CHAPTER 1
CHAPTER 1
OVERVIEW


CBN Monetary Policy Review

CHAPTER 1
1.0
OVERVIEW
onetary policy in the second
half of 2014 focused on
achieving the objective of
price and exchange rate stability.
Accordingly, the Bank sustained a tight
policy stance with a view to ensuring
that electioneering spending did not
result in uptick in inflation. Headline
inflation remained within single digit,
and fluctuated between 7.9 and 8.5
per cent in the review period, due to
the combined effects of the declines
in the prices of clothing and footwear;
and transport components as well as
the relative stability in the price of
education in response to the tight
policy measures taken at the July,
September, and November 2014 MPC
meetings.
The
benign
inflation
environment
enabled the economy to sustain a
modest growth trajectory. Data from
the National Bureau of Statistics (NBS)
showed that the real Gross Domestic
Product (GDP) grew by 5.94 per cent
in the fourth quarter of 2014, down
from
6.77
per
cent
in
the
corresponding quarter of 2013 and the
6.23 per cent in the third quarter of the
year. The services and agricultural
sectors were the largest contributors to
GDP in the fourth quarter, with services
contributing 53.48 per cent, while
agriculture contributed 23.86 per cent.
The growth in the agricultural sector
was attributed to impressive harvest of
farm produce, while services and
industrial sectors remained relatively
stable.
The
exchange
rate
experienced
significant pressure during the review
period, due largely to the impact of
the US Fed quantitative easing (QE)
tapering, declining oil prices, depletion
in the
foreign
reserves,
and
the
absence
of
fiscal
buffers.
As
a
response,
the
Bank
moved
the
exchange
rate
mid-point
from
N155/US$ to N168/US$ and widened
the band around the midpoint from
+/-3.0 to +/-5.0 per cent.
The financial market was generally
stable for most of the second half of
2014, although, significant fluctuations
were noticed towards the end of the
year. A number of policy instruments
were deployed to achieve price and
financial system stability, with a view to
boosting
investor
confidence
and
reducing concerns about declining
foreign reserves. The instruments were:
the Monetary Policy Rate (MPR), Open
Market Operations (OMO), Discount
Window Operations, Cash Reserve
Ratio (CRR) and Foreign Exchange
Trading Position (FTP) limit. During the
period, the MPC raised the MPR by 100
basis points from 12.0 to 13.0 per cent
and
maintained
the
symmetric
corridor of +/- 200 basis points. The CRR
on private sector deposits was raised
by 500 basis points from 15.0 to 20.0
per cent, while CRR on public sector
deposits was retained at 75.0 per cent.
The MPC also retained the Liquidity
M


CBN Monetary Policy Review

Ratio at 30.0 per cent, in order to
address liquidity surfeit in the banking
system.
OMO was principally used to mop up
or inject liquidity into the system as a
strategy of monetary management by
the Bank. OMO auctions in the review
period
increased
over
the
corresponding period of 2013 as a
result of injections into the system from
the maturity of FGN Bonds, NTBs and
AMCON bonds. In the period under
review, the economy continued to
experience
fluctuations
in
liquidity
levels. To compliment OMO, the CRR
was used to smoothen the liquidity
cycle, and reduce pressure on the
naira exchange rate. Reserve money
and its components trended upwards
relative to the levels in the first half of
2014. Compared with the end-June
2014 level, the broad measure of
money supply trended upwards, while
narrow money decreased, reflecting
the liquidity surfeit attributable to
cyclical Federal Accounts Allocation
Committee (FAAC) disbursements and
increased spending towards the 2015
general elections.
The money market remained active in
the second half of 2014, with trading in
CBN bills and government securities.
The improvement in liquidity conditions
in the financial sector continued to
influence market activities, alongside
the demand pressure in the foreign
exchange market. The interbank call
and open buy back (OBB) rates
remained within the retained policy
rate corridor of +/-200 basis points
around the MPR in the review period,
except in December, 2014. Despite the
rebound
in
the
activities
of
the
uncollateralized
segment
of
the
money market, transactions in OMO
and standing facilities dominated the
market. The daily Nigerian Interbank
Offered rates (NIBOR) were generally
stable but experienced occasional
spikes, reflecting periods of liquidity
tightness.
The performance of the capital market
declined in the second half of 2014,
relative to the first half of the year and
the corresponding period of 2013. The
All Share Index (ASI) fell by 18.42 per
cent to 34,657.15 at end-December
2014, from its level of 42,482.48 at
end-June 2014, and by 16.14 per cent,
when
compared
with
41,329.19
recorded at end-December 2013. The
development was due largely to the
dampening effects of external factors
such
as
the
recovery
in
some
developed
economies
and
the
conclusion of the US Federal Reserve
QE.
Other
macroeconomic
developments that affected equities
included
the
declining
oil
prices,
depletion
in
external
reserves,
insurgency,
and
the
uncertainties
surrounding
the

