
meeting – in other words, unwinding
QE has gathered pace. Furthermore,
the outlook is tilts towards further
acceleration in tapering.

The import of QE tapering is its
anticipated impact on portfolio flows,
commodity prices, reserve strength
and exchange rates as US yields rise.
As data shows, the impact of QE
tapering is already being felt by
Nigeria. In the opening two months of
2014, at US1,886mn, portfolio inflows
amounted to 44percent of what it had
been in the same period the previous
year. Net Foreign Exchange Cash-flow
through the Central Bank continues to
worsen – touching a new low of $‐
3,815mn in Feb., 2014. In addition,


CBN Monetary Policy Review

FOREX Reserves have diminished 12
per cent from the 2013 year end to
$37.83bn. It is pertinent to note that
while the monthly average price of
Bonny Light crude eased 2.8 per cent
in the same period ‐ dropping to
US$111.34/barrel, the outlook, provided
by NYMEX Forward prices, is for further
easing in oil prices.

Domestic parameters paint a mixed
picture. While projections for output
growth in 2014 remain around 7 per
cent, liquidity – irrespective of definition
– continues to contract while credit to
the
private
sector,
annualized
at
current year‐to‐date basis, continues to
grow
slower
than
inflation.
While
growth in Quasi Money continues
largely flat, Demand Deposits continue
to
contract.
Having
alluded
to
currency substitution earlier, Domiciliary
Account balances now account for
20.59 per cent of total deposits. Retail
lending rates remain in the range
between 16‐26 per cent. Whilst it would
have been convenient to explain the
sharp reduction in both volume and
value of transactions at the interbank
window to overhang of liquidity from
AMCON payments at the end of 2013,
however, the volume of patronage of
the CBN’s Standing Lending Facility
(SLF) and Standing Deposit Facility
(SDF)
may
be
a
reflection
of
confidence issues amongst operators.

Shifting focus back to our principal
mandate of price stability and noting
that Monetary Policy strategy requires
currency stability as a tool towards
attaining and sustaining price stability,
the Naira’s weakness at the Bureau de
Change
(BDC)
segment
and
the
widening premium between BDC and
official
segments
of
the
currency
market continue to be a source for
concern. It would appear that while
the measures taken at the MPC
meeting in January saw the Naira
strengthen almost 3 per cent, by mid‐
February. In the BDC segment, it has
since then weakened. Indeed, the gap
between these two market segments,
which narrowed 380bps to 6.8 per cent
in mid‐ February, has gained 190bps
since Valentine’s Day.

Since we know that irrespective of
where foreign currency is procured,
BDC rates form the basis for pricing, it is
not surprising that worsening currency
rates provide part of the explanation
for deterioration in inflation Outlook by
Bank Staff. The six‐month Outlook for
inflation has Headline inflation steadily
deteriorating to 10 per cent by August.
In the same manner, food inflation is
now expected to accelerate to 11.5
per cent over the same period. While
Core inflation is expected to worsen
from 6.8 per cent in March to 8.3 per
cent by June; improving thereafter to 7
per cent in August.

An outlook which projects lower oil
prices, faster tapering of Quantitative
Easing resulting in Capital Outflows,
prospect of rising deficit as revenues
continue
to
slip,
further
currency


CBN Monetary Policy Review

substitution and worsening inflationary
pressure points to the need for further
restriction
in
the
monetary
policy
regime. Though the direction of policy
is clear, I am less sure about the
appropriate choice of instrument.

Reduction in liquidity by raising the
Cash Reserve Ratio (CRR) is clear
enough – though a blunt instrument, it
has the added advantage of being
cost‐efficient. Having started down the
route of imposing differential CRR on
various deposit classes, should we
simply
fully
sterilize
Federal
Government Deposits by raising CRR
on this class of deposits to 100? New,
we hope more effective, effort by the
Federal
Government
to
ensure
effective
implementation
of
the
Treasury Single Account coupled with
operational challenges that will attend
the imposition of 100 per cent CRR on
public sector deposits rules that out for
the time being. This leaves raising the
CRR on private sector deposits as the
avenue
for
restricting
available
liquidity.

I am not unaware that the value of
maturing bills will almost neutralize the
impact of the higher CRR imposed on
non‐government deposits. I expect
that
the
process
of
policy
implementation
will
ensure
effectiveness of the measure. The
option of raising the Monetary Policy
Rate (MPR) is one I have been unable
to support on this occasion. Whilst an
increase
in
MPR,
by
raising
the
sovereign rate, will make government
bonds attractive and may serve to
improve our chances of slowing the
outflow
of
‘hot
money’,
I
am
increasingly of the view that this is the
time to deal with causes rather than
symptoms. The case for adjustment by
rebuilding eroded fiscal and forex
buffers is uncontested. If we are not to
raise costs thereby undermining the
competitiveness of our economy, fiscal
consolidation – however difficult –
offers the most suitable option.

The challenge of trying to stem capital
outflow arising from an inability or is it
unwillingness to rebuild fiscal and Forex
buffers. The logic behind the decision
to ‘invite’ ‘hot money’ was to buy time
for rebuilding fiscal and forex buffers.
As it is, our Forex Reserves are back to
where they were in August 2010
despite average price of Bonny Light
of US$103.56/barrel, export earnings of
approximately US$323bn and gross
foreign
portfolio
inflows
of
almost
US$39bn.

Raising MPR in the absence of a
credible basis – such as an announced
timetable for accretions ‐ to believe
that the fiscal policy authorities can, or
will,
delivers
on
the
oft‐repeated
statements of intention to rebuild
buffers is, in my judgment, an exercise
in futility. If we are buying time, it
makes sense to be clear how much
time is being bought and at what cost.
Competing
with
other
Emerging
Market and Frontier Economy nation’s


CBN Monetary Policy Review

countries for retention of portfolio
inflows leads us into a high interest rate
trap which will be difficult to handle.

Having
noted
the
increased
patronage of the SDF window in
preference to the Interbank Market, I
conclude that there may be a ‘flight‐
to‐safety’
in
progress.
In
such
a
circumstance, I expect that deposits
will come to the SDF provided there is
a positive return – hence my vote in
support of the option to make the
corridor around the MPR asymmetric.

In summary, I have thus voted in favour
of raising the CRR on non‐government
deposits to 15 per cent. In addition, I
also voted in favour of an asymmetric
corridor around the MPR with SLF and
SDF at 14 per cent and 5 per cent
respectively.

8.0
UCHE, U. CHIBUIKE

In my view, the March 2014 MPC
meeting was a very difficult one.
Evidence
before
the
Committee
showed that interest rates, exchange
rates and our national reserves all
came under immense pressure after
the
January

MPC
meeting.
Although some of these pressures may
be based on economic fundamentals,
I am convinced that most of it was as a
consequence of recent developments
in the Nigerian financial system. This
has led some investors to question the
continued commitment of CBN [and
the
Government
of
Nigeria]
to
macroeconomic stability. Thankfully, as
the
statistics
on
capital
flows
demonstrate, such noises have started
to quieten down in the last couple of
weeks. Despite this, the dangers of
depending on foreign capital inflows,
especially portfolio flows remain real
for monetary stability. This is especially
so because the incentive structure
behind the deployment of such funds is
purely their ability to earn short term
returns rather than cause real sector
economic development in recipient
countries.

Although I am sympathetic to the
argument
that
under
the
current
circumstances, and in the light of the
higher interest rates offered by some
developing countries for their debt
instruments, there is need to raise the
MPR with the prime objective of
encouraging such foreign capital to
stay within our shores, I am not
convinced that such a move will yield
any substantial benefit. In the first
place, there is no guarantee that a
hike in MPR will ensure that such
capital are retained in Nigeria. This is
because, the determinants of the
decision making behavior of portfolio
investors go beyond our MPR rate.
Political and economic factors in both
developed and developing nations
have a major role to play in this
direction. Equally important is the fact
that I am also not convinced that the
future of our real sector and banking
system should be sacrificed on the
altar of speculative capital and its
attendant short term benefits.


