CENTRAL BANK OF NIGERIA
MONETARY
POLICY REVIEW
MONETARY
POLICY REVIEW
August 2012
August 2012
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
©2012 Central Bank of Nigeria
:
ISSN: 2141-6281
Mandate
Vision
Mission Statement
§Ensure monetary and price stability
§Issue legal tender currency in Nigeria
§Promote a sound financial system in Nigeria
§Maintain external reserves to safeguard the international
value of the legal tender currency
§Act as banker and provide economic and financial
advice to the Federal Government
“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

vii
Chapter 1
Overview


Chapter 2
Domestic Price Developments and the Real Economy

Chapter 3
Monetary Policy


Chapter 4
Domestic Financial Markets


Chapter 5
Economic Outlook


Table 2.1
Inflation Rate (June 2011 - June 2012)..
..
..

Table 2.2 Quarterly Consumer Price Development
(November 2009=100)..


Table 2.3
Selected CPI Components' Contribution to Food
Inflation (Year-on-Year) January – June 2012 ..
..

Table 2.4 Selected CPI Components' Contribution to Core
Inflation (Year-on-Year) January – June 2012 ..
..

Table 3.1 Monetary Policy Committee (MPC) Decisions
January – June 2012


Table 3.2 CBN OMO Bills Auction (N'million)
(January 2009 - June 2012)


Table 3.3 CBN Standing Lending Facility (N'billion)
(January 2009 – June 2012)


Table 3.4 CBN Deposit Lending Facility (N'billion)
(January 2009 – June 2012)


Table 3.5 Foreign Exchange Supply by the CBN (US$ million)
..

Table 3.6 Performance of the Monetary Aggregates
..
..

Table 4.1 Weighted Average Money Market Interest Rates (%)
(December 2011 – June 2012)
..
..
..

Table 4.2 Average Monthly Spot Exchange Rates (N/US$):
January 2011- June 2012


Table 4.3 Average Monthly Foreign Exchange Forward Rates
(N/US$): March 2011- June 2012
..
..
..

Table 4.4 End-Month Exchange Rates Movements at Various
Segments of the Market, January 2011 – June 2012
(N/US$)..


Table 4.5 Nominal and Real Effective Exchange Rates

Indices (January 2011 – June 2012)
..
..
..

Table 4.6 Foreign Exchange Demand and Supply
Rates Indices (US$ million)


Table 4.7 CBN Monthly Foreign Exchange Flows (US$ million)
..

Table 4.8 NSE All-Share Index (ASI) and Market
Capitalization (MC): July 2011 – June 2012
..
..

Table 5.1 World Economic Outlook (WEO)
..
..
..

vi
CBN Monetary Policy Review
CBN Monetary Policy Review
Page
List of Figures
List of Boxes
Appendices
Figure 2.1
Headline Inflation (June 2011 – June 2012)
..
..

Figure 2.2
Headline Inflation (January – June 2012)
..
..

Figure 2.3
Headline, Core and Food Inflation Rate
(June 2011 – June 2012)


Figure 2.4
Selected CPI Components Contribution to Food
Inflation (Year-on-Year) January – June 2012 ..
..

Figure 2.5
Selected CPI Components Contribution to Core
Inflation (Year-on-Year) January – June 2012 ..
..

Figure 2.6
Actual and Seasonally Adjusted Headline Inflation
..

Figure 2.7
Oil Price (Bonny Light) (January 2011 – June 2012)
..

Figure 3.1
The Performance of M2, M1 and RM (2011 and 2012)..

Figure 3.2
The Performance of NDC, Cg and Cp (2011 and 2012)

Figure 4.1
Weighted Average Money Market Rates
(December 2011 – June 2012)..
..
..
..

Figure 4.2
Daily Interbank Call Rate (January – June 2012)
..

Figure 4.3
Daily Open-Buy-Back Rate (January – June 2012)
..

Figure 4.4
Daily Exchange Rate (January 2011 – June 2012)
..

Figure 4.5
Demand and Sales of Foreign Exchange at wDAS
Forwards (January 2011 – June 2012) ..
..
..

Figure 4.6
End-Month Exchange Rate of the Naira
(July 2010 – December 2011) ..
..
..
..

Figure 4.7
Nominal and Real Effective Exchange Rates
Indices (January 2010 – June 2012)
..
..
..

Figure 4.8
Foreign Exchange Flows (January 2011 – June 2012) ..

Figure 4.9
NSE ASI and MC (June 2011 – June 2012)
..
..

Figure 4.10
NSE ASI and MC (January 2012 – June 2012) ..
..

Figure 4.12
NSE Market Capitalization by Sector as at
End-June, 2011


Figure 4.13
NSE Market Capitalization by Sector as at
End-December, 2011 ..


Figure 4.14
NSE Market Capitalization by Sector as at
June 29, 2012 ..


Figure 4.15
Volume and Value of FGN Bonds
..
..
..

Figure 4.16
10-year U.S. dollar-denominated Bond
Yields for Nigeria (January 24, 2011 – June 29, 2012) ..

Figure 4.17
FGN Bond Yield Curves (end-June 2011 vs
end-December 2011 vs end-June 2012)
..
..

Figure 5.1
Fan Chart for Inflation from 2012:6 – 2013:12 ..
..

Box 2.1 Implementation of Treasury Single Account and
Price Stability in Nigeria


Communiqué No. 81 ..


Communiqué No. 82 ..


Communiqué No. 83 ..


vii
CBN Monetary Policy Review
CBN Monetary Policy Review
STATEMENT BY THE GOVERNOR
Sanusi Lamido Sanusi, CON
Governor,
Central Bank of Nigeria.
The main thrust of monetary policy in the first half of 2012 was to contain increased
pressure on domestic consumer prices arising from developments within and
outside the economy. On the domestic front, the challenges to monetary policy
and price stability in the first half of 2012 were the anticipated huge deficit spending
plan of the Federal Government and the hike in the price of premium motor spirit
(PMS) at a time when inflation inertia was already very strong with headline inflation
at end-June 2012 in double digits. External conditions were not favourable either.
The debt crisis in Europe had intensified, weakening financial markets, aggregate
demand and increasing economic uncertainty. Global energy and food prices
trended upward with dire consequences for overall global prices and potentially
strong impact on some open economies, including Nigeria.
The environment for monetary policy, therefore, in the first half of 2012 was far from
conducive. With the monetary policy stance already tight since October 2011, the
scope for the conduct of monetary policy was limited considering the potential
impact on yields in the financial markets, cost of liquidity management, financial
system stability and the sluggish growth in credit to the private sector. In the
circumstance, monetary policy had to be complemented with some administrative
and regulatory measures including closer monitoring of the markets and improved
communication. Monetary policy had been pushed to the limits and the need for
greater fiscal policy engineering became apparent.
In the face of these challenges, greater reliance on proactive liquidity
management and the 'leaning against the wind' approach adopted during the
period under review proved to be worthwhile in the later months. The Naira
exchange rate remained stable within the target band just as short-term (interbank)
rates stabilized around the bank's standing lending facility rate in the last couple of
months in 2012. With demand pressure in the foreign exchange market abating, the
risks of exchange rate instability and significant pass-through of higher global prices
to domestic prices were expected to decline in the months ahead.

Overall, the short- to medium-term outlook for the economy suggests that
inflationary pressure would moderate particularly as the harvest season sets in,
paving the way for more investment and growth. Monetary policy will remain largely
proactive and supportive of growth.


CBN Monetary Policy Review

CHAPTER 1
OVERVIEW

The primary focus of monetary policy in the first half of 2012
remained the maintenance of price and monetary stability.
The Bank continued with tight monetary policy, which
commenced in the fourth quarter of 2011. The Bank retained
the use of the benchmark interest rate, the Monetary Policy
Rate (MPR), signalling the stance of monetary policy and as an
anchor for short-term money market and other interest rates in
order to rein-in inflation expectations. This was supported by
the use of Open Market Operations (OMO); repurchase
transactions,
standing
facilities
and
Discount
Window
operations as the major tools of monetary operations to ensure
optimal system liquidity. These were complemented with
reserve requirements such as cash reserve ratio (CRR) and
liquidity ratio (LR). Primary market transactions in government
securities and foreign exchange market intervention were also
used to support monetary management. The Bank continued
to make efforts towards improving communication with market
operators and other stakeholders.

In the review period, the MPC held three scheduled meetings
during which it maintained the MPR at 12.0 per cent, with a
symmetric corridor of +/- 200 basis points around the MPR. The
Bank also implemented some administrative and regulatory
measures to complement OMO in addressing liquidity
concerns and demand pressures in the foreign exchange
market e.g. CRR at 8 per cent; LR at 30.0 per cent; and the
mid-point of exchange rate at N155/US$ with a band of +/-3.0
per cent.

Against the background of increased uncertainty in the global
economy, the MPC closely monitored developments in the
external sector, in the evaluation of policy options in the review
period. The slow pace of recovery in the advanced
economies,
reduced
growth
momentum
in
emerging
economies, the prolonged financial stress in the euro area and
inflationary pressures in the domestic economy were some of
the key considerations that defined the monetary policy thrust
The primary focus
of monetary
policy in the first
half of 2012
remained the
maintenance of
price stability


CBN Monetary Policy Review

of the Bank in the first half of 2012.

The first half of 2012 witnessed relatively slow growth in the
monetary aggregates arising mainly from the restrictive stance
of monetary policy since the fourth quarter of 2011, more
effective management of government liquidity position
following the operationalisation of the Treasury Single Account
(TSA), increased recourse to bond financing of the fiscal deficit
and substantial OMO sales.

Growth in broad money (M2) stood at 1.35 per cent as at endJune 2012, annualised to 2.70 per cent, which was significantly
lower than 15.43 per cent as at end-December 2011. This
development reflected the contraction in net domestic asset
particularly, credit to government, which declined substantially
in the review period relative to December and the
corresponding period of 2011.

Inflationary pressures remained elevated during the review
period owing to a number of factors, including rising global
food and energy prices, effects of the partial removal of
subsidy on premium motor spirit (PMS) in January 2012, fiscal
operations of the Federal Government and the upward review
of electricity tariff. Headline inflation (year-on-year) stood at
12.9 per cent at end-June 2012, 2.6 percentage points higher
than the 10.3 per cent at end-December 2011. Core and food
inflation (year-on-year) stood at 15.2 and 12.0 per cent,
respectively, compared with 10.8 and 11.0 per cent at endDecember 2011. Nonetheless, the relatively stable naira
exchange rate, the lower-than-programme expansion in the
monetary aggregates and the tight monetary policy stance
had moderating effects on consumer prices during the period.

With the progress achieved in resolving the banking system
crisis of 2011, the domestic financial markets stabilized to play
key roles in the transmission of monetary policy impulses to the
real economy. Thus, improved banking system stability helped
to promote the effectiveness of monetary policy. As a direct
consequence, short-term interest rates tracked the upper
band of the MPR corridor. With the standing lending facility at
14.0 per cent (MPR+200 basis points), interbank interest rates
The first half of
2012 witnessed
relatively slow
growth in the
monetary
aggregates due
mainly to the
restrictive stance
of monetary
policy


CBN Monetary Policy Review

were relatively less volatile. The average interbank call and
open buy back (OBB) rates rose from 13.88 and 13.57 per cent
at end-December 2011 to 14.98 and 14.69 per cent,
respectively, at end-June 2012.

The average prime lending rate moved from 16.75 per cent at
end-December 2011 to 17.02 per cent at end-June 2012. The
average maximum lending rate also rose from 23.21 per cent
in December 2011 to 23.44 per cent in June 2012. The average
consolidated deposit rate rose from 3.09 per cent in December
2011 to 3.82 per cent in June 2012; thus narrowing the spread
between the maximum lending and consolidated deposit
rates from 20.12 to 19.62 per cent. The upward movement in
rates reflected the tight stance of monetary policy.

Demand pressure moderated considerably at the wholesale
Dutch Auction System (wDAS) segment of the foreign
exchange market. The exchange rate appreciated at the
wDAS and Bureau de Change (BDC) segments, while it
depreciated at the interbank window. During the first half of
2012, FGN bonds and NTB auctions were oversubscribed due
to attractive yields on the instruments and the increased
appetite of local and foreign investors in the Nigerian
government-issued fixed income securities.

Real sector performance, though still robust, slightly declined in
the review period as data from the National Bureau of Statistics
(NBS) indicated that GDP growth rate slowed from 7.68 per
cent in Q4 2011 to 6.37 per cent in the first half 2012. The
decline in GDP growth rate was attributable to the loss of
N207.41 billion in national output during the oil subsidy strike by
labour unions in January 2012 and security challenges in most
parts of the country.


Demand pressure
moderated
considerably at
the wholesale
Dutch Auction
System (wDAS)
segment...
exchange rate
appreciated at
the wDAS and
BDC’s segments,
while it
depreciated at
the interbank
segment...


CBN Monetary Policy Review

CBN Monetary Policy Review

CHAPTER 2
DOMESTIC PRICE DEVELOPMENTS AND THE REAL
ECONOMY

In the first half of 2012, inflationary pressures persisted owing
mainly to domestic output contraction, effects of the partial
removal of subsidy on premium motor spirit (PMS) and higher
electricity tariff. Other factors that contributed to the domestic
consumer price pressures were ratchet effect of fiscal
operations, new tariff regimes on imported food items
(including rice and wheat) and seasonality effects.

2.1
Domestic Economic Activity
Domestic output growth remained resilient despite severe
weaknesses in the global economy. Growth in real Gross
Domestic Product (GDP) was 6.38 per cent in the first half of
2012 compared with 7.61 per cent in the corresponding period
of 2011. The NBS projects overall real GDP growth rate at 6.85
per cent for fiscal 2012, down from 7.45 per cent in 2011. The
NBS estimated that the country lost about N207.41 billion of
national output to the week-long nationwide strike action by
labour unions that occurred in January 2012, in response to the
partial removal of subsidy on PMS.

The non-oil sector remained the major driver of growth,
growing by 6.58 per cent in the first half of 2012 with agriculture
and services contributing 1.56 and 2.82 percentage points,
respectively, compared with 2.70 and 2.79 percentage points
in the second half of 2011. The slowdown in the contribution of
agriculture to output growth was attributable to flood and
security challenges, which affected farming activities in some
parts of the country during the review period.

The index of industrial production at 136.3 (1990=100) in the
second quarter of 2012, rose by 1.40 per cent from 134. 58 in
the first quarter of 2012 and by 5.98 per cent compared with
the corresponding period of 2011. The development was
attributed largely to improved performance of the electricity
and manufacturing sub-sectors. The index of manufacturing
production, estimated at 106.1 (1990=100) in the second
Inflationary
pressures
persisted owing
mainly to
domestic output
contraction,
effects of the
partial removal of
the subsidy on
PMS and
increases in
electricity tariff


CBN Monetary Policy Review

quarter of 2012, rose by 0.41 and 7.28 per cent over the levels
in the first quarter of 2012 and the corresponding quarter of
2011,
respectively.
Estimated
manufacturing
capacity
utilization also rose marginally by 1.1 percentage points to 57.0
per cent relative to the level in the second quarter of 2011.
Similarly, the index of mining production at 146.7 (1990=100)
increased marginally by 0.53 and 4.34 percentage points over
the levels in the preceding half and the corresponding period
of 2011 respectively. The rise was accounted for by the
increase in crude oil and gas production.