general
elections.
In the fixed income market, FGN
bonds continued to dominate, with
fewer transactions recorded in the
State/Local
Government
and
Corporate Bond segments.


CBN Monetary Policy Review

Activities
in
the
global
financial
markets
were
characterized
by
uncertainties
about
economic
recovery. Growth rebounded in the
USA and the UK, while the Euro area,
Japan, and emerging and developing
market economies continued to be
constrained by a number of old and
new
fragilities.
Accordingly,
the
exchange rate of major international
currencies
experienced
mild
fluctuations,
including
regional
currencies such as the Ghanaian cedi,
Kenyan shilling, the South African rand
and the Egyptian pound.
The inflation outlook indicates that the
economy may experience a gradual
rise in consumer prices but within
single-digit target in the first half of
2015. This may be attributable to
increased spending in the run up to
the

general
elections,
depreciation of the naira and the
pass-through to domestic prices. These
would be exacerbated by security
concerns, disruption of agricultural
activities and poor harvest in some
areas of the northern axis of the
country
affected
by
insurgency.
Headline
inflation
is
therefore,
projected to oscillate around 8.6 and
9.4 per cent in the first half of 2015,
and could rise to 10.8 per cent by year
end. This outlook is premised on the
assumption that the reduction in the
pump price of refined fuel is expected
to ameliorate domestic prices and
that the Bank will continue to pursue a
tight monetary policy stance.
Output growth in the fourth quarter of
2014 was 5.94 per cent down from 6.23
per cent in the third quarter. Output is
projected to grow by 5.5 per cent in
2015 (FGN 2015 Budget) down from
6.22 per cent in 2014. The lower growth
forecast is conservative, compared
with the 7.3 per cent projection by the
IMF (Oct 2014 WEO). The lower growth
forecast
is
due
to
emerging
developments such as falling crude oil
prices,
security
challenges
and
infrastructural
constraints.
With
declining oil prices and production
challenges
in
an
oil-dependent
economy,
achieving
the
growth
projection
requires
improved
coordination of fiscal and monetary
policies to support the non-oil sector.


CBN Monetary Policy Review

CHAPTER 2
CHAPTER 2
OUTPUT IN THE DOMESTIC
ECONOMY


CBN Monetary Policy Review

CHAPTER 2
2.0 OUTPUT IN THE DOMESTIC
ECONOMY
he Nigerian economy continued
its robust growth trajectory in the
second half of 2014. Real GDP
grew by 6.23 per cent in the third
quarter before slowing to 5.94 per cent
in the fourth quarter. The observed
growth in the third quarter was higher
than
the
5.17
per
cent
in
the
corresponding quarter of 2013 but
lower than 6.54 per cent in the
preceding quarter. The performance
in the fourth quarter was lower than
the 6.77 per cent in the corresponding
period of 2013 and 6.23 per cent in the
preceding quarter. The major drivers of
growth in the third quarter were
services (2.53%), agriculture (1.21%),
trade (1.08%) and industry (1.04%),
while that of fourth quarter were
services
(2.45%),
industry
(1.30%),
agriculture (0.87%) and trade (0.87%).
Within
the
industrial
sector,
the
manufacturing sub-sector contributed
1.44 and 1.17 per cent to growth in the
third and fourth quarters, respectively,
while crude
oil and natural gas
declined by 0.41 per cent in the third
quarter but rose by 0.11 per cent in the
fourth quarter. Overall, output growth
in 2014 was 6.22 per cent compared
with 5.49 per cent in 2013.