CBN Monetary Policy Review

Just as I do not support the raising of
the MPR, I also do not support the
devaluation of our currency at the
present time. This is especially because
doing so makes little sense in a mono
product rentier economy like ours. The
inflation consequences of such a
move
in
an
import
dependent
economy
will
further
complicate
monetary policy at the present time.
Having ruled out currency devaluation
and a hike in MPR, we must find other
ways of tightening money supply if we
are to successfully cushion the current
pressures on inflation, reserves and
exchange rates. In this direction, I will
strongly recommend that we continue
in our path of employing monetary
policy instruments, which also have the
potential of influencing fiscal behavior
of government, to tighten money
supply.

For some time now there has been
consensus among MPC members that
fiscal policy remains a major threat to
the
promulgation
of
effective
monetary policy in Nigeria. Poor fiscal
management
and
excessive
borrowings
by
government
have
resulted in financial repression. In other
words the more we tighten the more
the real sector of the economy is
crowded out of the credit market by
government and its agencies. The
consequence of this is that although
monetary
policy
tightening
has
consistently
achieved
single
digit
inflation for some time now, this has
been to the detriment of the real
sector of our economy. Thankfully,
monetary policy is not altogether
helpless
in
tackling
poor
fiscal
management policies and practices of
government.

One area where monetary policy has
proved potent in the past is with
respect to the government attitude
towards the Treasury Single Account
(TSA). Although Government for about
a decade now has been consistent in
voicing out its decision to implement
the TSA, in reality, there has been little
progress
in
this
direction.
The
consequence
is
that
it
is
not
uncommon
for
some
government
agencies to place huge sums of
money in low or no interest yielding
deposit accounts while at the same
time borrowing from banks at market
interest rates. The fact that this makes
little
economic
sense
has
fuelled
allegations
that
such
perverse
behavior
by
some
government
managers is as a consequence of
pecuniary personal gains derived by
such officers from such practices. The
fact that Government has thus far not
exhibited the political will necessary to
stop such a senseless practice has
added fodder to such speculations. It
was in light of the above background
that we, at the January 2014 MPC
raised the CRR on such government
deposits to 75 percent. The simple
objective of this was to increasingly
sterilize such government funds which
in the first place should normally be


CBN Monetary Policy Review

outside
the
commercial
banking
system.

So
far,
our
strategy
has
yielded
encouraging results. Available statistics
however show that some banks are
now taking advantage of the fact that
we have thus far not applied CRR on
public sector deposits held in foreign
currency domiciliary accounts. The
result is that government domiciliary
account
deposits
have
increased
sharply. This no doubt is a constituent
part of the pressure that is increasingly
being applied on our Naira exchange
rate. The above has influenced my
view that there is now need to block
this emergent arbitrage loophole. In
reaching this decision, it is important to
reiterate that the charging of CRR on
public sector deposits is an explicit
anomaly. This is so because, by law,
the Central Bank of Nigeria is the
banker to the government. If, as is
normal, all government funds are
domiciled in the CBN, the issue of CRR
on government deposits will never arise
in the first place.
In moving in the above direction, I
strongly recommend that we continue
to
proceed
with
caution.
This
is
because of the possible implications of
introducing CRR
on public sector
domiciliary account deposits for the
health of some banks that are over
exposed to such government deposits.
While our objective is to eventually
eliminate the arbitrage opportunities
created by the charging of differential
CRR on local currency and domiciliary
account
deposits
of
government
agencies, this must be pursued in a
gradual fashion.

In the light of the above factors, I
hereby vote as follows: (1) to retain
MPR at 12 percent with interest rate
corridor of + 200/- 200 basis points; (2)
to retain CRR at on private sector and
government deposits at 12 percent
and 75 percent respectively; (3) to
introduce
CRR
on
government
domiciliary account deposits and (4) to
retain Liquidity Ratio at 30 percent.

9.0
YAHAYA SHEHU
I vote to hold the MPR at its current
level of 12%, along with the symmetric
corridor of 2% and the CRR on public
sector deposits at the current level of
75%. However, the CRR on private
sector deposits should be increased to
15%.
My decision is mainly predicated on
the need to promote stability in the
foreign exchange, capital and money
markets,
and
to
stem
inflationary
pressures
from
international
and
domestic sources.

Tapering of QE3 represents the most
palpable
challenge
to
the
management of monetary policy in
developing countries and in Nigeria.
Already it has triggered substantial
reverse
flows
of
capital
from
developing
countries
to
US
and
Europe. Prospect of further tapering,
particularly if done in an accelerated
fashion, will impact further on capital


CBN Monetary Policy Review

flows, stock markets, reserves and put
considerable pressure on the foreign
exchange
market
in
developing
countries.

On the positive side, growth in the
world economy and in the main
trading partners of Nigeria shows a
positive trend- stronger in the US and
UK, weaker, but still positive in the Euro
area, stable in China and low but
positive
in
Japan.
The
growth
prospects in Africa, particularly SubSaharan Africa, remain strong.

The world price of oil also appears to
be fairly stable in the short run, with
forecasts indicating that prices are
likely to remain above USD 100/barrel,
well above the USD 79/barrel used as
the budget benchmark in the country.

With respect to inflation, it is expected
that global price levels, including in the
US, Eurozone and Japan, will increase
a bit, but not sufficient to pose
significant
pressures
on
imported
inflation.

For the domestic Nigerian economy,
GDP is estimated to have increased
slightly in 2013 to 6.89% compared to
6.58% in 2012, with most of the growth
being
led
by
the
non-oil
sector,
including agriculture. This is despite the
persistent low level of bank lending to
the real sector (except for power and
gas and oil).

At the fiscal level, government revenue
targets for 2013 were not fully met, but
there was also restraint from the fiscal
authorities, so that the budget deficit
for 2013 was only slightly higher than
the figure for 2012. Concerns regarding
government spending relate mainly to
the
very
low
share
of
capital
expenditure (less than 20%), which will
negatively affect future growth. The
second concern is the relatively low
level
of
mobilization
of
domestic
revenue. This is a critical issue in view of
the threats to future demand and
revenue from the sale of Nigerian oil
and gas emanating from the shale oil
production in the US, tar sands oil from
Canada and oil and gas discoveries in
a
number
of
African
countries.
Furthermore
the
prospects
for
an
elevated level of spending in the next
one year due to the impending
elections pose concerns for inflationary
pressure.

Price levels have been moderating for
much of 2013 and the year-on-year
headline inflation was 7.7% in February
2014, which is the lowest ever in many
years.
This was mainly driven by
declines in food inflation, particularly
farm
produce.
Moreover,
money
aggregates are all growing at lower
than the target rates, so there is little
risk of inflationary pressure from this
source. Nevertheless, CBN estimates
indicate that inflation is likely to rise in
the next one year period, possibly up
to double digits, unless the right policy
measures are implemented.


CBN Monetary Policy Review

In summary, output levels in the
economy are likely to remain on a
positive trajectory; oil earnings are likely
to remain stable in the short run
(despite the medium term challenges);
there is little risk of significant imported
inflation. The main challenges to the
economy with respect to monetary
policy emanate from the net capital
outflows
which
threaten
foreign
reserves levels, pressures on the Naira
exchange rate and the risk of excess
demand from rises in fiscal spending.

In consideration of the above, it is
necessary to act to try and stave off
pressures on the foreign exchange
market, with its inflationary implications.
Available information suggests that the
increase in CRR on public sector
deposits decided in previous MPC
meetings
and
implemented
since
August 2013 has had some effect in
reducing excess liquidity. However,
part of this effect was muted by
currency substitution of public sector
deposits into foreign currency.

It is therefore proposed that the CRR
for all private sector deposits should
now be increased to 15%. This should
help stem liquidity and ease pressure
on
the
foreign
exchange
market
without
impacting
too
much
on
banking sector liquidity ratios.

Admittedly, the CRR will impact mainly
on domestic liquidity. It will do little to
reverse net capital outflows, which will
be more affected by domestic interest
rates and therefore the MPR. However,
the use of this instrument also has
implications for growth, jobs, NPLs in
the banking sector, provisioning and
capital
adequacy.
On
this
issue
therefore, it is judged prudent to
observe the direction and speed of the
quantitative easing in the US and then
deploy the necessary instruments to
address the challenge.