Global economic recovery remained weak, as reflected in
increased downside risks to overall growth in 2012. Key sources
of growth vulnerabilities were: the lingering sovereign debt
crisis and financial sector fragilities in the Euro zone, the
recession in most of Europe; and reduced growth in the US;
which continued to affect the export-driven economies of
China, India and Brazil. This necessitated a downward review
of the projected global output growth for 2012 by the
International Monetary Fund (IMF) to 3.5 per cent from 3.9 per
cent in July 2012. In particular, growth in the advanced
economies was estimated to decelerate from 1.6 per cent in
2011 to 1.4 per cent in 2012.

2.2
Trends in Inflation during the First Half of 2012
Consumer prices trended upwards in the first half of 2012,
driven partly by higher prices of petroleum products, higher
electricity tariffs, and increased prices of some farm produce,
among others. Inflationary pressures were also fuelled by the
below-the-trend performance in agricultural output, traceable
to security challenges in some parts of the country.

Headline inflation (year-on-year) fluctuated in the first half of
2012 and stood at 12.9 per cent by end-June, compared with
10.2 and 10.3 per cent at end-June and end-December 2011,
respectively.

Food inflation (year-on-year) stood at 12.0 per cent by endJune 2012, compared with 9.2 and 11.0 per cent at end-June
and end-December 2011, respectively. Core inflation (year-onyear) stood at 15.2 per cent by end-June 2012, compared with
Headline inflation
trended upwards
in the first half of

CBN Monetary Policy Review

11.5 and 10.8 per cent at end-June and end-December 2011,
respectively.

Figure 2.1
Headline Inflation (June 2011 – June 2012)
Source: NBS

Figure 2.2
Headline Inflation (January - June 2012)
Source: NBS


CBN Monetary Policy Review

Table 2.1
Inflation Rate (June 2011 – June 2012)

Headline Inflation
Core Inflation
Food Inflation
Date
CPI
Yon-Y
12MMA
CPI
Yon-Y
12MMA
CPI
Yon-Y
12MMA
Jun-11

Jul-11

Aug-11

Sep-11

Oct-11

Nov-11

Dec-11

Jan-12

Feb-12

Mar-12

Apr-12

May-12

Jun-12

Source: National Bureau of Statistics (NBS)

Table 2.2
Quarterly Consumer Price Development (November 2009=100)

Sep-11
Dec-11
Mar-12
Jun-12

Y-on-Y
12-MMA
Y-on-Y
12-MMA
Y-on-Y
12-MMA
Y-on-Y
12-MMA
Headline

Core %

Food %

Source: National Bureau of Statistics (NBS)

In the period under review, both core and food components
of the consumer price index increased from 124.8 and 128.0, at
end- December 2011 to 138.0 and 134.5, respectively. The core
index increased by 13.2 points, while the food index rose by 6.5
points. In effect, the core components of inflation exerted
greater pressure on headline inflation.


CBN Monetary Policy Review

Figure 2.3
Headline, Core and Food Inflation Rate (June 2011 - June 2012)
Source: NBS

The contributions of processed food; fruits; and yams, potatoes
and other tubers to food inflation decreased from 6.3, 0.6 and
2.0 per cent in January to 4.2, 0.4 and 1.8 per cent in June
2012, respectively. On the other hand, the contribution of
meat to food inflation increased from 1.3 per cent in January
to 1.4 per cent in June, 2012 (Table 2.3).

Table 2.3
Selected CPI Components’ Contribution to
Food Inflation (Year-on-Year) January – June 2012
Date
Jan-12
Feb-12
Mar-12
Apr-12
May-12
Jun-12
Food %

Processed
Food %

Meat %

Fruits %

Yams,
Potatoes &
Other
Tuber %

Source: NBS

Further analysis of the CPI components showed that housing,
water, electricity, gas & other fuels; and transport contribution
to core inflation in the first half of 2012, declined from 5.3 and


CBN Monetary Policy Review

2.2 per cent in January to 4.7 and 1.2 per cent, respectively.
Furnishings, household (HH) equipment & HH maintenance;
and education increased from 0.8 and 0.3 per cent in January,
to 0.9 and 0.7 per cent, respectively, in June 2012 (Table 2.4).

Table 2.4
Selected CPI Components’ Contribution to
Core Inflation (Year-on-Year) (January – June 2012)
Date
Jan-12
Feb-12
Mar-12
Apr-12
May-12
Jun-12
Core %

Housing,
Water,
Electricity,
Gas & Other
fuels %

Transport

Furnishings,
Household
Equip. & HH
Maint. %

Education %

Source: NBS


Figure 2.4
Selected CPI Components’ Contribution to
Food Inflation (Year-on-Year) (January – June 2012)
Source: NBS


CBN Monetary Policy Review

Figure 2.5
Selected CPI Components’ Contribution to
Core Inflation (Year-on-Year) (January – June 2012)
Source: NBS

2.3
Actual and Seasonally Adjusted Headline Inflation
Actual inflation remained higher (except in March 2012) than
the seasonally adjusted inflation; indicating influences of
seasonality. In the first half of 2012, the most active seasonal
factor was the commencement of the planting season when
scarcity of food items exerts upward pressure on prices.

Figure 2.6
Actual and Seasonally Adjusted Headline Inflation
(December 2011 – June 2012)

Source: NBS


CBN Monetary Policy Review

2.4
Key Factors that Influenced the Domestic Price Level
In the first half of 2012, the major factors that influenced
inflation in Nigeria were categorized into demand-pull and
cost-push factors. There were also some factors which tended
to mitigate inflationary pressures in the period under review.

2.4.1 Pull and Push Factors
Government fiscal operations both at the state and federal
levels exerted significant pressure on domestic prices in the first
half of 2012. The fiscal operations of the Federal Government
resulted in substantial increases in domestic liquidity with
attendant inflationary risks. Actual fiscal operations of the
Federal Government between January and June 2012,
resulted in a national budget deficit of N277.92 billion,
financed mainly through issuance of bonds. Total Federal
Government expenditure during the period amounted to
N1,859.58 billion of which N1,133.65 billion or 60.96 per cent was
recurrent non-debt expenditure.

Oil prices remained high during the review period (i.e., the
prices exceeded the budget benchmark price of US$72.00 per
barrel). By March 2012, the price of Bonny Light crude rose to
US$128.00 per barrel, compared with the level of US$111.46 per
barrel recorded in December 2011, and the average price of
US$113.51 per barrel in the first half of 2011. By June 2012, the
price of Bonny Light crude stood at US$98.06 per barrel. The
high oil prices boosted overall federation revenues and
supported higher levels of public expenditure across the tiers of
government.


CBN Monetary Policy Review

Figure 2.7
Oil Price (Bonny Light) (January – June 2012)
Source: NBS

Displacement of farmers in some parts of the country due to
flood and insecurity accounted substantially for the drop in
agricultural output in the review period. The decline in
agricultural output and recent security challenges hampered
effective
distribution
of
agricultural
products,
thereby,
accentuating higher food prices.

The partial withdrawal of subsidy on PMS in January 2012 was a
key driver of inflation through its primary effect on energy and
transport costs and secondary effects on other prices. As a
result, core inflation rose from 12.7 per cent in January to 15.0,
14.9, and 15.2 per cent in March, May and June, respectively.
Imported food prices which had declined to 5.7 per cent in
February 2012 rose to 9.9 and 18.5 per cent in May and June
2012, respectively. The escalation in imported food prices was
attributed to rising global food inflation due to food shortages.
Anticipatory effects of new fiscal measures including the
upward review of tariffs on electricity, imported rice and wheat
aimed at ensuring an appropriate pricing regime to attract
investment into the subsectors further increased pressure on
domestic prices. New import tariffs on rice and wheat were
announced in the 2012 budget to be implemented from July 1,
2012.


CBN Monetary Policy Review

2.4.2 Moderating Factors
In the first half of 2012, the CBN maintained the tight monetary
policy stance that commenced in 2011, in order to control
excess liquidity and rein-in inflation expectations. The MPR and
CRR were left unchanged at 12.0 and 8.0 per cent,
respectively. Tight monetary policy combined with aggressive
liquidity mop-up operations slowed down the growth in the
monetary aggregates with a dampening effect on inflation.

Exchange
rate
management
sought
to
discourage
speculative demand for foreign exchange in order to stabilize
the naira. Some of the measures taken to keep the naira
exchange rate stable were: intervention in the foreign
exchange market; and buildup of the stock of external
reserves to sustain future demand for foreign exchange. In the
first half of 2012, the stock of external reserves rose by 12.50 per
cent from US$32.64 billion at end-December 2011 to US$36.72
billion. On account of these developments, the naira
appreciated against the dollar during the period, thus
moderating inflation expectations. The naira opened at
N158.27/US$
at
end-December

and
closed
at
N157.50/US$ on 30th June 2012, indicating an average
exchange rate of N157.62/US$, and appreciation of N0.77 or
0.49 per cent. Similarly, at the Bureau de Change (BDC)
segment, the exchange rate opened at N166.00/US$ and
closed at N164.00/US$ with an average exchange rate of
N161.13/US$, indicating an appreciation of N2.00 or 1.20 per
cent.

The slow growth in the monetary aggregates had a
dampening effect on domestic prices. Broad money supply
(M2) grew marginally by 0.01, 2.25 and 1.35 per cent, or at
annualized rates of 0.03, 5.40, and 2.70 per cent, in April, May,
and June 2012, respectively, compared with 15.40 per cent at
end-December
2011.
Aggregate
domestic
credit
(net)
declined by 3.18, and 2.73 per cent, in May and June 2012,
respectively, relative to the level at end-December 2011.


CBN Monetary Policy Review

Box 2.1

Implementation of Treasury Single Account and Price Stability in Nigeria
Imperfect information on government finances is a common phenomenon in
many emerging and developing countries due to the fragmented nature of
public sector banking arrangements. This results in Ministries, Departments and
Agencies (MDAs) operating multiple bank accounts; which impede effective
cash management and control. To address this concern, the Federal Ministry
of Finance (FMF) and the Office of the Accountant-General of the Federation
(OAGF) in collaboration with the Central Bank of Nigeria, with technical
support from the World Bank and the International Monetary Fund (IMF)
introduced the Treasury Single Account (TSA) initiative on a pilot scheme in the
first half of 2012. The TSA is aimed at overcoming the problems associated with
multiplicity of accounts and idle balances to improve government cash
management and control processes. It is a unified system that consolidates
government cash balances, improves cash flow and reinforces budget
controls and monitoring. In view of the aforementioned benefits, this system
enjoys widespread adoption by several countries especially as it conforms with
best practice.

TSA implementation in Nigeria
The TSA implementation is in four phases. The first phase, which commenced in
August 2011, involved linkage of the Consolidated Revenue Fund (CRF)
Account of the Federal Government with MDAs capital account balances.
The second phase which commenced in January 2012 was to consolidate
balances of the CRF including moving MDAs balances from DMBs to the
Federal Government single account (CRF) or connected accounts in the CBN.
The Government Integrated Financial Management Information System
(GIFMIS) is expected to take off in the 3rd – 4th quarters of 2012 to support the
planned TSA banking arrangement by which time all the transitional accounts
would be closed and their balances transferred to TSA. Linkage of Donor funds
and Government controlled trust/social security funds to TSA/CRF account
would be made in 2015. Upon full implementation, TSA is expected to achieve
unification of all bank accounts of MDAs, eliminate floats in the system, and
allow the Treasury comprehensive overview and coverage of all sources of
revenue to the Federal Government on real time basis.

Implications for Monetary Policy
The domiciliation in CBN of all MDA funds would reduce banking system
liquidity and the cost of Open Market Operations. Also, the reduction of
government idle funds with DMBs would reduce speculative pressures on the
naira exchange rate. TSA would reduce the Federal Government’s utilization
of Ways and Means Advances which involves creation of high-powered
money which is inimical to the price stability objective of the Bank. Thus, cash
management and monetary policy would be more effective when the cash
balance targeting model of TSA system is fully implemented.


CBN Monetary Policy Review

CBN Monetary Policy Review

CHAPTER 3
MONETARY POLICY
The thrust of monetary policy in the first half of 2012 remained
the achievement of price stability conducive to economic
growth. The Bank maintained a tight monetary policy stance in
the period, in order to mitigate inflationary pressures arising
from the partial removal of subsidy on PMS and other fiscal
policy measures (upward adjustment of tariffs on electricity
and imported rice/wheat). The Monetary Policy Committee
(MPC) held three scheduled meetings during the first half of
2012 and left the MPR unchanged at 12.0 per cent.

3.1
Highlight of Monetary Policy Measures
In the period under review, the Bank maintained its restrictive
stance on monetary policy. The MPR was unchanged at 12.0
per cent in the three meetings held in the first half of 2012. In
addition, the CRR was maintained at 8.0 per cent. Similarly, the
foreign exchange net open position of banks remained at 3.0
per cent in the review period. Besides the retention of MPR and
CRR, the mid-point of the exchange rate remained at
N155.00/US$1.00 with the band of +/- 3.0 per cent, in order to
sustain the stability of the domestic currency and build-up
external reserves as well as provide conditions that were
conducive to the inflow of foreign investment.

Key considerations that informed the retention of tight
monetary policy by the Bank included the partial removal of
the subsidy on PMS in January 2012; the announcement effect
of the planned increases in import tariff on rice and wheat
effective from July 2012; and in electricity tariff effective from
June 2012. Also, the Committee recognized the limitations of
monetary policy with respect to inducing long-term growth
and that it must be complemented by fiscal and structural
policies relating to petroleum and infrastructure sectors.

3.2
Monetary Policy Committee (MPC) Decisions
The MPC at its January 2012 meeting underscored the need for
price stability conducive to economic growth. In this regard, it
observed that the announced increase in import tariff on some
food items would exert further pressure on food prices which
The Bank
maintained a
tight monetary
policy stance in
the period, in
order to mitigate
inflationary
pressures arising
from the partial
removal of
subsidy on PMS
The MPR was
unchanged at
12.0 per cent in
the three
meetings held in
the first half of

CBN Monetary Policy Review

could compound the effect of increased transportation costs
induced by the partial removal of fuel subsidy. The Committee
noted that historically, upward adjustments in the price of PMS
had tended to have a short-term impact on the rate of
inflation. A review of previous instances of adjustments in fuel
prices showed that without exception, each instance was
accompanied by an increase in the rate of inflation followed
almost immediately by a moderation in the short- to - medium
term. Considering the impact of previous tightening on inflation
and the naira exchange rate up to December 2011, the
Committee unanimously agreed to retain the policy rate (MPR)
at 12.00 per cent, along with the symmetric interest rate
corridor of +/-200 basis points around the MPR.

At the meeting of March 2012, the Committee noted that the
prevailing inflationary pressures from supply shocks would have
been more severe if there had been no mitigating factors on
the demand side. The Committee observed that aggregate
credit and broad money (M2) had been on the decline and
there were signs of improving fiscal position with some control
over expenditure and no imminent increase in wages. The
fiscal stance and the absence of second-round effects of the
fuel subsidy removal had complemented the monetary policy
stance to dampen demand. The situation was further
supported by the stable exchange rate and improved
international commodity prices which combined to moderate
imported inflation. However, there was no incentive to reduce
the policy rate because inflationary threats re-emerged in
March 2012 after moderating in February. In particular, food
and core inflation rose sharply during the month of march 2012
to 11.8 and 15.0 per cent respectively, compared with 9.7 and
12.7 per cent in February. In the light of these developments,
and considering the beneficial effects of previous tightening
on inflation and the exchange rate up to February 2012, the
Committee unanimously decided to retain the benchmark
rate (MPR) at 12.00 per cent and the corridor at +/- 200 basis
points.


At the MPC meeting of May 2012, the Committee noted that
the uncertainty surrounding the global economy remained
...the Committee
noted that the
prevailing
inflationary
pressure from
supply shocks
would have been
more severe if
there had been
no mitigating
factors on the
demand side


CBN Monetary Policy Review

elevated
owing
to
continued
economic
slowdown
in
advanced and major emerging economies as well as the
financial stress in the Euro zone. These developments were
likely to impact the domestic economy through trade and
financial channels, thereby weakening the external and fiscal
positions. Furthermore, the Committee reviewed the output
data which indicated a slowdown in GDP growth. It noted that
the huge drop in agricultural output was traced to the
following factors: displacement of farmers in the northern part
of the country owing to insecurity, inadequate rainfall and
increased production costs due to the partial removal of fuel
subsidy in January 2012. The Committee concluded that a
downward adjustment in the policy rate would not be
effective
in
stimulating
growth
under
the
prevailing
circumstance. It was the Committee’s view that the sluggish
growth in credit, stable exchange rate, healthy external
reserve position and benign month-on-month inflation did not
suggest a need for further tightening. However, in rejecting the
alternative proposal for policy rate reduction, the MPC
reasoned that the causes of the slowdown in agriculture and
oil GDP growth would not be addressed by monetary easing
alone. Consequently, the Committee unanimously voted to
maintain
the
restrictive
stance
of
monetary
policy.
Consequently, the MPR was retained at 12.0 per cent, along
with the symmetric band of +/- 200 basis points around the
MPR. The CRR and Liquidity Ratio (LR) were also left
unchanged.


CBN Monetary Policy Review

Table 3.1
MPC Decisions (January – June, 2012)
Items
January
March
May
MPR
Retained the MPR at
12.00%
No Change
No Change
MPR
Corridor
Retained the corridor at
+/- 200 basis points
No Change
No Change
SDF Rate
Retained at 10.00%
No Change
No Change
SLF Rate
Retained at 14.00%
No Change
No Change
CRR
Retained at 8.00%
No Change
No Change
LR
Retained at 30.00%
No Change
No Change
NOP
Retained at 3.00%
No Change
No Change
FX Rate Mid
–Point
Retained at
N155.00/US$1.00
No Change
No Change
FX Band
Retained at +/- 3.00%
No Change
No Change

3.3
Monetary Policy Instruments
The overriding consideration of the MPC during the review
period was to maintain price and exchange rate stability,
build-up
external
reserves,
and
create
a
conducive
environment for attracting and retaining foreign investment. In
choosing the instruments to realize these objectives, the MPC
was guided by the need for consistency and stability in the
domestic macroeconomic environment.

3.3.1 Monetary Policy Rate (MPR)
The MPR, the Bank’s benchmark policy rate, remained the
major signalling instrument complemented by the standing
(lending/deposit) facilities. The Committee kept the MPR
unchanged at 12.0 per cent during the three meetings held in
the review period. This decision maintained the restrictive
stance of monetary policy to keep inflation in check.


CBN Monetary Policy Review

3.3.2 Reserve Requirements
The Bank retained the use of reserve requirements: cash
reserve ratio (CRR) and liquidity ratio (LR) in the period to
complement
OMO
and
other
instruments
of
liquidity
management. The CRR was retained at 8.0 per cent while the
LR was unchanged at 30.0 per cent in the first half of 2012.

3.3.3 Open Market Operations (OMO)
The Bank continued the use of OMO as the major tool of
liquidity and monetary management. The CBN Bills were the
main securities for OMO operations during the period. Total
amount on offer was N2,760.00 billion, while subscription was
N5,051.93 billion. Actual sales, however, amounted to
N1,717.35 billion in the first half of 2012, compared with
N1,582.02 billion in the second half of 2011 and N1,466.48 billion
in the corresponding period of 2011, representing an increase
of 8.6 and 17.1 per cent, respectively.

Table 3.2
CBN OMO Bills Auction (N’million) January 2009 – June, 2012
Date

% Change
over the
Preceding
Year
Jan


Feb


Mar


Apr


May


Jun


1st Half

Jul
125.36
250.91
209.74


Aug
105.22
141.16
218.92


Sep
91.76
206.57
280.57


Oct
170.26
167.01
309.95


Nov
120.22
205.93
242.93


Dec
162.56
297.91
319.91


2nd Half
775.38
1,269.49
1,582.02


Cumulative
Figure
1,392.54
2,003.95
3,048.50


...subscription
was N5,051.93
billion... Actual
sales, however,
amounted to
N1,717.35 billion
in the first half of
2012, compared
with N1,582.02
billion in the
second half of

CBN Monetary Policy Review

3.4
Standing Facilities
The Bank’s standing facilities (lending/deposit) were available
to DMBs to meet their daily liquidity needs. In the first half of
2012, both facilities were actively used by the DMBs and
discount houses. The cumulative volume of transactions at the
CBN standing lending facility (SLF) in the first half of 2012 stood
at N10,721.44 billion compared with N25,047.27 billion in the
second half of 2011 and N17,628.64 billion in the corresponding
period of 2011. The cumulative volume of SLF at end-June 2012
represented a decrease of 57.19 and 39.18 per cent
compared with the level in the second half of 2011 and the
corresponding period of 2011, respectively (Table 3.3). This
development was a reflection of improved liquidity conditions
driven principally by AMCON injections, huge repayments of
matured FGN bonds and CBN securities.

Table 3.3
CBN Standing Lending Facility (N'billion)
(January 2009- June 2012)
Date

Percentage
change over the
preceding/corres
ponding period
Jan


Feb

Mar

Apr

May

Jun

1st
Half

Jul
4,675.02
55.76
3,334.91


Aug
3,733.78
0.00
2,714.70


Sep
2,287.90
73.10
7,698.83


Oct
1,231.61
983.44
6,675.79


Nov
537.58
1,374.80
2,592.94


Dec
1,022.60
853.50
2,057.10


2nd
Half
13,488.49
3,340.60
25,047.27


Total
32,533.60
3,768.77
42,702.91


The cumulative volume of transactions at the CBN Standing
Deposit Facility (SDF) stood at N3,727.96 billion in the first half of
2012 compared with N1,435.82 billion in the second half of
The Bank’s
standing facilities
(lending/deposit)
were available to
DMBs to meet
their daily liquidity
needs


CBN Monetary Policy Review

2011 and N3,132.04 billion in the corresponding period of 2011.
The level of SDF as at end-June 2012 represented 159.64 and
19.03 per cent increases over the levels in the second half of
2011 and the corresponding period in 2011, respectively (Table
3.4). The observed increase in the use of the SDF window when
compared with the corresponding period of 2011 was due to
the non-remuneration under the facility between March and
October 2011 when the reserve averaging scheme was in
operation.

Table 3.4
CBN Standing Deposit Facility (N'billion)
(January 2009- June 2012)
Date

% Change over
the preceding
period
Jan


Feb

Mar

Apr

May

Jun

1st Half

Jul
162.00
4,055.52
-


Aug
1,453.38
6,849.71
-


Sep
1,058.75
4,224.80
-


Oct
3,106.30
1,117.30
422.50


Nov
1,050.59
443.78
436.47


Dec
1,797.92
1,191.78
576.85


2nd Half
8,628.94
17,882.89
1,435.82


Cumulative
Figure
8,628.94
53,173.02
4,567.86


3.5
Foreign Exchange Intervention
In the first half of 2012, the Bank continued its intervention in the
foreign exchange market to sustain the stability of the naira.
Total supply of foreign exchange by the Bank in the review
period
stood
at
US$13,861.67
million
compared
with
US$23,458.70 million and US$17,002.68 million in the preceding
half year and the corresponding period of 2011, respectively
(Table 3.5). Total supply in the first half of 2012 decreased by
40.91 and 18.47 per cent from the levels in the second half and

The Bank
continued its
intervention in
the foreign
exchange
market to sustain
the stability of the
naira


CBN Monetary Policy Review

the corresponding period of 2011, respectively. The sharp
decline in demand reflected more detailed documentation
and monitoring by the Bank to sanitize the foreign exchange
market. These measures were complemented by increased
autonomous foreign exchange inflows.

Table 3.5
Foreign Exchange Supply by the CBN (US$ million)
YEAR

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

Feb
1,838.85


Mar

Apr

May

Jun

1st
Half

Jul


Aug


Sep


Oct


Nov


Dec


2nd
Half


Total


3.6
Performance of Monetary Aggregates
Growth in broad money stock (M2) in the first half of 2012
remained below the 2012 first half indicative target. It grew by
N179.87 billion or 1.35 per cent over the end-December 2011
level as against N1, 131.39 billion or 9.29 per cent in the second
half of 2011 (Table 3.6). On annualized basis, the growth in
broad money was 2.70 per cent, lower than the target of 24.64
per cent. Narrow money (M1) decreased by N171.88 billion or
2.54 per cent in contrast to an increase of N1, 134.32 billion or
20.12 per cent in the second half of 2011. M1 contracted by
5.08 per cent on annualized basis, falling short of the annual
growth target of 34.71 per cent by 39.79 percentage points.
The weak performance of the monetary aggregates was
....broad money
stock (M2) in the
first half of 2012
remained below
the 2012
indicative target


CBN Monetary Policy Review

attributed to a more effective management of government
liquidity position (following the implementation of the TSA),
increased recourse to bond financing of deficit and substantial
OMO sales.

Table 3.6
Performance of Monetary Aggregates

Change
in
2011:H2
Change
in
2012:H1

Actual
June

Target

Actual
Dec

Deviation
Target

Actual
June

Actual
Actual
M2
(N’b)

M2 (%)

M1(N’b)

M1 (%)

RM
(N’b)

RM (%)

NDC
(N’b)

NDC

Cg
(N’b)

Cg (%)

Cp
(N’b)

Cp (%)

NFA
(N’b)

NFA (%)


CBN Monetary Policy Review

Figure 3.1
The Performance of M2, M1 and RM (2011 and 2012)


Reserve Money (Base money) decreased in the first half of
2012. It fell by N271.80 billion or 9.76 per cent as against an
increase of N719.17 billion or 34.82 per cent in the second half
of 2011. Overall, reserve money was N2, 512.47 billion at endJune 2012, which was below the indicative benchmark of N3,
013.32 billion for the year by N500.85 billion or 16.62 per cent.

Aggregate domestic credit decreased by N373.65 billion or
2.73 per cent at end-June 2012 compared with an increase of
N4, 797.09 billion or 53.96 per cent in the second half of 2011. In
relation to end-June 2011, aggregate credit grew by 49.76 per
cent. Credit to government decreased by N883.67 billion or
177.85 per cent in the first half of 2012 in contrast to an
increase of N571.45 billion or 53.49 per cent in the second half
of 2011. The sharp decrease was partly attributable to greater
reliance of the FGN on public financing (issuance of bonds)
and better management of its cash flow under the TSA.

Aggregate credit increased by 5.46 per cent, on annualized
basis compared with the target of 52.17 per cent. Credit to
government decreased by 177.85 per cent (annualized at
355.70 per cent) compared with the target growth of 61.47 per
cent. In effect, the public sector was a net financier to the
banking system at the end of the first half of 2012.

Domestic credit
decreased by
N373.65 billion or
2.73 per cent at
end-June 2012
compared with
an increase of
N4, 797.09
billion....


CBN Monetary Policy Review

Figure 3.2
The Performance of NDC, Cg and Cp (2011 and 2012)


Credit to the private sector increased to N14, 693.61 billion in
the first half, an increase of N510.02 billion or 3.60 per cent.
Compared with the corresponding period of 2011, credit to the
private sector increased by N4, 225.64 billion or 42.43 per cent.
On annualized basis, credit to private sector grew by 7.20 per
cent as against the target of 47.50 per cent.

The Net Foreign Assets (NFA) of the banking system rose by
N386.54 billion or 5.41 per cent compared with N684.98 billion
or 10.61 per cent in the second half of 2011. On annualized
basis, NFA increased by 10.82 per cent compared with the
target of 6.60 per cent. The growth in the first half of 2012 was
due largely to tight monetary policy, the high price of crude oil
in the early part of the year and increased private inflow.


Credit to the
private sector
increased to N14,
693.61 billion in
the first half of
2012 from N14,
183.59 billion at
end-December

CBN Monetary Policy Review

CBN Monetary Policy Review

CHAPTER 4
DOMESTIC FINANCIAL MARKETS

4.1
Money Market
Transaction in money market instruments remained active in
the first half of 2012, being the main channel for trade in shortterm financial assets. Transactions were dominated by
Government and CBN securities for OMO; repurchase
transactions and Discount Window (DW) operations. Money
market activities in the first half of 2012 were largely influenced
by the relatively high short-term interest rates. The relatively
high money market rates induced the inflow of foreign capital
to take advantage of high returns on naira-denominated
assets. Money market activities were also influenced by the
fiscal operations1 of the three tiers of government which,
though transitory were nonetheless disruptive to the Bank’s
liquidity management operations.

4.1.1
Developments in Short-Term Interest Rates
Stabilizing short-term interest rates around the policy rate
remained a challenge to monetary management. It was
exacerbated by the destabilizing impact of the sharing of
revenue proceeds in the Federation Account by the three tiers
of government which created system-wide liquidity swings and
volatility in short-term interest rates (figure 4.1). The average
interbank call rate ranged between 13.35 and 14.98 per cent,
while the open buy back (OBB) rate ranged from 10.07 to 14.69
per cent in the first half of 2012.


1 Notable among this is the Federation Accounts Allocation
Committee disbursements that hold every month. The meeting is held
to distribute among the three tiers of government revenue proceeds
in the Federation Account based on the revenue allocation formula.
Money
market
activities in the
first half of 2012
were
largely
influenced by the
relatively
high
short-term interest
rates
Stabilizing
shortterm interest rates
around the policy
rate remained a
challenge
to
monetary
management...
exacerbated by
the
destabilizing
impact
of
the
sharing
of
revenue...