CBN Monetary Policy Review

Central Bank of Nigeria Communiqué
No. 95 of the Monetary Policy
Committee Meeting of May 19 and 20,

The Monetary Policy Committee (MPC)
met on 19th and 20th May, 2014
against the backdrop of continuing
modest recovery in the US economy,
lingering fragile recovery in Europe,
slowing output growth in the emerging
market economies and possible risks to
domestic price stability. In attendance
were

members
including
Mr.
Adebayo Adelabu, the new Deputy
Governor, Financial System Stability.
The
Committee
considered
major
developments in both the global and
domestic economies up to May 2014,
and the outlook for the rest of the year.

International Economic Developments

The Committee noted the prospects of
improved
global
growth
in

predicated
on
expectations
of
sustained favorable developments in
the US and the euro area. Driven by
the
recovery
in
the
advanced
economies,
global
growth
strengthened in the second half of
2013, averaging 3.6 per cent from the
2.6 per cent recorded during the first
half. In the United States, improved
domestic
demand
continues
to
strengthen growth outlook. In Europe, a
pickup in growth in the core states
continued to compensate for the
decline in most of the peripheral states
even as debt, low inflation, financial
fragmentation
and
unemployment
persisted as threats to sustainable long
term economic recovery in the region.
Growth in the emerging markets and
developing economies is projected to
rise from 4.7 per cent in 2013 to 4.9 per
cent in 2014. The effects of tighter
financial
conditions
in
these
economies
are
expected
to
be
moderated
by
improved
external
demand
from
the
advanced
economies. Global inflation is generally
expected to remain subdued in 2014
with sustained sizable negative output
gaps in the advanced economies,
weaker domestic demand in several
emerging
economies,
and
falling
commodity prices. In the euro area
and
the
United
States,
headline
inflation at about 1.5 per cent is
projected to remain below the longterm
inflation
expectations.
Lower
world commodity prices in U.S. dollar
terms
would
help
reduce
price
pressures,
although
in
some
economies,
exchange
rate
depreciation continues to pose a
threat to consumer price stability. The
Committee
noted
that
monetary
policy stance across the advanced
economies could begin to diverge in
2014/15. In the United States, the
Federal
Open
Market
Committee
(FOMC) rate is expected to increase,
post-tapering, in 2015. On the contrary,
markets
continue
to
expect
a
prolonged period of low interest rates
and supportive monetary policy in the
euro area and Japan. In the emerging
market economies, there has been a
tightening of monetary and financial


CBN Monetary Policy Review

conditions since mid-2013, owing to the
combined effect of spillovers from
rising bond rates and better economic
prospects in the advanced economies
based on the markets’ reassessment of
medium-term growth prospects. The
risks posed to the emerging economies
by capital reversals in the posttapering
era remain a major challenge to the
outlook.
Overall,
global
economic
outlook remains benign with prospects
of steady and gradual improvements
in the major economies, as well as
slowing but sustained healthy growth in
the emerging markets and developing
economies.

Domestic
Economic
and
Financial
Developments Output

The Committee noted that real Gross
Domestic
Product
(GDP)
growth
remains robust. The recently rebased
GDP figures released by the National
Bureau of Statistics (NBS) indicated that
real GDP grew by 7.41 per cent in 2013,
compared with the 5.09 and 6.66 per
cent recorded in 2011 and 2012,
respectively. From the rebased GDP,
the new major sectors of the economy
in 2013 in terms of their share in GDP
were:
Services
(36.08%);
Industry
(21.73%);
Agriculture
(21.50%)
and
Trade (17.06%). Figures for the first
quarter of 2014 based on the rebased
GDP are yet to be released by the NBS.
The non- il sector remained the main
source of overall growth performance
(7.77%), driven largely by: agriculture
(0.43%),
industry
(1.28%)
of
which
manufacturing
was
1.26%
and
construction (0.62%); trade (1.54%) and
services (3.89%).

Prices

Inflation
has
remained
within
the
indicative benchmark target range of
6.0-9.0 per cent during the first four
months of 2014. On a year-on-year
basis,
however,
headline
inflation
inched up to 7.9 per cent in April from
7.8 per cent in March 2014. Food
inflation, which was 9.3 per cent in
January, declined to 9.2 per cent in
February and slightly increased to 9.3
and 9.4 per cent in March and April,
2014, respectively. Core inflation, which
declined to 6.6 per cent in January,
increased to 7.2 per cent in February,
and rose further to 7.5 per cent in April,
2014.
The
Committee
noted
that
headline inflation has remained within
single digit in the last sixteen months
and stressed its commitment to sustain
price stability; defined by the Bank’s
indicative benchmark range.

Monetary,
Credit
and
Financial
Markets’ Developments
Broad money supply (M2) increased by
1.94 per cent in April, over the level at
end-December
2013.
When
annualized, M2 increased by 5.83 per
cent. M2 was however, below the
growth benchmark of 15.52 per cent
for 2014. The increase in money supply
reflected
the
growth
in
the
net
domestic credit (NDC) of 1.62 per cent
in April. Annualized, NDC grew by 4.85
per cent over the end- December,
2013 level. It is, however, below the


CBN Monetary Policy Review

provisional benchmark of 28.5 per cent
for 2014. The slow growth in aggregate
credit was traced mainly to Federal
Government
borrowing
which
contracted by 18.06 per cent in April
2014 or 54.18 per cent on annualized
basis. In the period under review,
money market interest rates remained
within the MPR corridor of +/- 200 basis
points; oscillating in tandem with the
level of liquidity in the banking system.

The inter-bank call and OBB rates
averaged 10.5 and 10.59 per cent,
respectively, in April. As at mid-May,
the inter-bank call rate stood at 10.57
per cent while the OBB rate was 10.32
per cent. The Committee noted the
modest improvement in the equities
segment of the capital market in the
review period. The All-Share Index (ASI)
rose by 0.7 per cent from 38,748.01 on
March 31, 2014 to 39,018.34 on May 16.
Similarly, Market Capitalization (MC)
increased by 3.3 per cent from N12.45
trillion to N12.85 trillion in the same
period. However, relative to endDecember 2013, the indices declined
by 5.6 and 2.8 per cent, respectively.
This was traced partly to the impact of
the
response
of
global
financial
markets to Q.E. tapering by the US Fed,
weak economic performance in the
emerging markets and fragile recovery
in the Eurozone.

External Sector Developments

The naira exchange rate remained
stable
at
the
rDAS
window
but
appreciated at the interbank and the
BDC segments of the market. The
exchange rate at the rDAS-SPT during
the review period (March 26,-May 16,
2014) strengthened to N157.29/US$
from
N157.30/US$,
representing
an
appreciation of N0.01k or 0.01 per
cent.
At
the
Interbank
foreign
exchange market, the selling rate
opened at N164.65/US$ and closed at
N162.33/US$,
representing
an
appreciation of 1.41 per cent or N2.32k
in the same period. At the BDC
segment of the foreign exchange
market,
the
naira
which
sold
at
N172.00/US$ on March 26, closed at
N167.00/US$ on May 16; indicating an
appreciation of 2.91 per cent. Gross
official reserves as at May 15, 2014
stood at US$38.30 billion compared
with US$37.40 billion at end-March and
US$42.85
billion
at
end-December
2013. The current level of the country’s
external
reserves
could
provide
approximately 9 months of imports
cover.