CBN Monetary Policy Review

Table 4.1
Weighted Average Money Market Interest Rates (%)
(December 2011 – June 2012)
Month
Monetary
Policy
Rate
Overnight
Interest
Rates
90-Day Rates
Call Rate
OpenBuy-Back
NIBOR NTB
Dec-11

Jan-12

Feb-12

Mar-12

Apr-12

May-12

Jun-12


Figure 4.1
Weighted Average Money Market Rates (December 2011-June 2012)

(i)
Interbank Call Interest Rate
The weighted average interbank call rate which was 13.88 per
cent in December 2011 increased to 14.18 and 14.29 per cent
in January and February, 2012, respectively. The rate rose
further, from 14.33 per cent in March 2012 to 14.98 per cent in
June. Overall, the interbank rate increased by 110 basis points
from 13.88 per cent in December 2011 to 14.98 per cent in
June 2012. On a year-on-year basis, the weighted average
interbank call rate rose by 332 basis points from 11.66 per cent
in June 2011 to 14.98 per cent in 2012 (Figure 4.1).
..weighted
average
interbank
call
rate which was
13.88 per cent in
December

rose to 14.33 per
cent
in
March

and...
to
14.98 per cent in
June..


CBN Monetary Policy Review

Figure 4.2
Daily Interbank Call Rate (Jan. – June. 2012)


(ii) Open Buy-Back Rate
The weighted average OBB rate which was 13.57 per cent in
December 2011 rose to 13.81 per cent in January and further
to 13.90 per cent in March and peaked at 14.69 per cent in
June. Thus, the OBB rate increased by 112 basis points from
13.57 per cent in December 2011 to 14.69 per cent in June
2012. On year-on-year basis, the weighted average OBB rate
increased by 5.1 percentage points from 9.59 per cent in June
2011 to 14.69 per cent in June 2012 (Figure 4.1).

Figure 4.3
Daily Open-Buy-Back Rate (Jan. - Jun. 2012)


The
weighted
average
OBB
rate which was
13.57 per cent in
December
2011... peaked at
14.69 per cent in
June.


CBN Monetary Policy Review

iii
Nigeria Interbank Offered Rate (NIBOR)
The NIBOR remained the traditional reference rate for tenored
transactions. The 90-day NIBOR rate moved in tandem with the
interbank call and OBB interest rates in the first half of 2012. The
weighted average 90-day NIBOR rate which was 15.88 per
cent in December 2011 moderated to 15.25 per cent in
January, then rose to 16.93 and 16.76 per cent in March and
June 2012, respectively(Figure 4.1).

The general decline in short-term rates in January was due to
liquidity surfeit arising from injections into the system traced to
the delayed payment of December statutory revenue in
January and the revaluation of the AMCON bonds. The effect
of the injections lasted through February, thereby, moderating
rates in that month. As monetary conditions tightened, shortterm rates rose in March but moderated slightly in April and
May in response to significant OMO maturities and statutory
revenue payments to the three tiers of government. However,
the rates trended upward in June 2012 as banking system
liquidity became tight following delay in the distribution of
statutory revenue and the effect of OMO conducted in the
preceding month.

The high rates recorded towards the end of the review period
were consistent with the tight monetary policy stance since the
third quarter of 2011, which encouraged a shift in DMB’s
composition of assets portfolio in favour of high yielding shortterm treasury instruments and CBN securities (figure 4.1).

4.2
The Foreign Exchange Market
The thrust of exchange rate policy remained the need to
engender a stable exchange rate of the naira around the midpoint of N155/US$ with a band of +/- 3 per cent. The Bank
continued to respond to the persistent foreign exchange
demand pressure to keep the exchange rate within the band.


The
weighted
average 90-day
NIBOR rate which
was
15.88
per
cent
in
December 2011..
rose to.. 16.76 in
June 2012.
The thrust of
exchange rate
policy remained
the need to
engender a
stable exchange
rate of the naira
around the midpoint of N155/US$
with a band of
+/- 3 per cent.


CBN Monetary Policy Review

Figure 4.4
Daily Exchange Rate (January 2011 – June 2012)

4.2.1 Spot Rate
The spot rate at the official window of the foreign exchange
market, the wDAS, averaged N157.65/US$ in the first half of
2012 compared with the average N154.51/US$ in the second
half of 2011 and N153.21/US$ in the corresponding period of
2011, representing depreciations of 2.00 and 2.80 per cent,
respectively.

In the interbank foreign exchange market (IFEM), the spot rate
averaged N159.31/US$ compared with N157.27/US$ in the
second half of 2011 and N154.49/US$ in the corresponding
period of 2011. The movement in rates showed depreciations
of 1.27 and 3.02 per cent in both periods, respectively. Similarly,
spot rates at the BDC segment averaged N161.23/US$ in the
first half of 2012 compared with N161.66/US$ in the second half
of 2011 and N156.96/US$ in the corresponding period of 2011,
representing an appreciation of 0.27 and a depreciation 2.46
per cent, respectively.

The depreciation in the spot rates across all segments of the
foreign exchange market was attributed to demand pressure
driven partly by the exit of offshore investors from the local
debt market, and the resurgence of demand from some
companies remitting dividends to their home countries. This
was, in addition to foreign exchange requests of importers
The depreciation
in the spot rates
across all
segments of
...market was
attributed to
demand pressure
driven partly by
the exit of
offshore
investors...


CBN Monetary Policy Review

outside the official window. Consequently, the spread
between the wDAS and BDC rates stood at N5.09 in December
2011 before increasing to N5.99 in June 2012 (Table 4.2).

Table 4.2
Average Monthly Spot Exchange Rates (N/US$)
(January 2011 – June 2012)
DATE
CBN
IFEM
BDC
Jan-11
151.55
152.47
156.13
Feb-11
151.94
152.86
155.11
Mar-11
152.51
155.21
157.09
Apr-11
153.97
154.60
157.05
May-11
154.80
156.17
158.05
Jun-11
154.50
155.65
158.32
2011: H1 Average
153.21
154.49
156.96
Jul-11
151.86
152.41
163.71
Aug-11
152.72
153.79
163.10
Sep-11
155.26
156.70
158.23
Oct-11
153.26
159.83
161.25
Nov-11
155.77
158.83
160.35
Dec-11
158.21
162.17
163.30
2011: H2 Average
154.51
157.29
161.66
2011 Average
153.54
155.89
159.31
Jan-12
158.39
161.31
164.62
Feb-12
157.87
158.59
160.85
Mar-12
157.59
157.72
159.41
Apr-12
157.33
157.44
159.37
May-12
157.28
158.46
159.67
Jun-12
157.44
162.33
163.43
2012: H2 Average
157.65
159.31
161.23

4.2.2 Forward Rates
The CBN continued with the foreign exchange forward
transactions with authorized dealers in expectation that it
would reduce speculative demand that exerted sustained
pressure on the naira. The 1-month forward rate averaged
N156.27/US$ in the first half of 2012, compared with the
average of N154.45/US$ in the second half of 2011 and
N153.73/US$ in the corresponding period of 2011, indicating a
The 1-month
forward rate
averaged
N156.27/US$ in
the first half of
2012, compared
with the average
of N154.45/US$ in
the second half
of 2011


CBN Monetary Policy Review

depreciation of 1.16 and 1.63 per cent, respectively. Similarly,
the average forward rate for 2-month tenor was N156.27/US$
in the review period as against N155.95/US$ in the second half
of 2011 and N154.95/US$ in the corresponding period of 2011,
reflecting a depreciation of 0.20 and 0.84 per cent,
respectively. The forward rate for 3-month tenor transactions
recorded an appreciation of 1.14 per cent to an average of
N156.38/US$ in the first half of 2012, compared with an
average of N158.17/US$ in the second half of of 2011.

Table 4.3
Average Monthly Foreign Exchange Forward Rates (N/US$)
(March 2011 – June 2012)
DATE
1-MONTH
2-MONTH
3-MONTH
Mar-11
152.43
153.85
154.27
Apr-11
153.75
154.30
154.46
May-11
154.47
155.52
156.71
Jun-11
154.29
155.49
153.45
2011: 1st Half Average
153.73
154.95
154.81
Jul-11
151.57
152.97
Aug-11
152.4
153.75
154.91
Sep-11
154.47
155.54
156.47
Oct-11
155.68
156.99
158.34
Nov-11
153.75
155.48
158.06
Dec-11
158.85
160.99
163.05
2011: 2nd Half Average
154.45
155.95
158.17
Jan-12
157.16
157.16
-
Feb-12
156.81
156.76
156.88
Mar-12
156.09
156.06
-
Apr-12
155.88
155.93
-
May-12
155.80
155.83
-
Jun-12
155.88
155.88
155.88
2012: 1st Half Average
156.27
156.27
156.38

The average demand at the wDAS forward market decreased
by 1.40 per cent from US$520.42 million in the second half of
2011 to US$513.12 million in the review period. Similarly, total
sales by the CBN decreased by 13.68 per cent from US$367.23
million in the second half of 2011 to US$317.01 million in the first
half of 2012.


CBN Monetary Policy Review

Figure 4.5
Demand and Sale of Foreign Exchange at wDAS Forwards
(January 2011 – June 2012)


4.2.3 End-Period Exchange Rate
In the first half of 2012, there was mixed performance in all
segments of the market. At the wDAS, the naira appreciated
by 0.5 per cent from N158.27/US$ at end-December 2011 to
N157.50/US$ at end-June 2012. It however, depreciated by 2.7
per cent from N153.31/US$ to N157.50/US$ at end-June, 2012
respectively, when compared with the corresponding period
of 2011(Table 4.4).

Similarly, the naira appreciated by 0.6 per cent from
N165.00/US$ at end-December 2011 to N164.00/US$ at the
BDC segment at end-June 2012, but depreciated by 3.05 per
cent when compared with the coresponding period of 2011.
At the
interbank
segment, the
naira depreciated to
N162.85/US$ at end-June 2012 from N159.7/US$ at endDecember

and
N153.00/US$
at
end-June
2011,
representing depreciations of 1.93 and 6.34 per cent,
respectively (Table 4.4).


CBN Monetary Policy Review

Figure 4.6
End-Month Exchange Rate of the Naira (Jul. 2010 - Dec. 2011)


Table 4.4
End-Month Exchange Rates Movements at Various
Segments of the Market, January 2011 – June 2012 (N/US$)
DATE
CBN
IFEM
BDC
Jan-11
151.85
152.20
155.00
Feb-11
152.07
153.35
156.00
Mar-11
153.04
155.22
157.50
Apr-11
154.45
154.72
157.00
May-11
155.13
156.40
159.00
Jun-11
153.31
152.52
159.00
Jul-11
151.96
153.00
164.00
Aug-11
153.92
155.00
157.00
Sep-11
156.15
159.60
160.00
Oct-11
151.75
159.35
160.00
Nov-11
157.87
161.20
161.00
Dec-11
158.27
159.70
165.00
Jan-12
158.62
161.16
163.00
Feb-12
157.46
157.75
159.00
Mar-12
157.57
157.72
159.00
Apr-12
157.26
157.40
159.00
May-12
157.31
159.85
162.00
Jun-12
157.50
162.85
164.00


CBN Monetary Policy Review

4.2.4 Nominal and Real Effective Exchange Rate Indices
The Nominal Effective Exchange Rate (NEER) index decreased
to N99.27 at end-June 2012, representing appreciations of 0.46
and 3.19 per cent from the N99.73 at end-December 2011 and
N102.54 at end-June 2011, respectively. The Real Effective
Exchange Rate (REER) index also fell to N79.98 at end-June
2012, indicating 5.41 and 12.67 per cent drop from N84.56 at
end-December

and
N91.60
at
end-June
2011,
respectively (Table 4.5 and Figure 4.7).

On the average, both the NEER and REER decreased at endJune 2012, when compared with the level at end-December
2011, reflecting a real exchange rate appreciation relative to
the currencies of Nigeria’s major trading partners.

Table 4.5
Nominal and Real Effective Exchange Rates Indices
(January 2011 – June 2012)
DATE
NEER
REER
Jan-11
99.72
93.31
Feb-11
99.90
93.73
Mar-11
101.55
91.20
Apr-11
104.28
94.65
May-11
102.99
93.07
Jun-11
102.54
91.60
2011: 1st Half Average
101.83
92.93
Jul-11
101.49
90.22
Aug-11
101.62
88.82
Sep-11
100.41
86.46
Oct-11
99.24
85.08
Nov-11
100.73
86.26
Dec-11
99.73
84.56
2011: 2nd Half Average
100.54
86.90
Jan-12
101.69
83.27
Feb-12
101.41
83.00
Mar-12
100.29
81.03
Apr-12
99.66
80.49
May-12
97.94
78.49
Jun-12
99.29
80.00
2011: 1st Half Average
100.04
81.04

The Nominal
Effective
Exchange Rate
(NEER) index
decreased to
N99.27 at endJune 2012,...


CBN Monetary Policy Review

Figure 4.7
Nominal and Real Effective Exchange Rates Indices
(January 2010 – June 2012)


4.2.5 Demand and Supply of Foreign Exchange
Total demand for foreign exchange at the wDAS in the review
period decreased by 45.23 per cent to US$10,964.17 million from
US$20,020.37 million recorded in the second half of 2011.
Compared with the US$17,405.43 million demanded at endJune 2011, the demand for foreign exchange fell by 38.77 per
cent. The total supply of foreign exchange at the wDAS
amounted to US$10,414.10 million in the first half of 2012,
compared with US$15,146.87 million recorded in the second
half of 2011 and US$14,638.04 million at end-June 2011,
representing
decreases
of
31.25
and
28.86
per
cent,
respectively (Table 4.6).

The various policy actions undertaken by the Bank in the last
quarter of 2011 were sustained in the first half of 2012, and
culminated in reduced demand at the official window and
huge inflows into the foreign exchange market, especially
through investment in government securities. Consequently,
demand for foreign exchange at the wDAS was low
compared with the level in the preceding period. The period
also experienced an increase in the price of crude oil
(Nigeria’s major source of foreign exchange earnings). Foreign
exchange reserves also grew during the period as a direct
consequence of reduced demand/intervention by the Bank.


CBN Monetary Policy Review

However, by mid-May 2012, foreign exchange demand at the
wDAS re-surfaced as private inflows (especially sales by oil
companies) reduced. In order to ensure exchange rate
stability in the face of renewed pressure at the foreign
exchange market, the Bank increased sales at the bi-weekly
auctions to US$400.00 million, from US$150.0 million. Also, the
Bank commenced special interventions in the interbank
market and sold the sum of US$774.20 and US$666.0 million in
May and June 2012, respectively. The forwards segment of the
market helped to absorb some of the demand at the spot
market.