The Committee’s Considerations

The MPC noted the mixed signals over
the global growth prospects in the
advanced, emerging markets and
developing
economies.
From
the
United States, the continued gains in
employment,
rising
inflation
and
growth stability could soon pave way
for policy tightening. On the contrary,
the
outlook
for
monetary
policy
appears biased towards sustaining
easy monetary stance in the euro area
and Japan against the backdrop of
slow and uneven recovery in the


CBN Monetary Policy Review

region. For the emerging markets and
developing countries, the Committee
was
concerned
that
the
current
underlying pressures on their currencies
arising from capital flow reversals,
increases in consumer prices and
declining inflows, which preclude the
use of expansionary monetary policy
to
stabilize
domestic
output
and
employment in the short run, could
dampen
growth
prospects.
The
Committee noted with satisfaction
Nigeria’s overall domestic economic
environment
which
has
remained
stable with inflation contained within
the target range, the recent stability in
the foreign exchange market, stable
interbank rates and strong growth
outlook. The key challenge for policy,
in the Committee’s view, was that of
sustaining
and
deepening
the
outcomes of existing policies. It noted,
also, that over the medium term, the
major risks to price stability appeared
to be emanating from both external
and internal sources. From the external
environment, risks to the domestic
economy include the prospects for
increased yields and interest rates in
the US and the rather low level of
economic activity in the emerging
markets; both of which could have
repercussions for foreign exchange
inflows
(private
and
official)
and
stability of the naira exchange rate.
Internally, the key risk factors include
the high systemic banking system
liquidity, elevated security concerns
and anticipated high election-related
spending in the run-up to the 2015
general
elections.
High
domestic
liquidity could exert sustained pressure
on both the exchange rate and
consumer
prices,
as
well
as
accentuate the already high demand
for foreign exchange, further depleting
the country’s external reserves. In
addition, core inflation has continued
to
send
conflicting
signals
since
January 2014. If the upward trend
continues as observed in April 2014, it
could be a major factor in the upward
trend in prices. The Committee also
expressed concern over the eroded
fiscal buffers which have exposed the
economy to vulnerabilities arising from
both domestic and external shocks.
The erosion has accentuated the
regime of persistently high interest
rates, elevated demand for foreign
exchange
and
declining
reserves
accretion. The Committee enjoined
the Management of the Bank to
continue to monitor developments in
the fiscal space with a view to taking
appropriate monetary policy actions.
In the light of the foregoing, the
Committee
acknowledged
the
success of monetary policy measures
in attaining price and exchange rate
stability and considered: the potential
headwinds in 2014, the ultimate goal of
transiting
to
a
truly
low-inflation
environment; and the need to retain
portfolio
flows.
The
Committee
unanimously
voted
to
retain
the
current stance of monetary policy. In
addition, one member voted for an
asymmetric corridor around the MPR.


CBN Monetary Policy Review

Consequently, the Committee voted
to:

hold the MPR at 12%;


keep the CRR on public sector
deposits at 75% and CRR on
private sector deposits at 15%;

retain the MPR corridor at +/-200
basis points.

Sarah O. Alade
Acting Governor
Central Bank of Nigeria
20th May, 2014


PERSONAL STATEMENTS BY MEMBERS OF
THE MONETARY POLICY COMMITTEE

1.0
ADELABU, ADEBAYO
Macroeconomic
outcomes
have
remained relatively good since the
beginning
of
FY
2014.
Headline
inflation, though inched up to 7.9 per
cent in April 2014, is still within the long
term target of the Bank while real
output growth at 7.94 per cent in 2013
is higher than the last 5-year average
of 6.93 per cent. Besides, real output
growth in FY 2013 confirms that the
economy is firmly on recovery path,
following the slowdown of 2011. The
exchange rate at the rDAS market has
remained within the Bank’s target of
+/-3.0
per
cent
while
a
modest
appreciation has been observed in the
interbank
and
BDC
markets.
Furthermore, volatility in the money
market
rates
has
largely
been
subdued. These outcomes reflect the
proactive nature of the monetary
policy of the Bank, which should be
consolidated.

The
sustainability
of
these
gains,
however, is confronted with a number
of challenges. With respect to the
consumer price level, although the
various measures of inflation are still
within the single digit target, an
upward trend appears to be firming up
for the core component since the
beginning of FY 2014. The elevated
banking system liquidity, evidenced by
an average of N400 billion in daily SDF
since
January
and
aggregate


CBN Monetary Policy Review

spending in the run-up to the 2015
general elections may pose significant
risk to inflation. To underscore this point,
staff forecasts indicate that headline
inflation could rise to around the
border of single digit as early as June.
Consequently, policy response to rein
in inflation expectation could not be
completely ignored at this point in
time.

Closely related to this is the declining
external reserve and implication for
exchange rate stability, which is a
major
challenge
to
nearly
all
developing
economies
at
the
moment. For us, the pressure is from
both supply and demand sides. The
recent upward adjustment of Cash
Reserve Requirement (CRR) on both
the public and private sector deposit
has largely curtailed the demand
pressure
in
the
foreign
exchange
market by modifying the behavior of
the DMBs. This notwithstanding, a slight
degree of volatility was still noticeable
in the interbank market particularly in
May 2014. Further increase on CRR
may pose some risks to the stability of
the banking system as threats to the
system are gradually seen in the
reduction of interbank transactions
since the beginning of the year. This
suggests that the supply side of the
foreign exchange market deserves
further policy attention.

There are two major issues on the
supply side of the foreign exchange
market. Accretion to the external
reserves
from
oil
has
not
been
significant in the recent past though
data in the last few months showed
that oil production volumes has started
to recover. With increased global
demand for oil due to recovery in the
advanced economies, oil price would
likely remain firm over the medium
term. In effect, accretion to reserves is
expected to improve. The other major
issue is the ongoing tapering of the
QE3 by the Federal Reserve which has
revised investors’ sentiment against
emerging and developing economies
in general. Besides, I am also of the
view
that
developing
economies
including Nigeria should be preparing
for the post tapering era in the US and
other
developed
economies.
With
unemployment
in
the
US
inching
towards the long term trend a switch to
a tightening mode appears very likely
in the medium term. The cumulative
effect of this development is that
capital
outflow
from
emerging
economies could continue for some
time to come.

In a nutshell, the foregoing analysis
presents the need to continue to
maintain a tight monetary stance
either by holding steady the current
measures or by strengthening them.
The impact of the tightening measures
on growth, however, could not be
completely
discounted,
particularly
when consideration is given to rising
lending rates to small and medium
scale borrowers. This notwithstanding,
the position of the monetary authority


CBN Monetary Policy Review

must be without ambiguity whenever
there is the delicate tradeoff between
price stability and other goals.

In sum, on the basis of the need to
manage inflation expectation, address
the vulnerability of the economy to
capital flow, build up external reserves
without undermining the stability of the
banking
system,
the
subsisting
monetary policy measures should be
maintained.

Consequently, I vote for retention of
the current monetary policy measures:
MPR at 12 per cent with a symmetry
corridor of 2 per cent, Private Sector
CRR at 15 per cent, and Public sector
CRR at 75 per cent.

2.0
ALADE, O. SARAH
Global economic growth is projected
broadly to strengthen to 3.6 percent in
2014 from 3.0 percent recorded in
2013, with much of the momentum
coming from advanced economies
according to the April 2014, World
Economic Outlook (WEO). In emerging
markets, while earlier projected risks
have diminished, new ones have
emerged as a result of lower than
expected inflation in the advanced
countries, which will impact output
demand and prices, and geopolitical
risks. In the domestic environment,
although stability have returned to the
foreign exchange market after some
periods
of
turbulence,
increased
political risk and uptick in inflation due
to seasonal planting period calls for a
hold on monetary policy rate to
safeguard the gains made. Based on
the
above,
I
support
a
hold in
Monetary
Policy
Rate
(MPC),
maintenance of a 75 percent increase
in public sector deposits Cash Reserve
Requirement (CRR) and a 15 percent
increase in private sector deposits.

Global economic growth has improved
albeit
with
some
downside
risks.
Outlook to global growth has turned
positive on the recovery from the
advanced countries led by United
States, United Kingdom and Germany.
In the United States, there is a pickup in
momentum
as
disposable
income
adjusted for inflation grew by a strong
3.8 percent in January through March
with
strong
consumer
confidence
index. The April surge in job growth to
288,000 confirms a pickup in the
economy as monthly job growth so far
this year averaged 214,000 a month,
above analysts’ estimate of 200,000
per month. In the Euro zone, growth is
positive but subdued at 0.2 percent in
the first quarter with Germany pushing
the growth in the region at 0.8 percent.
The high growth in Germany was
bolstered by industrial expansion and
construction activity which benefited
from a mild winter. In emerging market
and developing economies, growth is
projected to pick up to 4.9 percent in
2014.
Growth
will
be
helped
by
stronger
external
demand
from
advanced
economies,
but
tighter
financial
conditions
from
tapering
could have a dampening effect on


CBN Monetary Policy Review

domestic
demand
growth
if
not
handled well. Therefore care must be
taken in balancing the dual objective
of stability and growth.