Table 4.6
Foreign Exchange Demand and Supply Rates Indices
(US$ million)
DATE
wDAS Demand
wDAS Sales
Jan-11
2,800.42
2,000.00
Feb-11
2,041.09
1,794.85
Mar-11
4,080.28
3,274.38
Apr-11
2,780.41
2,375.58
May-11
2,878.43
2,549.89
Jun-11
3,325.53
2,643.34
2011: 1st Half Total
17,906.16
14,638.04
Jul-11
3,065.41
2,643.34
Aug-11
4,504.49
2,899.05
Sep-11
4,081.18
3,850.00
Oct-11
3,899.58
2,607.00
Nov-11
3,054.43
1,749.62
Dec-11
1,415.28
1,397.86
2011: 2nd Half Total
20,020.37
15,146.87
Jan-12
2,134.00
1,640.65
Feb-12
1,891.96
1,942.18
Mar-12
1,426.45
1,452.75
Apr-12
1,052.88
891.52
May-12
1,681.26
1,487.00
Jun-12
2,777.62
3,000.00
2012: 1st Half Total
10,964.17
10,414.10

4.2.6 Foreign Exchange Flows
Gross foreign exchange inflow into the economy was
US$22,140.75 million in the first half of 2012, compared with


CBN Monetary Policy Review

US$27,631.39 million and US$19,547.33 million in the second half
and the corresponding period of 2011, representing a decrease
of 19.87 and an increase of 13.11 per cent, respectively (Figure
4.8 and Table 4.7). Foreign exchange outflow decreased from
US$28,244.16 million in the second half of 2011 to US$19,372.63
million in the first half of 2012 (or by 31.41 per cent). Relative to
the corresponding period of 2011, total outflow fell by 5.64 per
cent.

In the first half of 2012, foreign exchange flows resulted in a net
inflow of US$2,768.12 million, reflecting an improvement over
the net outflow of US$612.77 million in the second half of 2011
and the US$956.19 million in the corresponding period of 2011
(Table 4.7). This development reflected the reduced funding of
wDAS.

Table 4.7
CBN Monthly Foreign Exchange Flows
(US$ million)
DATE
INFLOW
OUTFLOW
NET FLOW
Jan-11
3,435.55
2,805.78
629.77
Feb-11
3,164.68
2,768.68
396.00
Mar-11
4,119.17
3,985.95
133.22
Apr-11
2,495.61
3,439.70
-944.09
May-11
2,896.12
3,657.16
-761.04
Jun-11
3,463.20
3,873.25
-410.05
2011: 1st Half
19,574.33
20,530.52
-956.19
Jul-11
4,647.69
3,826.89
820.80
Aug-11
4,356.59
4,234.08
122.51
Sep-11
5,323.46
6,087.81
-764.35
Oct-11
4,915.31
5,345.96
-430.65
Nov-11
4,256.05
5,082.29
-826.24
Dec-11
4,132.29
3,667.13
465.16
2011: 2nd Half
27,631.39
28,244.16
-612.77
2011 Total
47,205.72
48,774.68
-1,568.96
Jan-12
4,307.02
2,945.80
1,361.22
Feb-12
3,546.16
3,902.27
-356.11
Mar-12
4,266.63
2,912.43
1,354.20
Apr-12
3,242.89
1,754.89
1,488.00
May-12
3,627.10
3,256.97
370.13
Jun-12
3,150.95
4,600.27
-1,449.32
2012: 1st Half
22,140.75
19,372.63
2,768.12


..foreign
exchange flows
resulted in a net
inflow of
US$2,768.12
million, reflecting
an improvement
over the net
outflow of
US$612.77 million
in the second
half of 2011


CBN Monetary Policy Review

Figure 4.8
Foreign Exchange Flows (January 2011 – June 2012)


4.3
Capital Market
The capital market was weighed down by profit-taking
activities of investors (especially in the equities segment) and
inadequate market liquidity; particularly, in the absence of
trading at the long-end of the bonds market. The situation also
reflected the global trend with major markets reporting
relatively weak indices in the period under review. Slow growth
in emerging market economies in Asia and South America
notably Brazil, India and China arising from increases in
investor-risk-aversion and perceived growth uncertainty, led to
equity price decreases, capital outflows and higher yield on
sovereign instruments.

4.3.1
Equities Market
The NSE All-Share Index (ASI) increased by 4.19 per cent to
21,599.56 at end-June 2012, from its level of 20,730.63 at endDecember 2011, but decreased by 13.53 per cent, when
compared with the first half of 2011. Market Capitalization
(MC) (equities) increased by 5.55 per cent to N6.90 trillion at
end-June 2012 from N6.53 trillion at end-December 2011, but
decreased by 13.67 per cent when compared with the N7.99
trillion recorded at end-June 2011 (Table 4.8 and Figure 4.9).

This development mirrored the trend in advanced and
emerging equity markets and was traced to the economic
The capital
market was
weighed down
by profit taking
activities of
investors
especially in the
equity segment


CBN Monetary Policy Review

slowdown in the euro area and the U.S. The euro area had
been at the centre of international financial market distress,
caused by heightened political and financial uncertainty in
Greece, banking sector crisis in Spain, misgivings about
governments' ability to deliver on fiscal adjustment and reforms
as well as the extent of preparedness of other EU countries to
provide bail-out funds. In the U.S, fiscal problems, weak
economic data (especially high rate of unemployment),
declining consumer confidence and reduction in the U.S.
growth projections by the Federal Reserve Bank system,
weakened investor-appetite for equities.

Table 4.8
NSE All-Share Index (ASI) and Market Capitalization (MC)
(July 2011 – June 2012)
Date
All-Share Index (ASI)
Market Capitalization
(Equities)
(N’ Trillion)
Jun-11
24,980.20
7.99
Jul-11
23,826.99
7.62
Aug-11
21,497.61
6.88
Sep-11
20,373.00
6.50
Oct-11
20,934.96
6.63
Nov-11
20,003.36
6.29
Dec-11
20,730.63
6.53
Jan-12
20,875.83
6.58
Feb-12
20,123.51
6.34
Mar-12
20,652.47
6.55
Apr-12
22,045.66
7.03
May-12
22,066.40
7.04
Jun-12
21,599.56
6.90
Source: NSE


CBN Monetary Policy Review

Figure 4.9
NSE ASI and MC, June 2011 – June 2012
Source: NSE

Figure 4.10
NSE ASI and MC, January 2012 – June 2012
Source: NSE

The increase in the ASI and MC in the later part of the first half
were mainly due to improved liquidity and strong market
fundamentals. This reflected in the improved performance of
listed companies with the release of their Annual (2011) and
First Quarter (2012) financials as well as the announcement of
market makers by the Nigerian Stock Exchange (NSE).


CBN Monetary Policy Review

4.3.2 Market Turnover
Aggregate stock market turnover in the first half of 2012 was
52.75 billion shares valued at N789.34 billion, exchanged in
427,848 deals. This compared with 40.06 billion shares valued at
N262.75 billion, exchanged in 497,025 deals in the second half
of 2011. There was a turnover of 49.52 billion shares valued at
N372.70 billion in the first half of 2011. Relative to the second
half of 2011, market turnover rose by 31.7 per cent in the
review period and by 6.52 per cent, when compared with the
corresponding period of 2011.

4.3.3 Sectoral Contribution to Equities Market Capitalization
The banking sector was the most capitalized with its overall
share of the market rising to 30.0 per cent at end-June 2012
from 28.0 per cent at end-December 2011. Compared with the
30.0 per cent at end-June 2011, the sector’s share of market
capitalization remained unchanged. Other leading sectors
were the breweries and food, beverages and tobacco with
respective market shares of 16.0 and 10.0 per cent,
respectively at end-June 2012.

Figure 4.11
NSE Market Capitalisation by Sector as at End – June, 2011
Source: NSE


The banking
sector was the
most capitalized
with its overall
share of the
market rising to
30.0 per cent at
end-June 2012
from 28.0 per
cent at endDecember 2011


CBN Monetary Policy Review

Figure 4.13
NSE Market Capitalisation by Sector as at End-December, 2011
Breweries
17%
Banking
28%
Food, Bev. and
Tobacco
10%
Conglomerates
1%
Insurance
2%
Oil and Gas
4%
Building Materials
29%
Other Sectors
9%
Figure 4.13
NSE Market Capitalisation by Sector as at End-December, 2011

Source: NSE

Figure 4.14
NSE Market Capitalisation by Sector as at June 29, 2012

Source: NSE

4.3.4 Bonds Market
The FGN bonds market maintained the same momentum in
the first half of 2012 as in the preceding half of 2011. The value
of activities remained at N3.76 trillion both in the second half of


CBN Monetary Policy Review

2011 and first half of 2012. It however, dropped by 15.3 per
cent when compared with the corresponding period of 2011.

4.3.4.1 Federal Government (FGN) Bonds
Total transactions in FGN bonds in the over-the-counter (OTC)
market in the first half of 2012 was 3.04 billion units valued at
N2.62 trillion in 20,357 deals, compared with 4.19 billion units
valued at N3.76 trillion in 29,625 deals in the second half of
2011 and a turnover of 5.01 billion units worth N4.44 trillion in
37,053 deals recorded in the corresponding period of 2011
(Figure 4.14). The decline in the OTC market was largely
attributed to the trading of only sixteen FGN bonds (on
average) out of the twenty six issues outstanding.

Figure 4.15
Volume and Value of FGN Bonds

2011:H1
2011:H2
2012:H1
Volume (Billions)
Billions
Trillions
Source: NSE

4.3.4.2 FGN Eurobond
The Federal Government of Nigeria’s Eurobond continued to
be traded in the review period. Yields on the bonds decreased
from 6.03 per cent at end-December 2011 to 5.52 per cent at
end-June 2012. The decrease in the Eurobond yield reflected
improved confidence in the country’s risk profile by foreign
investors. Weak global economic and financial conditions and
in particular, investor-concern about the euro area sovereign
debt crisis continued to facilitate the redirection of capital
flows in favour of emerging market and developing countries.
In the domestic economy, measures taken by the Central Bank


CBN Monetary Policy Review

to stabilize the exchange rate and increase the stock of
external reserves also assisted in boosting investor-confidence
(figure 4.15).

Figure 4.16
10-year U.S. Dollar-denominated Bond Yields for Nigeria
(January 24, 2011 – June 29, 2012)

24-Jan-11
21-Apr-11
17-Jul-11
12-Oct-11
7-Jan-12
3-Apr-12
29-Jun-12
Yields (%)

Source: Bloomberg

4.3.4.3 Yields on Federal Government Bonds
The FGN bonds yield curve at end-June 2012 shifted outwards
by 89 basis points compared with the position at endDecember 2011 and also by 435 basis points compared with
the level at end-June 2011 (Figure 4.16). The upward shift in the
yield curve was traceable to the prevailing MPR of 12.0 per
cent within the period. Yields on all FGN bonds were above the
12.9 per cent inflation rate indicating positive returns on FGN
bonds as at end-June 2012.


CBN Monetary Policy Review

Figure 4.17
FGN Bond Yield Curves
(end-June 2011vs end-December 2011 vs end-June 2012)

Term to Maturity (Years)
Annual Yields (%)
end-June 2011
end-June 2012
end-December 2011

Source: Bloomberg

4.3.4.4 State Government Bonds
The total value of state government bonds issued in the first
half of 2012 was N341.0 billion, compared with the N84.0 billion
issued in the second half of 2011. The development was traced
to the listing of the Ekiti State N20.0 billion, fixed rate
development bond and the Benue State N13.0 billion fixed
rate development bond.

4.3.4.5 Corporate Bonds
In the first half of 2012, the value of outstanding corporate
bonds dropped marginally to N1.39 trillion when compared
with N1.4 trillion in the second half of 2011 despite the listing of
3 new bonds namely: N35.0 billion 14.0 per cent Medium Term
Notes 2018 series 2 in favour of United Bank for Africa Plc, 11.50
per cent LCW Oct. 2014 (Lafarge WAPCO) and Chellarams Plc
bond (MPR + 5 per cent Feb. 2019) all issued within the review
period.


CBN Monetary Policy Review

CBN Monetary Policy Review

CHAPTER 5
ECONOMIC OUTLOOK

5.1 Overview
Global economic recovery in the first half of 2012 weakened
as shown by the sustained stress in the financial markets,
sovereign debt crisis in the euro area and general investorapathy in most countries across the world. The slowdown was
more pronounced in the second quarter, resulting in rising
unemployment in most advanced and emerging market
economies. Specifically, the political and financial situation in
Greece, banking sector illiquidity in Spain, and doubts about
the ability of the fiscal authorities to deliver on promised
adjustments tended to worsen the already fragile global
economic
situation.
The
spillover
effects
of
these
developments were felt in form of reduced exports and output
contraction in the emerging and developing economies.

Global output growth was estimated at 2.29 per cent for the
first half of 20122. In the second half of 2012, however, growth
would depend on efforts to contain uncertainties in the euro
area, ongoing banking sector deleveraging, improving liquidity
conditions in advanced countries and strengthening capacity
in developing countries. Overall, global output in 2012 may
remain depressed as downside risks such as political unrest in
the Middle East and North Africa (MENA); rising global energy
and food prices; and financial system fragilities in euro area
persist.

The outlook for the domestic economy appears mixed in the
short-to medium-term. While the on-going reforms and the
renewed drive to attract foreign investments into the economy
could impact positively on growth, rising security and other
infrastructure challenges could combine with the less ambient
external environment to keep inflationary pressures elevated.

2 Quarterly and half year data were obtained from Bloomberg, while annual
data were from the WEO.
.. rising security
and other
infrastructure
challenges could,
combine with the
less ambient
external
environment to
keep inflationary
pressures
elevated
Global economic
recovery in the
first half of 2012
weakened as
shown by the
sustained stress
on financial
markets..


CBN Monetary Policy Review

5.1.1
Global Output3
Global output growth in the first half of 2012 was estimated to
have declined to 2.29 per cent from 2.77 per cent recorded in
the second half of 2011 and was projected to increase to 2.39
per cent in the second half of the year. The outlook for the
global economy in the second half of 2012 is premised on the
possibility of improvement in market sentiments following efforts
to resolve the sovereign debt and fiscal consolidation crisis in
the euro area. Growth in the advanced economies was 1.40
per cent, down from 1.76 per cent in the second half of 2011
and was expected to decelerate further to 1.22 per cent in the
second half of 2012. In the emerging and developing
economies, growth was 6.63 per cent in the second half of
2011 as against 6.50 per cent in the first half of 2012. In
Developing Asia, growth declined to 6.36 per cent in the first
half of 2012 from 7.09 per cent in the second half of 2011 and
was projected at 7.25 per cent in the second half of 2012.
Similarly, in Latin America and the Caribbean countries, output
growth decelerated from 3.56 per cent in the second half of
2011 to 2.91 per cent in the first half of 2012 and was projected
to improve to 3.84 per cent in the second half.

Provisional data from the World Economic Outlook (WEO)
indicate that annual output growth for 2012 in the advanced
countries would be 1.4 per cent; Emerging Market and
Developing Countries (EMDCs), 5.6 per cent; Developing Asia,
7.1 per cent; Latin America and the Caribbean, 3.4 per cent;
MENA, 5.5 per cent and sub-Saharan Africa, 5.4 per cent
(Table 5.1).

EMDCs are also clouded with uncertainties from external
developments. Export prospects have been dampened by
dwindling demand in the advanced economies just as capital
inflows into these economies have surged by the default of
financial system weakness in the advanced economies. This
situation could persist in the near-term, thereby, intensifying
appreciation pressure on exchange rates and current account
in these countries. The outlook for sub-Sahara African countries

3 Quarterly and half year data were obtained from Bloomberg, while the
annual data were from the WEO
Global output
growth in the first
half of 2012 was
estimated to
have declined to
2.29 per cent
from 2.77 per
cent recorded in
the second half
of 2011....
Emerging and
Developing
economies are
clouded with
uncertainties
from the external
developments..
outlook for subSahara African
countries
remained
robust,..