Headline inflation increased to 7.9
percent in April compared to 7.8
percent recorded in March 2014.
Headline inflation increased to 7.9
percent
in
April,
suggesting
that
inflation may be expected to stay
elevated in the coming months, as
local food supply dwindle at the start
of the planting season. Although a
slight increase, it is still within the
Central Bank target of between 6- 9
percent and the overall goal of single
digit inflation. Core inflation rose slightly
to 7.9 percent in April from 6.8 percent
recorded in March, 2014, while food
inflation
increased
slightly
to
9.4
percent from 9.3 percent recorded in
the previous month. The increase in
food
index
is
driven
mainly
by
dwindling local food stocks as planting
season commence, suggesting that
future increase in inflation is to be
expected in the coming months. Aside
from the seasonal factors, there is still
fiscal risk as a result of pre-election and
increased security spending. Based on
this, monetary policy should remain
restrictive to forestall the anticipated
impact of fiscal risks and food supply
seasonality.

Stability has returned to the domestic
market. Foreign exchange reserves
increased to $38.30 billion as at May
15, 2014, after declining in February
and March as investors react to the
perceived uncertainty in the market.
This is as a result of increase revenue
from oil and an attempt to strengthen
the fiscal buffer by the government.
Excess
Crude
Account
(ECA)
increased to $4.1 billion as at May 16,
2014 from $2.5 billion at the end of
2013, as government intensifies effort at
rebuilding the fiscal buffers to forestall
the downside risk to the domestic
economy
through
foreign
reserve
depletion.
The
projection
is
that
reserves build-up in the coming months
will be sustained if prices stay steady
on the back of high production and
stable
prices.
The
Naira
has
strengthened by 2% in the past 3
months to reach NGN/USD162.4 as
foreign investors return to the local
bond
market.
Proper
coordination
between the fiscal and monetary
authority
have
helped
stir
the
economy safely out of the temporary
macroeconomic shock it experienced
earlier on the year.

Domestic growth has remained robust
but downside risks remain. The forecast
for 2014 GDP growth ranged from 6.75
percent to 7.41 percent but there are
risk to this projection. While the rebased
GDP suggest that the economy is now
more diversified and broad-based,
sustaining
the
momentum
and
creating inclusive growth is the task all
policy makers should take seriously.
This
will
require
creating
an
environment that is competitive and
attractive
to
both
foreign
and


CBN Monetary Policy Review

domestic
investors.
The
security
challenges
in
the
country
could
impact growth negatively, although
the effort at dealing with the issue with
international
help
is
a
welcome
development with the potential of
achieving positive results.

Pressure
in
the
foreign
exchange
market has eased and some level of
stability has returned. Pressure at the
foreign exchange market window has
eased as the diligent and coordinated
efforts by the Central Bank to restore
stability paid off. This has been helped
by the foreign exchange inflows by
foreign investors who are now returning
to the country in the local bond market
and other portfolio flows. Rates at the
Interbank and Open Buy Back (OBB)
rate have remained within the band at
10.55 and 10.29 percent respectively
as at May 16, 2014. These indicate
excess liquidity in the system as banks
accessed the Standing Deposit facility
(SDF), but were rarely at the Standing
Lending Facility (SLF) window since the
last MPC in March. In addition, lending
rates eased to 21 percent, suggesting
that care must be taken to manage
the structural liquidity and the structural
impediments to credit growth in the
economy.

Although
pressure
on
the
foreign
exchange has eased, there are some
downside risks to the growth and
stability prospects, and now is not the
time to start easing. Base on this, I vote
for a hold on Monetary Policy Rate, the
maintenance of 75 percent increase in
public sector deposits Cash Reserve
Requirement (CRR) and a 15 percent
increase in private sector Cash Reserve
Requirement.

3.0
BARAU, SULEIMAN

The current MPC meeting is taking
place at a time of relative stability in
the local environment and when there
is no significant development in the
global economy to elicit a change in
policy.

Review of Developments

1.1
The global economy sustained
the momentum towards recovery
since the last MPC meeting, with
global output estimated at 2.8%
in the first quarter (Q1). The
sustained
accommodative
monetary policy in the Euro area,
Japan and the United States of
America inspite of ‘tapering’ is
largely responsible for this. It is this
and other significant measures
implemented particularly in the
Euro area that ensured a more
optimistic global growth forecast.
Consequently,
global
output
growth is projected at 3.6% by
the International Monetary Fund
(IMF) as against 3.0% achieved in
2013. The projected output
growth in the Euro area of 1.2%
for 2014 is similarly optimistic, up
from
minus
0.4%
in
2013.
Unemployment
in
the
US
dropped to 6.3% in April, thus


CBN Monetary Policy Review

supporting the strong forecast
growth numbers. The Federal
Open
Market
Committee
(FOMC) has further reduced the
monthly
asset
purchase
programme
to
$45
billion
effective May, 2013 in the USA.
Overall, growth is expected to
increase
to
2.8%
in

compared with 1.9% in 2013.
China’s Q1 GDP growth reduced
to 7.4% compared to 7.7% in Q3.
It is however slightly below the
7.5% forecast in 2013 indicating
that growth is within forecast.
Output in Sub-Saharan Africa is
expected to increase to 5.5% in
2014, a stronger prospect when
compared with 4.9% in 2013.
Overall the global economy is
expected to moderately grow in
2014.

1.2
The Nigeria economy, after the
recent
rebasing
of
GDP,
witnessed substantial growth of
7.94% in 2013 when compared
with 6.66% in 2012. The rebasing
of the GDP indicates the fact
that
our
economy
is
more
diversified than we thought it
was. Industry and services now
accounts for over 57% of GDP up
from 39%. The rebasing has
however, also thrown up other
challenges
in
terms
of
strengthening taxes and revenue
base to reflect the level of the
rebased GDP. Overall, growth
outlook remains strong at over 7%
for 2014 inspite of the GDP
rebasing.

1.3
Headline Inflation (HI) though
largely
stable
inched
up
marginally from 7.8% to 7.9% in
April, 2014, largely accounted by
the surge in Food/Non Alcoholic
Beverage
and
Housing/Water/Electricity/Other
Fuels
components
of
that
measure. The Core measure (CI)
showed a stronger surge from
6.8% in March to 7.5% in April,
2014. While inflation has largely
been subdued, the outlook for
the Headline and Core measures
indicate a disturbing upside risk.
In all, the Headline measure of
inflation is expected to remain
within single digit level for a large
part of 2014 based on staff
estimates. However, real interest
rate is expected to continue to
be positive.

1.4
Interest rates remained largely
stable. Market rates, remained
within the corridor. It is however,
disturbing
that
active
traders
have
not
resumed
in
the
interbank
clean
(unsecured)
segment of the money market,
indicating
that
inspite
of
evidence
of
good
liquidity,
confidence has not returned.
The
spread
between
the
consolidated
deposit
and
lending
rates
also
remain
a
concern. It is hoped that the


CBN Monetary Policy Review

effect of the shared services
initiatives when fully implemented
would help to narrow the spreads
through the reduction of cost of
doing business of banks and
ultimately, lending rates. The
more strategic solution to this
problem
remains
the
development of a vibrant fixed
income segment of the capital
market that should radically alter
the demand and supply balance
for credits in the banking system
and favourably lower lending
rates.

1.5
Exchange
Rate
witnessed
substantial appreciation in the
Interbank and Bureau De Change
segments.

Interbank
Rate
appreciated by 1.41% (N2.32)
from 164.65 to N162.33 from
March
26th
to
May
16th
respectively. The BDC rate also
appreciated by 2.91% (N5.00)
from
172.00
to
N167.00
respectively
over
the
same
period. The rDAS rate remained
stable at around N157.29 over
the same period. The stability
and appreciation witnessed in
the respective segments was
largely as a result of the tight
stance
in
policy,
reversal
in
market sentiment and reversal of
portfolio outflows.

1.6
Foreign Reserves level became
stable at $37 billion. External
reserves at $38.30 billion as at
May
15th
is
equivalent
to
approximately 9 months of import
cover. There are a few reasons
for this. First, the production level
of crude has been largely stable
at about 1.876 bpd. Secondly, oil
price has maintained a floor
above $100/b. Thirdly, portfolio
outflows
have
reversed
and
inflows are at pre-February 21
level.

Fourthly,
and
closely
related, market sentiments have
reversed. Finally, with tax holiday
given to the Nigerian Liquefied
Natural

Gas
Company
just
expiring,
inflows
from
the
petroleum
sector
would
be
diversified and enhanced. We
see overall stability in the level of
foreign reserves in the short run
given the above demand and
supply
scenario
for
foreign
exchange.

Pressure points/challenges
Fiscal scenario remains a source of
concern
from
a
Monetary
Policy
standpoint. Inspite of efforts towards
fiscal consolidation, with impressive
outcome, fiscal buffers from the low
balances in the Excess Crude Account
at a period of high oil price and stable
production levels gives me concern.
Besides, the budget is yet to be signed
into law by the President/C in C as a
result of reported issues with respect to
the package passed by the National
Assembly. It may be true that recurrent
spending is being made at current
levels but capital expenditure is said to


CBN Monetary Policy Review

be at 50% of previous year’s numbers. I
cannot therefore rule out the possibility
of increase/sudden injection of liquidity
from spending as the Appropriation
Act is signed, due to what one may
loosely call ‘money illusion’.

Portfolio inflow trends have favourably
reversed recently. Future trend will
depend
on
FOMC
decisions
on
tapering going forward and indeed on
the reversal of quantitative easing in
Japan and across the globe. This is an
external variable that could potentially
impact the success of policy in Nigeria.

Slow levels of structural reforms due to
the known limitations of monetary.
Monetary Policy can only deliver stable
prices and monetary variables that are
conducive to growth. Growth should
ultimately be driven by fundamental
and complementary reforms coming
from the real sectors. With the recent
privatization of the power sector and
significant reforms in the agricultural
sector, we are heading in the right
direction. However, we need to
extend these reforms to other sectors
and drive them faster as well. It is well
known that financial sector and real
sector reforms produce best results if
they are pursued concurrently.

Current
security
challenge
is
a
significant exogenous variable that
may hamper the effectiveness of
monetary policy if not contained.
Besides, I have not been able to de
couple the security challenge that we
have today with significant issues of
the
current
human
development
indices in Nigeria. In plain terms,
significant success in monetary policy,
financial and real sector reforms are
best delivered in an environment
where security of lives and property is
guaranteed.

Recommendation

In the light of the fact that the above
challenges
are
already
receiving
varying
levels
of
attention
from
Government, the demonstrated global
and
domestic
macroeconomic
stability since the last MPC as well as
successes recorded by the MPC, I
have no doubt that the sensible course
for the current MPC is to hold stance of
policy and various measures already in
place to support this stance. I
therefore voted as follows:


Keep MPR at 12%;

Keep Private Sector CRR at 15%;

Keep Public Sector CRR at 75%;

Keep the systemic corridor at plus
and minus 2% around the MPR;
and

Keep Net Open Position at 1% of
Shareholders Funds

4.0
DANIEL-NWAOBIA, ANASTASIA
Developments in 2013 indicated that
the economy recorded a rebased
growth of 7.94 per cent, which was
higher than 5.09 and 6.6 per cent
recorded
in

and
2012,
respectively despite continuing security
challenges,
and
weak
external


CBN Monetary Policy Review

environment. The improved growth
outlook
was
based
on
sustained
implementation
of
the
on-going
reforms and the Federal Government’s
transformation agenda, especially in
Agriculture; Energy and Transportation.
Government’s increased efforts aimed
at curbing crude oil theft; critical
infrastructure vandalization such as gas
and oil pipelines, as well as the general
sanitization of the petroleum industry
cannot be overlooked.

Headline
inflation
continued
its
moderation to single digits, indicating
the effectiveness of sustained tight
monetary policy of the Bank. Though it
rose marginally to 7.8 and 7.9 per cent
in March and April, 2014, respectively
from 7.7 per cent in February 2014,
projections of inflation performance in
the next six months indicate that the
year-on-year headline inflation would
remain within the single digit target.

Stability
in
the
foreign
exchange
market, as evidenced by the modest
appreciation recorded in the three
segments of the market during the
period under review (March, 26 – April
30 2014) is also worthy of note. The
appreciation witnessed in the three
segments of the market could be
attributed to improved supply following
the gradual return of foreign investors
to the Nigerian market as a result of
the
confidence
reposed
in
the
economy.

A key challenge to monetary policy in
2014 in the wake of the tapering by the
Federal Reserve which is proceeding
faster
than
anticipated
with
consequences
for
capital
flow
reversals relates to a possible instability
in our financial markets. However, the
recently concluded 24th edition of the
World Economic Forum Africa (WEFA) is
expected to help stimulate investment
in the economy, thereby creating job
opportunities
and
reducing
unemployment. The result of this is
expected soon as understanding and
commitments were made during the
meeting by several investors, especially
in
the
area
of
Power,
Housing,
Education, Agriculture, etc. This is likely
to reduce the vulnerability of the
economy
to
shocks,
particularly
through
the
diversification
of
the
funding
sources
away
from
oil.
Attraction
of
capital
will
reduce
pressure on the exchange rate and
also help in external reserves build-up.
However, there is need to continue to
keep
an
eye
on
the
areas
of
vulnerability
and
intervene
when
necessary.

In view of the effectiveness of the
current tight monetary policy stance in
keeping inflation within single digits as
well as maintaining stability in the
foreign
exchange
market,
it
is
advisable to sustain the current policy
stance.


CBN Monetary Policy Review

Consequently, I vote as follows:
i.
The Monetary Policy Rate (MPR)
to be retained at the current
level of 12% and corridor of +/-
2% for the inter-meeting period.

ii.
The Private sector CRR which was
increased from 12 to 15 per cent
in March, 2014 should also be
sustained to enable the market
adjust to the new policy.

iii.
The current policy on foreign
exchange
(mid-point
and
exchange
rate
band
of
N155/US$1 +/- 3%) should be
retained for the next two months
when another review will be due
for consideration, while effort to
rebuild the fiscal buffers is being
sustained to further engender
stability in the foreign exchange
market
and
build
investor
confidence.

5.0
GARBA, ABDUL-GANIYU

At the third MPC meeting for 2014
(May 19-20), my decision took account
of (1) my previous decisions and the
majority decisions, (2) action lag and
policy performance, (3) the revealed
and expected responses of key players
to policy, action lag and policy
options, (4) regulatory effectiveness, (5)
underlying vulnerabilities in the national
and global economy, (6) short-term
stability of key variables in March and
April and the associated costs and
risks,
(6)
transition
issues
and
(6)
underlying trends and fundamental
structural changes in the economy.
After due analysis of the underlying
evidence and contemplations about
the outlook (national and global), I am
convinced that it is wise to keep MPR,
CRR on private sector deposit and CRR
on public sector deposit and the SLF
rate unchanged in the short term. This
implies the following: MPR (12%), CRR
on private sector deposit (15%), CRR
on public sector deposit (75%) and SLF
rate (14%).

However, I remain convinced of the
need for (1) short term responses to the
slow-down in the activities in the
interbank lending market and (2)
medium term planned adaptations to
a post- QE world.

In the short term, I am convinced that
there is a need for an asymmetric
corridor
to
gradually
reduce
the
incentive for the rapidly expanding
activities
in
the
Standing
Deposit
Facility (SDF) window. It is axiomatic
that
an
active
interbank
lending
market (ILM) is necessary for the
efficient pricing of risks and financial
assets, for allocative efficiency as well
as for the effectiveness of monetary
policy to stimulate the growth in
investments,
employment
and
economic development. I do not
subscribe to the idea of classical
dichotomy that is, the idea that
monetary policy variables impact only
monetary variables in the short run or
the
idea
that
monetary
policy


CBN Monetary Policy Review

variables do not generate hysteresis
that is, long lasting impacts.

Indeed, both the interbank lending
market and Open Buy Back are pivotal
to the transmission mechanism of the
monetary policy regime guiding the
MPC decisions. Since the interbank call
rate became the operating target for
monetary policy, the call rate also
became the benchmark for short-term
rates (prime and maximum lending
rates). Until recently, strong linkages
were successfully established between
MPR, call rate and the short term rates
in the tightening regime that began
with
the
September

MPC
meeting. When the interbank lending
market
becomes
significantly
less
active for whatever reason (s), the call
rate
becomes
a
less
effective
benchmark for the pricing of short-term
risks and rates and for the efficient
allocation of financial assets.