CBN Monetary Policy Review

remained robust, riding on high commodity prices, fresh
investments
in
new
mineral
exploration
and
friendlier
investment climate. In the same vein, the outlook for the MENA
region seems promising against the background of serious
disruptions experienced in 2011. The region could witness a
return of foreign direct investment (FDI) flow in the foreseeable
future. However, the Syrian crisis and the unstable political
situation in Libya could affect the region’s outlook. Also, Iran’s
nuclear programme and the United Nations (UN)-backed
sanctions may further depress the prospects for growth in the
region.

Sources: IMF World Economic Outlook Update, July 2012


Table 5.1
World Economic Outlook (WEO)

A. World Output


World Output

Advanced Economies

USA

Euro Area

Japan

UK

Canada

Other Advanced
Economies

Emerging & Developing
Economies

Central and Eastern Europe

Commonwealth of
Independent States

Developing Asia

Latin America and the
Caribbean

Middle East and North
Africa

Sub-Saharan Africa

B. Commodity Prices (US'
Dollars)


Oil

Non-fuel

C. Consumer Prices


Advanced Economies

Emerging & Developing
Economies


CBN Monetary Policy Review

5.1.2
Global Inflation
Global inflation moderated to 2.87 per cent in the first half of
2012 from 3.70 per cent recorded in the second half of 2011,
largely due to falling commodity and energy prices. Global
inflation is projected to slow further to 2.42 per cent in the
second half of 2012 as a result of declining demand, falling
commodity prices and weakening global economy. In the
advanced economies, inflation averaged 2.10 per cent in the
first half of 2012 as against 2.73 per cent in the second half of
2011, and could further decline to 1.75 per cent in the second
half of 2012. Similarly, inflation in the U.S. was 2.47 per cent in
the first half of 2012 down from 3.55 per cent in the second half
of 2011, and is projected to further ease to 1.95 per cent in the
second half of 2012. In sub-Saharan Africa, a combination of
pressures arising from strong domestic and foreign exchange
demand coupled with rising food prices could accentuate
consumer price inflation in the second half of 2012.

5.1.3
Global Oil Prices
The Organization of Petroleum Exporting Countries (OPEC)
basket price of crude oil averaged US$112.05 per barrel in the
first half of 2012, up from US$107.96 per barrel in the second
half of 2011, representing an increase of 3.79 per cent. The
reviewed IMF baseline oil price projection for 2012 of US$101.80
per barrel is lower than the average price at end-June 2012.
The projected decline in oil prices is largely due to high
prospects of further slowdown in economic activities in the
second half of 2012.

5.1.4
Domestic Output Growth
The overall growth outlook for the domestic economy in the
second half of 2012 remains fairly optimistic. Provisional data
from the NBS shows output growth of 6.37 per cent in the first
half of 2012 as against 7.54 per cent recorded in the second
half of 2011. The NBS estimates growth of the domestic
economy to slow to 6.5 per cent in 2012. This projection is
based on anticipated slowdown in the global economy, loss of
N207.41 billion in national output during the oil subsidy strike in
January 2012 and security challenges in most parts of the
country. However, expected increase in electricity generation
following the ongoing power sector reforms, conclusion of the
Global inflation
moderated to
2.87 per cent in
the first half of
2012 from 3.70
per cent...
..projected
decline in oil
prices is largely
due to high
prospects of
further slowdown
in economic
activities in the
second half of

..overall growth
outlook for the
domestic
economy in the
second half of
2012 remains
fairly optimistic


CBN Monetary Policy Review

banking
sector
reforms,
implementation
of
Federal
Government’s
transformation
initiatives
particularly
in
agriculture and growth in the non-oil sector are expected to
drive output in 2012 and beyond.

5.2
Outlook for Inflation and Monetary Policy in 2012
5.2.1 Inflation Outlook
Inflation at the end of the first half of 2012 was 12.9 per cent up
from 10.31 per cent in the second half of 2011. Staff forecast
suggests that headline inflation rate would lie between 12.5712.67 and 12.34-12.51 per cent in September 2012 and
December 2012, respectively, based on 90.0 per cent
confidence limits. At a higher confidence level, headline
inflation would lie between 11.96-13.28 and 11.27 -13.58 per
cent in September 2012 and December 2012, respectively.
However, by December 2013, the rate could moderate to
between 9.07 – 9.47 or 6.64 – 11.9 per cent.

The upside risks to this projections include fiscal injections in
relation to the 2012 budget and unexpected natural disasters
like flood, drought in parts of the country, the second round
effects of the partial removal of subsidy on PMS in January
2012, rising global commodity prices due to drought in different
parts of the world, the implementation of the new tariff regimes
on imported food products such as rice, wheat and flour as
well as the upward review of electricity tariff in June 2012.

Figure 5.1
Fan Chart for Inflation from 2012:6 - 2013:12

Jan-12
Apr-12
Jul-12
Oct-12
Jan-13
Apr-13
Jul-13
Oct-13

Central path

Source: Research Department, CBN


CBN Monetary Policy Review

CBN Monetary Policy Review

APPENDICES

Communiqué of the Monetary Policy Committee
(January – June 2012)

Central Bank of Nigeria Communiqué No. 81 of the Monetary Policy Committee
Meeting of Monday and Tuesday, January 30 and 31, 2012
The Monetary Policy Committee (MPC) met on January 30 and 31, 2012 with all 12
members in attendance to review the domestic economy in 2011 and the nature
of current challenges against the background of developments in the
international economic and financial environments.

At the outset, the Committee recalled that in a bid to ensure price and financial
stability, the Committee, held six (6) regular meetings and one (1) extra-ordinary
meeting in 2011 during which it raised the Monetary Policy Rate (MPR) six (6) times,
from 6.25 to 12.0 per cent; raised the cash reserve ratio (CRR) three (3) times from
1.0 to 8.0 per cent; and the liquidity ratio (LR) once from 25.0 to 30.0 per cent. It
also reduced the foreign exchange net open position of DMBs from 5.0 to 3.0 per
cent, and adjusted the mid-point of the exchange rate band from N150/US$1 to
N155/US$1. These decisions signalled to the market the Committee’s clear and
unambiguous commitment to the primacy of price stability as its key mandate.

The Global Economy
Latest projections by the International Monetary Fund (IMF) indicated that global
output growth which had slackened from 5.2 per cent in 2010 to 3.8 per cent in
2011 could decelerate further to 3.3 per cent in 2012. Advanced economies are
expected to record a lower rate of growth of 1.2 per cent in 2012 compared to
the estimated 1.6 per cent in 2011. The US economic growth in the coming
quarters would depend a great deal on growth of the euro area. The euro area is
projected to record a negative growth of 0.5 per cent in 2012 essentially on
account of the burden of high public debt and the fragility of the credit and
financial markets. Output growth in emerging and developing economies slowed
down in 2011. China, India and Brazil all posted lower growth rates in 2011 than in
2010. Sub-Saharan Africa has been a major exception to the global trend: it is
estimated to have grown by 4.9 per cent in 2011 and is expected to record a
higher growth of 5.5 per cent in 2012.

Inflation rates in most of the advanced economies trended upward in 2011 with
the exception of Japan. In the US, UK, and Germany, inflation rose from 1.4, 3.7,
and 1.7 per cent in 2010 to 3.0, 4.2, and 2.1 per cent in 2011, respectively. The


CBN Monetary Policy Review

Euro-zone debt crisis worsened; leading to credit ratings downgrades, change of
governments, and implementation of austerity measures, even as a few nations
appeared to have entered into a recession.

The Committee felt that in the light of the expected deceleration in the
economies of the country’s major trading partners, and the absence of adequate
commitment of most advanced economies to effectively address the fiscal
imbalances and to reform their financial systems, there would be continued
pressure on Nigeria’s external sector in 2012. The anticipated slack in external
demand would, in the view of the Committee, have to be offset by generating
the needed domestic demand. This, however, would require a shift in the
economic development strategy that allows greater diversification of the
economy without losing sight of the need to pursue sound demand management
policies.

Key Domestic Macroeconomic and Financial Developments
Output and Prices
Provisional data from the National Bureau of Statistics (NBS) indicated that real
Gross Domestic Product (GDP) grew by 8.68 per cent in the fourth quarter of 2011
up from 6.64, 7.72, and 7.40 per cent in the 1st, 2nd and 3rd quarters, respectively.
The overall GDP growth rate in 2011 was estimated by the NBS at 7.69 per cent,
marginally lower than the 7.87 per cent recorded in 2010. This projection is based
on the estimated third quarter and fourth quarter growth rate of 7.40 per cent and
8.68 per cent respectively. The 2012 Budget proposal assumed a growth rate of 7.2
per cent. This is in line with the latest World Bank forecast of 7.1 per cent growth for
Nigeria in 2012. The Committee noted with satisfaction, the good performance of
non-oil activities including agricultural and services sectors as well as the recovery
in crude oil output in 2011, particularly in the fourth quarter. In the Committee’s
view, the opportunity to build on the robust non-oil growth with further investments
in infrastructure and manufacturing and processing activities should be utilized in
order to mitigate any negative impacts from the likely external shocks during the
year.

The Committee also noted the NBS survey data on the rise in the unemployment
rate to 23.9 per cent in 2011 from 21.4 per cent in 2010. The latest unemployment
rate is considerably higher than the 12.3 per cent recorded in 2006 by the NBS
survey, which suggests that the consistently high output growth during this period
had failed to create adequate employment for the growing labour force.

In view of this, the Committee recommends that in addition to the structural
reforms being currently pursued, emphasis should be placed on technical and


CBN Monetary Policy Review

vocational education in order to produce a labour force that is compatible with
the current stage of the country’s development.

In 2011, the Inflation rate fluctuated within the lower double-digits range during
the early part of the year, but moderated thereafter. The year-on-year headline
inflation rate, which was 12.1 per cent in January 2011 rose to 12.8 per cent in
March, before moderating to 10.2, 10.3, and 10.3 per cent in June, September,
and December, respectively. Similarly, food inflation rose from 10.3 per cent in
January 2011 to 12.2 per cent in March and thereafter moderated to 9.2, 9.5, and
11.0 per cent in, June, September, and December, respectively. Core inflation also
rose from 12.1 per cent in January to 12.8 per cent in March stabilizing at 11.5, 11.6,
and 10.8 per cent in June, September and December, respectively.

The headline inflation rate stood at 10.3 per cent in December 2011, by far the
lowest since December 2008 and lower than the average of 12.75 per cent during
the period 2001-11. Food inflation, at 11.0 per cent in December 2011, was lower
than its level in the preceding three years. Similarly, the year-on-year core inflation
declined in 2011. At 10.8 per cent in December 2011, core inflation was marginally
lower than the 10.9 per cent in December 2010 and 11.2 per cent in December
2009. The Committee noted that both food and core inflation have remained high
exerting immense pressure on the headline inflation rate. The Committee was
therefore of the view that while the focus on growth continues to be a key
imperative, the containment of inflation equally deserves immediate attention. It
noted that the inflation outlook in the short- term will be impacted by the
anticipated fiscal injections in relation to the proposed 2012 budget, the recent
partial deregulation of pump price of PMS, and new tariff regimes on certain food
imports. The Committee has also noted comments indicating possible plans by the
National Assembly to revise the budget benchmark price of oil from $ 70 per barrel
to $75 or even $80 per barrel. Such a measure would significantly increase
expenditures especially given the already high oil output assumptions. In addition,
it would reduce accretion to the Excess Crude Account (ECA) and increase the
inflationary pressure already in place on the supply-side. In the event of this
happening, the likelihood of further tightening during 2012 increases. The
Committee would like to reaffirm its commitment to price and exchange rate
stability and its determination not to pursue an accommodative policy stance. The
Committee therefore, strongly supports the recommendations of the Executive for
a benchmark price of a maximum of $70 per barrel.


CBN Monetary Policy Review

Monetary, Credit and Financial Market Developments
Broad money supply (M2) growth was sluggish up to May, 2011, accelerated
thereafter to 5.66, 9.50 and 15.40 per cent in June, September, and December
2011, respectively. When annualized, M2 grew by 11.32, 12.67, and 15.40 per cent
in June, September and December, respectively, which hovered around the
indicative growth benchmark of 13.75 per cent for 2011. Thus, M2 growth of 15.4
per cent in 2011 was higher than the 6.9 per cent growth in 2010. The significant
increase in credit to the private sector as result of loan to AMCON to finance its
activities was a major factor underlying growth in monetary aggregates in 2011.

The Committee noted that money market rates moved upward in 2011. The
average OBB rate increased to 15.50 per cent in December from 6.22, per cent in
January. Similarly, the average call rate rose to 14.09 per cent in December from
6.42, per cent in January. The rise in money market rates should be viewed in the
overall context of monetary tightening stance of the Bank in 2011 through hikes in
the monetary policy rate (MPR) as well as the sharp increase in the cash reserve
ratio (CRR) from 4 per cent in September to 8 per cent in October. The Committee
observed that monetary tightening was also used to restore stability in the foreign
exchange market. In January 2012, money market rates have been hovering
within a range of 12.85-15.70 per cent. Long term bond yields have tended to
move in the range of 14-15 per cent.

Responding positively to the hike in policy rates, both the lending and deposits
rates of deposit money banks also moved up in 2011, although substantially less in
the case of the latter. The maximum lending rate increased to 23.21 per cent in
December from 21.75, 22.02, 22.02 and 22.09 per cent in January, March, June
and September, respectively. Also, the prime lending rate rose to 16.75 per cent in
December from 15.73, 15.81, 15.76 and 15.87 per cent in January, March, June
and September, respectively. The spread between the maximum lending rate and
the average deposit rate which was at 19.22 percentage points in June moved up
to 20.12 percentage points in December.

External Sector Developments
Foreign exchange reserves amounted to US$ 32.64 billion as at end December
2011, more or less flat relative to the US$32.34 billion as at end December 2010,
despite the higher oil price in 2011. Notwithstanding the high prices of Nigeria’s
reference crude oil (Bonny Light) which averaged US$106.32 per barrel for the
year, the limited accretion to external reserves was due to the high demand for
foreign exchange in the market. The Committee noted that pressure on the
exchange rate emanating from the high demand reflected the importdependent nature of the economy, probably compounded by the activities of


CBN Monetary Policy Review

speculators. The reduction in arbitrage opportunities in the oil marketing sectors
combined with stronger controls in foreign exchange practices have already led
to a noticeable moderation in foreign exchange net demand.