I am convinced based on analysis of
available data and from institutional
perspectives that (1) the AMCON
effects on the interbank market are
exaggerated; (2) a 10% rate on SDF
has
been
a
consistently
strong
incentive for inverted intermediation
and by corollary, a strong disincentive
against
the
intermediation
effectiveness of DMBs and (3) a
reduction in the SDF rate along with
game changing administrative options
will incentivize DMBs away from the
highly profitable games of inverted
intermediation.
I therefore, vote for a reduction in SDF
by 300 basis points that is from 10% to
7%. The risk of a portfolio readjustment
into the
forex
market
may
exist.
However,
effective
administrative
actions including (a) mechanism redesign
and
(b)
more
effective
surveillance
would
considerably
reduce
such
risks.
The
inverted
intermediation is a strong vulnerability
in the Nigerian economy that must be
inverted if monetary policy is to stand a
strong chance of sustaining price
stability and lowering the sacrifice ratio
(employment and growth forgone in
disinflation regimes). Besides, analysis
of available data convinces me on a
sustained basis that the pressure on the
Naira is not driven by fundamentals
(net exports, current account balances
and net financial flows have been
positive from 2011). For instance, in the
first quarter of 2014, the average
monthly
trade
balance
and
net
financial are respectively $3.34 billion
and $4.6 billion respectively. It is clear
to me that “unwise rational greed”
(destructive
rationalism)
and
asymmetries
(financial
power
and
information) undermine the pricing
and allocation of financial assets with
adverse
effects
on
employment,
investment, development and security.
The challenge for MPC and the CBN in
collaborations with fiscal authorities is
to develop a right mix of policy,
administrative
effectiveness
and
institutional changes to tame such
behaviors, address the vulnerabilities in
the economy that are being exploited


CBN Monetary Policy Review

and; to be build resilience into the
economy to sustain stability in a postQE world.

I have always favored a forwardlooking
monetary
policy
regime
anchored in (1) a creative mix of
policies and institutional changes; (2)
effective coordination and (3) sound
prudential oversights. These ought to
be at the core of the conversations
and decisions for the post-QE era
macroeconomic management of the
Nigerian economy.

6.0
MOGHALU, C. KINGSLEY

Considerations
Taking
into
consideration
a
combination of monetary conditions
and the economic environment, my
vote in this MPC meeting appears
obvious to me.

At the last MPC meeting there were
concerns generated by the leadership
transition in the Central Bank of Nigeria.
Between then and now, stability has
been firmly anchored, and the naira
has been stable and even recorded
gains vis-à-vis the dollar. But this has
been at significant cost to our external
reserves
owing
to
the
resolute
interventions by the CBN in the forex
market. Nigeria has had net inflows of
foreign capital since April 2014. And
with reserves at US$38.30 as at May 15,
2014, this provides approximately 9
months of import cover.

Against this background, we have a
present
context
in
which
the
economy’s growth rate is satisfactory
at 7.41 per cent in 2013 driven by nonoil sectors; inflation, though ticking up
to 7.9 per cent in April 2014 on a yearon-year basis, remained within the
single digit indicative target. Broad
money supply (M2) increased by 5.83
per cent on an annualized basis but
remained
below
the
growth
benchmark of 15.52 per cent for 2014,
and net domestic credit increased by
1.62 per cent in April. The interbank
market has remained stable. Oil
output increased.

On the other hand, two factors suggest
the MPC cannot be complacent in the
present state of things. The first is that
liquidity remains high and inflationary
threats remain. The second is that the
United States Federal Reserve Bank
appears set to increase the pace of
tapering and is expected to increase
its monetary policy rate in 2015. U.S.
interest rate rises, combined with the
prospect of increased spending in the
Nigerian election period, could place
serious pressures on the naira as foreign
investors seek what they may perceive
to be relative safety, and inflationary
pressure may increase.

No matter, the situation at present and
the immediate future clearly argues for
the
maintenance
of
stability
and
leaving monetary aggregates as they
are at present.


CBN Monetary Policy Review

The threat at the last MPC having
passed, this is not a time to make
changes to the monetary stance of this
Committee. Until the structure of the
Nigerian
economy
changes
in
a
fundamental manner, or fiscal buffers
increase markedly (or, preferably, both
outcomes occur), monetary policy
must remain tight. It is a hopeful sign
that recent growth has been driven
largely by non-oil sectors, and the
recent GDP rebasing exercise indicates
an increasing diversification of the
economy.
But,
until
we
achieve
economic complexity and import far
less than we do today, monetary
policy will have to continue to bear a
heavy burden. That is the Faustian
dilemma
–
and
eradicating
that
dilemma is a largely fiscal responsibility.

Vote
I therefore vote to:

Maintain the MPR at 12%

Hold the CRR on public sector at
75% and CRR on private sector
deposits at 15%

Retain the MPR corridor at plus or
minus 200 basis points.

7.0
ORONSAYE O. STEPHEN

From the statistics released by the
National Bureau of Statistics (NBS), our
real Gross Domestic Product (GDP)
indicates that our economy is healthy.
Specifically, the NBS figures show that
the rebased GDP grew by 7.41 per
cent in 2013, compared to what the
economy
witnessed
in
the
corresponding period of last year.
The
Year-on-Year
(Y-O-Y)
headline
inflation rose to 7.9 per cent in April,
while food inflation stood at 9.4 per
cent for the months of March and April
2014, up 0.1 per cent from the figure in
February 2014. Core inflation rose from
7.2 per cent in February 2014 to 7.5 per
cent.
Despite
the
percentage
increases, it is gratifying to note that
inflation has remained within the single
digit benchmark in the first quarter of
2014. It is also noteworthy that the
Naira has remained quite stable in the
face of extreme internal and external
pressures.

The Committee, in considering the
performance of the Nigerian economy
in the last three months, equally noted
that the country’s overall domestic
economic environment has remained
stable,
backed
with
single
digit
inflation, as well as stability in the
foreign
exchange
market
and
interbank rates. These, however, need
to be sustained.

Considering the success of monetary
policy measures in attaining price and
exchange rate stability and the fact
that the conditions for maintaining MPR
at 12% are still unchanged; there is
therefore
no
justifiable
reason
to
tamper with the present rate.

On the Cash Reserve Requirement
(CRR) on deposits from the Public
Sector, I do not see the reason for any
increase at this time considering the


CBN Monetary Policy Review

gains achieved from imposing 75 per
cent CRR on the funds.

Votes
The arguments canvassed for holding
the MPR at 12% in March 2014 remain
largely unchanged. Given the stability
all-round, I do not see reasons why the
parameters should be altered at this
time.

Based on the foregoing, I voted for the
following:
a)
Holding the MPR at 12%;
b)
Retaining the symmetric corridor
of 200 basis point around the
MPR;

c)
Retaining
the
Cash
Reserve
Requirement (CRR) at 15% for
deposits from the private sector;
and

d)
Retaining the 75% Cash Reserve
Requirement (CRR) on deposits
from the Public Sector.

8.0
SALAMI, R. ADEDOYIN

Despite
the
marginal
increase
in
Headline Inflation to 7.9percent in April,
prices, in the opening four months of
the
year
rose
on
average
by
7.85percent. This places inflation within
the 6-9percent target for 2014. Unlike
the opening months of 2013 when
Core inflation trended lower, there is
no immediately discernible trend in the
data for Non-food inflation for the 1st
four months of 2014. However, the
average rate of Core inflation is, thus
far, approximately 200bps lower than it
had been for the same period last
year. While Food inflation is similarly
lower than it had been between
January-April 2013, at an average of
9.4 percent, it however continues to
rise faster than Core Inflation.