The official wDAS rate (inclusive of 1 per cent commission) moved up from N151.62
per US$1 in January 2011 to N154.45/US$1 in June and further to N158.21/US$1 in
December 2011. The volatility in the official rates, however, was limited with the
coefficient of variation being 1.28 per cent for the year as a whole compared to
0.32 per cent in 2010. The Committee commended the CBN for its efforts at
establishing stability in the market. It also urged the CBN to strive to eliminate
speculative demand for foreign exchange. The Committee also noted that as at
January 24, 2012, the exchange rate was N158.57/US$1, while the foreign
exchange reserves amounted to $34.18 billion on January 27, 2012, which could
finance over 6 months of imports of goods and services. The outlook for oil prices in
the short-term as well as the forecast demand/supply balance, suggest that the
current exchange rate band should be retained while still achieving moderate
continuous accretion to reserves

The Committee’s Considerations
The Committee is pleased that ahead of most African countries, Nigeria had been
proactive by responding to the threats of inflation induced by fiscal spending and
global food, fuel and other commodity prices as well as to the challenges of
financial stability. The Committee observed that the mandate of the Bank was
largely achieved, as inflation was contained within tolerable levels and the
exchange rate was generally stable throughout 2011. The resolution of the
banking crisis during the year was also commended. Against this background, the
Committee welcomed the stated fiscal stance of the Federal Government as part
of its programmed movement towards fiscal consolidation. The increased share of
capital expenditure in the proposed total expenditure in 2012 is an important
signal of the commitment of the Federal Government to improve the productive
capacity of the economy. The Committee finds the current environment to be
conducive for improved co-operation and coordination between fiscal and
monetary authorities.

The Committee acknowledged that the decision to remove the fuel subsidy was a
major development that took place since its last meeting in November 2011. It
commended the Federal Government on the partial removal of subsidy on
Premium Motor Spirit (PMS), which it noted will have salutary effects on the
external reserves and exchange rate as well as on investment in oil and gas
downstream sector. It further commended the Federal Government for the
commitment towards the passage of the Petroleum Industry Bill (PIB) which, it


CBN Monetary Policy Review

believes, would further complement the benefits of the fuel subsidy removal. On
the other hand, it recognized the possible negative impact of the partial removal
of fuel subsidy on the general price level and hence inflation in the short run. In this
regard, it underscored the need for the speedy implementation of the palliative
measures and entrenchment of social safety nets for the more vulnerable groups.
However, the long-term benefits far outweigh the likely short term costs as far as
inflation is concerned.

Furthermore, the Committee commended the fiscal authorities for the benchmark
crude oil price of $70 per barrel as proposed in the 2012 budget and advocated
for its retention as any upward revision would tend to undermine macroeconomic
stability.

The Committee considered the need to sustain the high output growth that the
country has seen in recent years partly because of the slowdown in the advanced
and other emerging economies and partly because of the need to generate
employment in the economy. However, to help generate new jobs, it would be
essential for the Federal Government to move quickly with the structural reforms
such as (a) power sector reforms, (b) implementing the agricultural sector
transformation programmes and the associated value chain, and (c) refocusing
attention to the provision of technical and vocational training to bring about skills
development that would match the needs of the economy.

The Committee underscored the need for maintaining price stability in a manner
conducive to the achievement of employment-generating growth. In this
connection, it observed that the announced increase in import duties on some
food items by the end of June 2012 would exert further pressure on food prices
which would compound the effect of increased transportation costs induced by
the partial removal of the fuel subsidy on the general price level and the
associated inflation expectation.

The Committee noted that historically, upward adjustments in the price of PMS
have tended to have a short-term impact on the rate of inflation. A review of
previous instances of adjustment in fuel prices shows that without exception, each
instance is accompanied by an increase in the rate of inflation followed almost
immediately by a moderation in the short - to - medium term. Staff estimates
indicate that inflation in the first two quarters of 2012 would range between 11.0
per cent and 14.5 per cent, and then moderate steadily towards the single digit
zone by late 2013. Real interest rates are therefore likely to remain positive on a
trend basis, even if the rate of inflation were to rise briefly above the MPR in the
second quarter.


CBN Monetary Policy Review

Finally, the Committee recognized the current security challenges and
Government’s efforts to find a lasting solution through dialogue, economic
measures and enhanced intelligence. It expressed confidence on the ability of
Government to resolve the problem.

Decisions
In the light of the above, and considering the clear impact of previous tightening
on the rate of inflation and exchange rates up to December 2011, the Committee
unanimously decided as follows:
1.
Retain MPR at 12.0 per cent with interest rate corridor of +/- 200 basis points;
2.
Retain CRR at 8.0 per cent;
3.
Retain minimum liquidity Ratio of 30.0 per cent; and
4.
Retain the Mid-point of exchange rate at N155/US$1 with a band of +/-3.0
per cent.

The Committee also resolved to watch closely developments with respect to the
fiscal stance and to respond appropriately if, and when, the need arises.

Sanusi Lamido Sanusi, CON
Governor
Central Bank of Nigeria

January 31, 2012


CBN Monetary Policy Review

Central Bank of Nigeria Communiqué No. 82 of the Monetary Policy Committee
Meeting of Monday and Tuesday March 19 and 20, 2012
The Monetary Policy Committee (MPC) met on March 19 and 20, 2012 with 10
members in attendance to review domestic and international economic and
financial conditions with a view to addressing monetary policy challenges in the
short-to medium-term.

The International Economic Situation
The outlook of the international economic environment has improved slightly,
when compared with 2011. The U.S. economy is showing signs of recovery and is
expected to post over 2 per cent growth in 2012 compared with 1.7 per cent in
2011. There are, however, lingering global security concerns, particularly with
respect to the face-off between the Iranian authorities on the one hand and the
governments of the U.S., Europe and Israel on the other. An escalation of conflict
may threaten global energy supplies and introduce shocks into the current
environment. The Eurozone countries economic outlook remained uncertain,
particularly owing to the loss of momentum in growth by the end of 2011. The
Eurozone countries posted a negative growth of 0.3 per cent in Q4 compared with
gains of 0.2 per cent and 0.1 per cent in the preceding two quarters. The recent
estimate indicated that the euro area may post a negative growth of 0.3 per cent
in 2012 against the estimated 1.4 per cent in 2011. The sovereign debt problem of
the highly-indebted countries of the Euro zone, however, seems to be coming
under control with supportive actions from creditors, in particular the European
Central Bank (ECB) and the IMF, which also boosted liquidity and sentiment in the
financial markets. The economic prospects of the United Kingdom also seem to
have improved recently partly owing to the financial support given by the ECB to
the financial markets and partly due to news of the incipient signs of improvement
in the economy of the U.S. The changed monetary stance of the ECB has clearly
provided the short term support needed to restore confidence and kick-start
recovery subject to improvements in fiscal balance sheets and competitiveness in
the European periphery.

In emerging economies, there is clear evidence of a slowdown. China posted 8.9
per cent growth in Q4 2011, the lowest since Q2 2009. It is expected that China’s
growth will slow down further in the current quarter going by the weak industrial
production gains in January and February and the low retail sales. Consequently,
China has revised its growth target for 2012 downward from 8.0 per cent to 7.5 per
cent. In India, growth in the quarter ending December 2011 was lower at 6.1 per
cent compared with 6.9 per cent in the preceding quarter. Inflation rose in
February 2012 with the result that inflation in 2011-12 could well be slightly above 7
per cent. However, the latest official estimate of growth for 2012-13 is 7.6 per cent.


CBN Monetary Policy Review

This is partly attributed to expected improvement in the fiscal position and
somewhat relaxed monetary policy. Brazil‟s growth in Q4 of 2011 was 2.47 per cent
and is expected to slow down further in 2012. For the year as a whole, Brazil
recorded a mere 2.7 per cent as against 7.5 per cent in 2010. Inflation was 5.8 per
cent in February 2012. The concerns around slowdown in the growth of these
leading emerging market economies are however mitigated by the relatively
positive outlook in the advanced economies.

The Committee noted that oil prices are likely to be stable in the short-to medium
term, with a possibility of volatility induced by any deterioration of peace
conditions in the Middle East. The risk of a sharp decline in oil price is significantly
lower today than it was at the last MPC. However, there is a need to guard against
complacency.

Domestic Economic and Financial Developments
Output
The National Bureau of Statistics (NBS) has revised the data on national accounts
for 2010 and 2011. In Quarter 4 of 2011, real GDP grew by 7.68 per cent, higher
than 7.30 per cent in the preceding quarter but lower than the 8.60 per cent of
the corresponding quarter of 2010. For the year as a whole, real GDP growth has
been lower for all the quarters in 2011 than in the corresponding quarters of 2010.
The Committee noted that real non-oil GDP recorded a robust growth of 8.85 per
cent in 2011 as against 8.51 per cent in 2010. Crude oil output growth recorded a
decline of 0.57 per cent in 2011. In the non-oil sector, agriculture decelerated
mildly: its growth was 5.71 per cent in 2011 compared with the growth of 5.82 per
cent in 2010. The main contributions to non-oil growth in 2011 were wholesale and
retail trade, services, building and construction, and minerals and manufacturing.
In general, the negative growth in the oil and gas and slowdown in agriculture are
pointers to the need for implementation of the appropriate reforms in the
agricultural and petroleum sectors.

Prices
The Committee noted the resurgence of inflationary threat starting in January after
it had moderated towards the end of 2011. The NBS data on prices shows that the
headline inflation in February 2012 stood at 11.9 per cent, lower than 12.6 per cent
in January but higher than 10.3 per cent in December 2011. Food inflation on year
on year basis was 12.9 per cent in February compared with 13.1 per cent in
January and 11.0 per cent in December. The year-on-year core inflation was high
at 13.5 per cent in February relative to 12.7 per cent in January and 10.8 per cent
in December. The moderation in food inflation has helped to lower headline
inflation. The rise in core inflation, however, must be kept in view in the formation


CBN Monetary Policy Review

of inflationary expectations. Given the partial removal of fuel subsidy in January
the moderation in inflation in February is probably attributable to a number of
variables including: reallocation of spending by consumers due to higher
expenditure on transport and fuel; the slowdown in monetary aggregates and
fiscal spending; the stable and strengthening exchange rate of the naira; seasonal
effect of food prices and statistical base effects.

Monetary, Credit and Financial Market Developments
The provisional data on broad money supply (M2) for February shows that it grew
by 13.4 per cent on year on year basis compared with 15.4 per cent in 2011. M1
grew at a faster pace of 19.1 per cent on year on year basis mainly owing to the
strong growth of demand deposits. However, relative to December 2011 levels,
both broad money (M2) and narrow money (M1) declined. Foreign assets (net)
and domestic credit (net) both increased on year-on-year basis. However, over
the December level, net foreign assets grew modestly by 1.15 per cent whereas
the domestic credit declined by 1.9 per cent. The Committee urged the Central
Bank of Nigeria to monitor closely the credit developments and ensure that the
private sector gets adequate credit from deposit money banks so that the current
growth momentum is not impeded by lack of adequate finance.

The Committee noted that money market rates have been moving around the
upper limit of the corridor. The average OBB rate was 13.91 per cent in January
and 13.64 per cent in February. The average call rates in January and February
months were 14.18 per cent and 14.29 per cent, respectively. The overall stability in
the money market rates was essentially a reflection of the effectiveness of
monetary policy implementation. The spread between the average maximum
lending rates and the weighted average rate on all categories of deposits fell
marginally from 20.12 percentage points in December 2011 to 19.94 percentage
points in January and further to 19.70 percentage points in February 2012.

External Sector Developments
Foreign exchange reserves amounted to US$35.43 billion as at March 14, 2012. This
is an improvement over the level of US$ 32.64 billion at end-December 2011. The
exchange rate at the wDAS auctions moved from US$/N158.6205 at the end of
January 2012 to US$/N157.6206 as on March 14, 2012. This partly reflected the
moderation in the demand for foreign exchange due to increased inflows and
reduced demand. The exchange rate at the inter-bank market appreciated
significantly from US$/N161.60 as at end January to US$/N157.70 as at March 14,
2012. The rate charged by BDCs also appreciated from US$/N163.00 to
US$/N160.00 during the same period. As a result, the premium between the wDAS


CBN Monetary Policy Review

rate and the rates in the other segments of the market declined substantially over
the period.

The Committee held the view that the improvement in the inflow of foreign
exchange partly owing to the current high crude oil prices in the international
markets and the general improvement in the policy environment to attract capital
flows influenced the observed trends in the external sector. It urged the Central
Bank of Nigeria to build up adequate external reserves to satisfy the genuine
needs for foreign exchange consistent with the increase in the growth in
economic activity and the need to conserve resources and to withstand external
shocks.

The Committee’s Considerations
The Committee noted that the underlying inflationary pressure from supply shocks
would have been more severe had there been no mitigating factors on the
demand side. Currently, aggregate credit and broad money (M2) have been on
the decline and there are signs of improving fiscal position with some control over
expenditure and no imminent increase in wages. The fiscal stance and the
absence of second-round effects of fuel subsidy removal have therefore
complemented the monetary stance to dampen demand. The situation is further
supported by stable exchange rates and stable international commodity prices
which combine to moderate imported inflation.

The Committee recognized that in light of increasingly benign global environment,
it is imperative to ensure that the current growth path is sustained. It noted the
relative stability in the foreign exchange market as well as the modest accretion to
external reserves during the period. In view of the poor accretion to reserves in
2011 and the need to continue to build buffers for the economy in an uncertain
environment, the Committee strongly endorsed the stance of the Bank to focus on
building reserves, defending the stability of the currency and providing conditions
that are conducive to the inflow of FDI.

The Committee noted with satisfaction the introduction of some fiscal and
structural measures that could improve the revenue base of the government as
well as enhance the capacity of the domestic economy to improve the value
chain in the production process. Some of these measures include introduction of
cost reflective electricity tariffs and progress in agricultural transformation
initiatives. Although these measures would have a salutary effect on the fiscal
position, they may, in the short run, put pressure on domestic prices. Consequently,
it is important for both monetary and fiscal authorities to put in place coordinated
measures that would moderate the increase in the general level of domestic


CBN Monetary Policy Review

prices in the short to medium term. The Committee is also concerned about the
rising level of domestic debt and its sustainability, as shown by the average debt
service to revenue ratio of 17.6 per cent in the last three years. This would likely
have a negative impact on domestic interest rates and the flow of credit to the
core private sector, among others. Although debt to GDP ratio in 2011 stood at
17.8 per cent, the Committee noted that the percentage of debt service to
government revenue was a high 19.1 per cent in the same year. In view of the
high interest rate environment occasioned by tight monetary policy stance, a
moderation in government borrowing would be positive not just for the fiscal
position but for access to finance by the private sector. After reviewing the overall
fiscal position the committee commended the fiscal authorities for the discipline
being introduced into government spending, the tightening of fiscal controls and
the renewed focus on spending on capital projects.

In arriving at its decision, the Committee was faced with a choice between two
options. One option was to consider, in view of the improving global economic
environment, a moderation in headline inflation, slowdown in monetary
aggregates and fiscal spending and the crowding out effects of high interest
rates, a reduction in the policy rate. This argument was considered but rejected on
the basis of a number of factors. These included persistent underlying core
inflationary pressures, the need to continue supporting the naira and build up
external reserves, the necessity for attracting and retaining foreign investment and
the need for consistency and stability in the macroeconomic environment. The
Bank also needs to maintain its clear focus on price stability and it is not evident
that a moderation in February is sufficient to establish a trend, and warrant a
reversal of monetary tightening.