With stability of the exchange rate
across
segments
–
indeed,
an
appreciation in the Bureau de Change
market,
the
background
to
this
meeting of the MPC was devoid of the
anxiety which had framed the run-up
to recent meetings. The stability which
formed
the
background
to
this
meeting is in no small measure the
result of improvement in confidence as
the turbulence generated by the
transition of leadership at the Central
Bank subsided. The slight rise in the
stock of Forex Reserves – rising by
approximately US$0.5bn to US$38.3bn -
since our meeting in March, also
reduced uncertainty. The recovery in
confidence saw a sharp rise in portfolio
inflow of US$2.152bn in April 2014 – an
increase of almost US$1.2bn over the
inflow the previous month.

Given the significance of international
developments to our economy, the
announcement of further tapering in
Quantitative Easing by the Federal
Open Markets Committee (FOMC) of
the US Federal Reserve was perhaps
the most significant non-domestic issue
to
reflect
on.
With
FOMC
Asset
purchases
further
reduced
by
US$10bn/month from May coupled


CBN Monetary Policy Review

with easing short and long term yields
in the US the impact on Capital flows
continues to be an issue of importance
for domestic policy making.

In the absence of data to indicate
how the output and expenditure sides
of the economy, in aggregate, have
fared in the opening months of the
year,
it
is
near
impossible
to
authoritatively
describe,
or
indeed
assess,
domestic
non-financial
economic conditions. It is thus near
impossible to situate developments in
the rest of economy in the context of
the
Monetary
Policy
Committee’s
(MPC) primary mandate of ensuring
currency and price stability.

Bearing in mind the caveat in the
preceding
paragraph,
liquidity
–
irrespective of definition – continues to
contract when adjusted for increases
in prices. In contrast, there appears to
be a sharp improvement in credit to
the private sector. Not only does its
growth rate exceed inflation, industry
loan book seems to be growing faster
than liabilities. The sharp reduction in
both volume and value of transactions
at the interbank window continues.

With regard to the MPC’s principal
mandate of price stability, the sixmonth ahead outlook for inflation,
provided by Bank Staff, shows some
improvement relative to the position at
our meeting in March. Notwithstanding
this, the Outlook is for Headline to
worsen
slightly
from
the
current
position. Headline Inflation, projected
to average 8.7percent between May
and October, is expected to show a
continuous rise. Over the next six
months, Core Inflation is expected to
peak
at
7.9percent
in
May/June
before decelerating to 6.1percent in
Sept. In the same six months, Food
price inflation is expected to worsen –
averaging 10.6percent, with a peak of
11.1percent.

Staff Outlook for economic conditions
hasn’t
changed
materially
–
characterized by lower oil prices, faster
tapering
of
Quantitative
Easing,
prospect of rising deficit as revenues
continue
to
slip,
and
worsening
inflationary pressure. Perhaps to these
we
should
add
the
formal
commencement of activities towards
the 2015 General Elections. On the
positive side, the leadership transition
at the Central Bank, a source of very
expensive
turbulence,
should
be
concluded shortly.

Leaving
all
monetary
policy
parameters unchanged, for which I
vote, is not to suggest that there are no
challenges ahead. The lull currently
being experienced simply offers an
opportunity to emplace a contingency
plan to proactively respond when the
next wave comes in.

9.0
UCHE, U. CHIBIUKE

For some time now I have consistently
voiced my concern about the impact
of fiscal policy (mis)management on


CBN Monetary Policy Review

monetary
policy.
Although
the
promotion of price stability is a key
mandate of MPC, this is not an end in
itself. If it were so it will, in my opinion,
be very easy to achieve. The essence
of price stability is to help create the
enabling environment for economic
growth and development to take
place. This perhaps explains why it is
also
the
mandate
of
MPC
to
determine
credit
policy.
As
a
consequence of this, we have in the
past tried to use monetary policy to
force changes in government fiscal
behavior which is also critical to
economic
development
and
the
credit system. A clear example of such
monetary policy strategy is the use of
CRR to force government to adopt the
Treasury
Single
Account
(TSA).
Specifically, the CRR on government
deposits has since been raised to 75
percent, as against 15 percent for
private sector deposits, all in the
attempt to promote government fiscal
prudence
which
facilitates
the
operationalisation of monetary policy.

Although I am pleased with the results
thus
far
from
the
above
policy
initiative, available data suggests that
some government agencies and banks
may be circumventing this strategy by
exploiting the arbitrage opportunities
that have arisen as a consequence of
the fact that there is currently no
requirement for CRR to be applied to
domiciliary
account
deposits
in
commercial
banks.
The
above
example clearly shows the limitations of
using monetary policy as a tool to
force prudent fiscal behavior on the
part of government and its agencies.
The fact that there are few viable
monetary policy instruments left in a
fiscally dominant environment explains
my minority vote to extend CRR to
public sector domiciliary accounts at
the last MPC meeting. To be able to
appreciate the difficulties we face in
formulating effective monetary policy,
it is important to note that the
placement of government deposits in
commercial banks contravenes the
CBN Act which makes it explicit that
the
CBN
is
the
banker
to
the
government.
Placement
of
government deposits in commercial
banks
also
facilitates
poor
fiscal
management by government and its
agencies which in turn complicate
monetary policy formulation. Based on
the above, I was pleased to learn that
the government is now taking the issue
of TSA seriously and has indeed given a
deadline
of
May

to
all
government agencies to comply or
face severe sanctions. Once the TSA is
achieved, the abnormal practice of
applying CRR on public sector deposits
will cease to exist.

Another policy development, although
considered contentious in some circles,
that
has
positively
impacted
on
monetary policy is the rebasing of the
Nigerian GDP. The above exercise has
demonstrated
that
the
Nigerian
economy is more diversified than
previously believed. It is for instance


CBN Monetary Policy Review

now known that the manufacturing
and service sectors are the leading
sectors in the Nigerian economy, not
agriculture as previously believed. The
implication of the above is that MPC
must now do more to encourage the
delivery of credit to these important
sectors. After all the design of credit
policy is also a key mandate of MPC.

The
argument
that the
dominant
subsistence practice in the agricultural
sector, coupled with its dependence
on uncontrollable natural forces like
the weather, makes it less responsive to
monetary policy manipulation clearly
cannot be transferred to the service
and manufacturing sectors of our
economy. Since the excessive interest
rates
charged
by
banks
has
consistently been a primary concern of
both the service and manufacturing
sectors, I am of the view that we
should do more to bring down the cost
of credit to these important sectors of
our economy. Using market forces to
explain
away
the
widening
gap
between deposit and lending rates in
the country is no longer useful.

Despite the above positive policy
anticipations
and/or
developments,
the monetary policy environment in
the country remains challenging. This
was no doubt brought to a head early
in the year by the leadership crisis in
the CBN. The subsequent outflow of
foreign
portfolio
investments
put
pressure on both our external reserves
and
the
value
of
our
currency.
Although these pressures have started
to ease, difficulties remain. While the
variance
between
the
w/r/DAS,
interbank and BDC exchange rates
narrowed in the recent past, it remains
material. I am also aware that there
are concerns about the fact that the
2014 budget has not been signed into
law, growing insecurity in some parts of
the
country
and
the
dwindling
government revenues especially in the
run up to an election year. Despite
these, I am reluctant to vote for further
tightening of monetary policy at this
point. This is
in part because if the
planned total implementation of the
TSA happens at the end of this month,
this will in itself represent an implicit
tightening of monetary policy.

Furthermore I am convinced that a lot
of the portfolio outflows that negatively
impacted on our foreign reserves had
more
to
do
with
the
perceived
uncertainties
that
arose
from
the
recent leadership crisis in the Central
Bank and less with the inability of the
Central Bank to tighten monetary
policy and offer investors better rates
of return, The fact that such portfolio
outflows have tapered provide support
for this view. More important however
is the fact that there will be another
change in the leadership of the CBN in
a couple of weeks.

I am of the view that policy changes
should be undertaken at the present
time only if absolutely necessary. From


CBN Monetary Policy Review

the above analysis, this is certainly not
the case at this point.

In the light of the above factors, I
hereby vote as follows: (1) to retain
MPR at 12 percent with interest rate
corridor of + 200/- 200 basis points; (2)
to retain CRR at on private sector and
government deposits at 15 percent
and 75 percent respectively, and; (3)
to retain Liquidity Ratio at 30 percent.


CBN Monetary Policy Review

CBN Monetary Policy Review