Decisions:
In the light of the above, and considering the clear impact of previous tightening
on the rate of inflation and exchange rates up to February 2012, the Committee
unanimously decided as follows:
1.
Retain MPR at 12.0 per cent with interest rate corridor of +/- 200 basis points;
2.
Retain CRR at 8.0 per cent;
3.
Retain minimum liquidity Ratio of 30.0 per cent; and
The Committee also resolved to watch closely developments with respect to the
fiscal stance and to respond appropriately if, and when, the need arises.

Sanusi Lamido Sanusi, CON
Governor
Central Bank of Nigeria
March 20, 2012


CBN Monetary Policy Review

Central Bank of Nigeria Communiqué No. 83 of the Monetary Policy Committee
Meeting of Monday and Tuesday May 21 and 22, 2012
The Monetary Policy Committee met on May 21 and 22, 2012 with all members in
attendance. The Committee reviewed the conditions and challenges that
confronted the domestic economy during the first five months of 2012, against the
backdrop of international economic and financial developments; to reassess the
monetary policy options in the near-to-medium term.

The International Economic Situation
The Committee noted that the global economy continued to experience sluggish
recovery as the downside risks remained elevated owing to the lingering Euro zone
debt crisis, weak balance sheet positions of Euro zone financial institutions, rising
unemployment in most advanced economies, geo-political uncertainties
affecting global oil prices and the legacy effects of the global financial crisis.
Growth in the advanced economies is estimated to decelerate from 1.6 per cent
in 2011 to 1.4 per cent in 2012. US output slowed from an annual rate of 3.0 per
cent in Q4 2011 to 2.2 per cent in Q1 of 2012. The slow US recovery was attributed
to the fall in business spending from 5.2 per cent in Q4 of 2011 to 2.1 per cent in Q1
of 2012.

In the euro area, real GDP growth is projected to contract from 1.4 per cent in
2011 to -0.3 per cent in 2012, owing to the lingering effects of the sovereign debt
crisis and the attendant fragility of the financial system. Although the effects of the
high commodity prices and supply disruptions from the Japanese earthquake had
diminished, the effect of the Greek bailout and the failure of fiscal retrenchment
have been magnified by the political impasse associated with the discussions on
Greek debt exit strategy. A domino effect on other debt-ridden euro zone
members and possible bank runs should not be ruled out entirely in the Euro area,
if political support is not provided for the already agreed fiscal compact.
European Governments are confronted with uncertainties that are coloured by
both political and economic realities. The UK, Denmark and Czech Republic, with
own national currencies outside the 17-nation Euro zone have been declared to
be officially in recession. There are no immediate plans in the UK for abandoning
austerity, and it is not yet clear if the tight fiscal stance is compatible with growth
aspirations.

In the leading emerging economies, there are indications of a significant
slowdown in economic activity. China has revised its growth targets for 2012
downwards, from 8.0 per cent to 7.5 per cent, compared with 9.2 per cent in 2011.
Growth in Indonesia was projected to decelerate to 6.10 per cent from 6.50 per
cent in 2011; while growth in Malaysia would remain unchanged at 4.40 per cent.


CBN Monetary Policy Review

India’s GDP growth in 2012 may not be significantly higher than the 6.50 per cent
in 2011. On balance, growth in the BRICS countries is projected to decelerate as
asset and currency markets reflect price fluctuations while banks and other
financial institutions are under increased stress. Reflecting the slowdown in
economic activities, crude oil prices in the international market have shown signs
of declining as supply in 2012 is forecast to exceed demand.

In sub-Saharan Africa, inflation is trending upward while growth prospects are
optimistically measured on the back of the resilience of the domestic economy in
recent times. However, the new risks posed by the recession in the euro area and
Chinese slowdown, in addition to the lag impact of the legacy factors associated
with the financial crisis, could somewhat dampen the growth prospects. In
addition, military coup d’états in some West African Countries and continuing
pockets of political instability remain a source of concern.

The Committee noted the general slowdown in the global economy and the
attendant softening in commodity prices which present uncertainties to the fiscal
outlook, trade, and financing flows to the domestic economy, noting the very dark
clouds over global economic recovery in 2012. The growing trade imbalances
and threats to financial flows could weaken the external and fiscal positions.

Domestic Economic and Financial Developments
Output
Indications are that the robust output growth recorded in 2010 and 2011 may not
be replicated in 2012. Provisional data from the National Bureau of Statistics (NBS)
indicate that real gross domestic product (GDP) in Q1 grew by 6.17 per cent,
down from 7.68 per cent in the fourth quarter of 2011 and 7.13 per cent in the
corresponding period of 2011. This continues a disturbing and unbroken trend of
decline in growth going back to Q1 2010. Overall, real GDP growth for fiscal 2012 is
projected at 6.50 per cent, down from 7.45 per cent in 2011. Crude oil production
was estimated to have declined by 2.32 per cent in Quarter 1, 2012 compared
with a marginal increase of 0.05 per cent in the corresponding period of 2011.
Non-oil real GDP growth estimated at 7.93 per cent in Q1 of 2012 was much lower
than the 8.73 per cent recorded in Q1 of 2011. Growth in agriculture decelerated
in Q1 to 4.15 per cent compared with the 5.54 per cent in Q1 of 2011 and 5.74 per
cent in Q4 of 2011. Agricultural growth rate has not been this slow in the last seven
years at least.

In general, the paradox of rising poverty incidence in the face of impressive
economic growth further reinforces the Committee’s call for the implementation


CBN Monetary Policy Review

of the appropriate structural reforms in the key sectors notably agriculture, power
and petroleum sectors, to stimulate productivity.

Prices
As anticipated by the Committee in earlier meetings, inflationary threats reemerged in Q1 2012, having moderated in Q4 2011. The year-on-year headline
inflation which was 12.6 per cent in January 2012 moderated to 11.9 per cent in
February but rose to 12.1 and 12.9 per cent in March and April 2012, respectively.
Similarly, food inflation which was 13.1 per cent in January 2012 fell to 9.7 per cent
in February but increased to 11.8 per cent in March before declining slightly to 11.2
per cent in April 2012. Core inflation, which declined to 11.9 per cent in February
from 12.7 per cent in January, rose sharply to 15.0 per cent in March before
moderating to 14.7 per cent in April 2012. On a month-on-month basis, inflationary
pressure was rather benign between March and April, and the rise in year-on-year
figures largely reflects the base effects in January from fuel subsidy removal.
Overall inflation numbers remain within our forecast range.

The proposed upward review of electricity and import tariffs on wheat and rice as
well as the rising global food and energy prices could further put upward pressure
on prices in the near-term. Notwithstanding this, the lingering impact of the
aggressive monetary tightening measures undertaken since 2011 and the general
slow growth in monetary aggregates and the impact of rising fuel prices in
consumer spending, may moderate the pressure on domestic prices in the near
term. Staff projections indicate that headline inflation is projected to peak around
14.5 per cent in July 2012 before moderating steadily till the end of the year.

Monetary, Credit and Financial Markets’ Developments
Broad money supply (M2) grew by 0.01 per cent in April 2012 when compared
with the level at end-December 2011. Relative to the level at end-December 2011,
aggregate domestic credit (net) declined by 2.04 per cent in April 2012,
translating to a decline of 6.12 per cent on annualized basis. The decline in
aggregate credit during the period was mainly due to the decline in credit to the
core private sector. Credit to the core private sector declined by 0.22 per cent or
0.66 on annualized basis while credit to Government (net) declined by 58.03 per
cent in Q1 of 2012. Despite the decline in credit to core private sector, overall
credit to the private sector rose marginally by 0.06 per cent or 0.18 per cent on
annualized basis. This is indicative of a disturbing trend of growth in lending to
States and Local governments at the expense of the core private sector.

Following these developments, the Committee reiterated its earlier advice that the
Bank should put in place appropriate measures that would enhance the flow of


CBN Monetary Policy Review

credit to the private sector, in particular to those activities that have the potential
of inducing growth in a relatively short period of time.

The Committee noted that since its meeting in March 2012, money market interest
rates remained anchored around the upper band of the interest rate corridor.

The interbank opened in March at 15.42 and 14. 00 per cent, closed at 14.66 and
14.34 per cent, respectively, on May 17. The medium to long term yields have also
eased moderately during the period. The Committee further noted a slight
reduction in the spread between the deposit and lending rates. The average
maximum lending rate rose to 23.31 per cent in April 2012 from 23.21 per cent in
March while the consolidated deposit rate rose to 3.93 per cent from 3.79 per cent
during the same period. Thus, the spread between the average maximum lending
rate and the consolidated deposit rate narrowed further to 19.38 per cent in April
2012 from 19.42 per cent in March 2012.

External Sector Developments
Foreign exchange reserves stood at US$36.66 billion at end-April 2012, representing
an increase of US$4.02 billion or 12.32 per cent above the level of US$32.64 billion
at end-December 2011. Reserves increased to US$38.72 billion as at 17th May
2012, representing 18.63 per cent increase over the level in December 2011. This
increase reflected generally favourable commodity prices and inflows of capital in
response to the removal of restrictions on repatriation and high domestic interest
rates, as well as stable exchange rates. The Committees noted the assurances that
total “hot money” in the system is under strict surveillance and the Bank is satisfied
that the figure of US$5 billion does not pose a threat to financial stability in view of
the current level of reserves. The exchange rate at the wDAS-SPT opened at
N157.62/US$ on March 20, 2012 and closed at N157.26/US$, on May 17, 2012
indicating an appreciation of N0.36k or 0.23 per cent. At the interbank segment,
the selling rate opened at N157.70/US$ and closed at N158.80/US$, representing a
depreciation of N1.10k or 0.7 per cent. At the BDC segment of the foreign
exchange market, the selling rate opened at N160.00/US$ and closed at
N159.00/US$, representing an appreciation of N1.00k or 0.06 per cent during the
same period. The Committee noted the decline in the premia between the rates
at the wDAS and the interbank and between the wDAS and the BDCs towards the
end of the review period. While noting the need to put in place policies that
would attract capital inflows necessary to build up adequate external reserves,
the Committee urged the Bank to sustain and complement existing measures to
discourage speculative demand for foreign exchange. The Committee
commended the Bank for taking proactive steps to intervene in the interbank
market to maintain the exchange rate within the target band.


CBN Monetary Policy Review

The Committee also commended the efforts of the Bank in monitoring the foreign
exchange demand and capital inflows into the economy with a view to ring
fencing the economy from external shocks and other vulnerabilities; and in
building the stock of reserves to meet genuine demand for foreign exchange. The
Committee expressed satisfaction over the orderliness in the foreign exchange
market and the stability of the exchange rate. It also encouraged the Bank to
continue its close surveillance of activities in the foreign exchange market, given
the current developments in the international currency and financial markets.

The Committee’s Considerations
The key concerns noted by the Committee were:
1.
Slowdown in global economic activities, particularly, in the US, Europe and
China
2.
Slowdown in domestic output, especially, sharp decline in agricultural output
and oil and gas sectors
3.
Possible softening of crude oil prices in international markets with potential
fiscal revenue loses and the likely pressure on the foreign exchange market
and exchange rate
4.
The inflationary threat that has re-surfaced in the first quarter of 2012, after
having moderated in the fourth quarter of 2011
5.
Imminent increase in electricity tariff which may lead to inflationary pressures
6.
High interest rates in the face of declining GDP output; and
7.
Security concerns in the country
8.
Slow pace of structural reforms induced by failure to improve power supply,
establish and implement reliable PPP framework that can attract funding for
infrastructure, and delay in passing the PIB

The Committee noted that since its meeting in March 2012, the uncertainty
surrounding the global economy remained elevated owing to continued
economic slowdown in advanced and major emerging economies as well as the
financial stress in key advanced economies. These developments will impact the
domestic economy through the trade and financial flow channels, weakening the
external and fiscal positions. Monetary policy on its own has limitations with respect
to inducing long-term growth which is dependent on fiscal and structural
measures relating to petroleum, power and infrastructure sectors. This Committee
reiterates the need to recognize the short-term nature and limits of monetary
policy. The growth and development of the Nigerian economy will continue to be
at risk so long as progress is not made in structural reforms.

Furthermore, the Committee reassessed the recently released provisional output
data which indicated a slowdown in GDP growth. It noted that the huge drop in


CBN Monetary Policy Review

agricultural output was traced to the following factors: displacement of farmers in
the northern part of the country owing to security situation, inadequate rainfall
and increased production cost due to the partial removal of fuel subsidy in
January 2011. It also noted the decline in oil and gas production and the recent
revelation by the oil Minister of the loss of over US$7 billion of revenues due to oil
theft. It concluded that the interest rate movements will not be effective in
stimulating growth under such circumstance and urged government to fast-track
the agricultural transformation initiative and to strengthen fiscal controls over the
oil industry.

The Committee also noted that while the lingering impact of the aggressive
monetary tightening measures undertaken since 2011 served to moderate the
pressure on domestic prices in the near term, the effect of the global economic
and financial developments on exchange rate and domestic prices could be
significant in the coming months. The international oil price output and the lag in
oil supplies in relation to demand seemed to indicate the onset of additional
pressures on foreign exchange reserves, exchange rates and prices. These
developments require that the power and petroleum sector reforms as well as
infrastructure investments need to be scaled up as quickly as possible. These
should complement measures to enhance credit flows to the private sector, in
particular to growth inducing activities, so that the likely pressures on interest rates
are addressed.

The Committee welcomed the efforts being made to improve fiscal consolidation.
Government revenues have improved in Q1 in relation to government
expenditures, resulting in notional fiscal surplus. The Committee encourages that
these efforts are furthered, especially in view of the growing domestic public debt
stock. The Committee also noted the very healthy collaboration that has been
established between the fiscal and monetary authorities and urged the Bank to
continue supporting the fiscal authorities in their pursuit of very difficult reforms.

The Committee evaluated the policy options available to it and the analysis of
alternative scenarios and agreed that monetary policy should contribute to the
consolidation of a positive and stable longer-term macroeconomic environment
conducive for growth and development. It was in the Committee’s view that at
this point in time, the trajectory of prices and output is dependent on fiscal and
structural policies than on the monetary stance. The sluggish growth in credit,
stable exchange rate, healthy reserve position and benign month-on-month
inflation do not suggest a need for further tightening at this point. Also, the
underlying reasons for slowdown for agric and oil GDP growth will not be
addressed by monetary easing.


CBN Monetary Policy Review

Decision
The Committee, therefore, decided by a unanimous vote to maintain the current
stance of monetary policy without discounting the possibility of changing it, should
economic and financial conditions warrant so in the near term. As such, the
Monetary Policy Rate (MPR) is retained at 12.0 per cent with the symmetric band
at +/- 200 basis points. The Cash Reserve Ratio (CRR) and Liquidity Ratio (LR) also
remain unchanged.

Sanusi Lamido Sanusi, CON
Governor
Central Bank of Nigeria

May 22, 2012