Figure 2.1
Real GDP Growth (%)
2013Q1 – 2014Q4

Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4

Per cent


2.1 Domestic Economic Activities
Overall, output continued to be driven
largely by activities in the non-oil
sector with performance of the oil
sector dampening growth. At 7.51 per
cent, the non-oil real GDP in the third
quarter of 2014 was higher than 6.71
per cent in the preceding quarter, but
lower than 8.46 per cent in the
corresponding period of 2013. The
non-oil sector growth was driven by
activities
in
the
crop
production
(1.09%); textile, apparel and footwear
(0.50%); telecommunications (0.47%)
and real estate (0.45%) sub-sectors.
In the fourth quarter, the non-oil sector
slowed to 6.44 per cent, compared
with 8.78 per cent in the corresponding
period of 2013. As in the preceding
quarter, non-oil sector growth in the
fourth quarter was driven by activities
in the crop production (0.75%); textile,
apparel and footwear (0.50%); and
real estate (0.50%) sub-sectors.
The oil sector, however, declined by
3.6 per cent in the third quarter of 2014
T


CBN Monetary Policy Review

in contrast to the 5.47 per cent growth
in the preceding quarter. This was due
to production challenges in the sector,
which
lowered
average
daily
production of crude oil to 2.15 million
barrels per day (mbd), from 2.26 mbd
in the corresponding quarter of 2013
and 2.21 mbd in the second quarter of
2014. In the fourth quarter, crude oil
output grew by 1.18 per cent with
average daily production level of 2.18
mbd,
from
2.16
mbd
in
the
corresponding quarter of 2013. The
production
challenges
were
exacerbated by declining crude oil
prices in the second half of 2014.

Figure 2.2
Quarterly Growth Rates of the Oil and
Non-Oil Sectors in 2014


2.2
Sectoral Analysis
This section analyses the performance
of each sector of the economy,
highlighting key institutional factors
that influenced domestic output in the
review period.


2.2.1
Agriculture
Agricultural output grew by 4.47 per
cent in the third quarter, up from 3.44
and 3.68 per cent in the corresponding
period of 2013 and the preceding
quarter, respectively. This represented
increases of 1.03 and 0.79 percentage
points. At 6.72 per cent, activity in the
fishing sub-sector was the main driver
of
growth,
while
livestock,
crop
production and forestry grew by 5.71,
4.38 and 2.36 per cent, respectively.
This compares with the growth rates of
4.89, 4.54, 3.56 and 5.04 per cent
recorded for fishing, livestock, crop
production and forestry, respectively,
in the second quarter. The relative
contribution of agriculture to GDP
dropped to 26.63 per cent in the third
quarter, from 27.08 per cent in the
corresponding
quarter
of
the
preceding year, but higher than the
20.89 per cent in the second quarter,
2014.
In
the
fourth
quarter,
agricultural
output
growth
slowed
by
0.83
percentage point to 3.64 per cent
from the preceding quarter, which
however represented an increase of
0.62 percentage point over the rate in
the corresponding period of 2013. As in
the preceding quarter, the fishing subsector at 6.78 per cent remained the
main driver of growth in the sector.


CBN Monetary Policy Review

Figure 2.3
Quarterly Growth Rate of Agricultural
Sector Activity in 2014

2.2.1.2
Agricultural
Policy
and
Institutional Support
The
performance
of
the
sector
resulted from a number of policies and
institutional support, which included
the following:

The
Agricultural
Credit
and
Guarantee Scheme (ACGS)
The ACGS guaranteed a total of
36,909 loans valued at N7.07 billion
between
July
and
December,
2014.

N200
Billion
Commercial
Agriculture
Credit
Scheme
(CACS)
The sum of N5.926billion was
released under the scheme to
eight (8) banks for eighteen (18)
projects (13 new projects and 5
enhancements) between July and
December, 2014.

N200
Billion
SME
Credit
Guarantee Scheme (SMECGS)
Five
(5)
projects
valued
at
N400.00 million were guaranteed in
the review period.


Nigeria Incentive-Based Risk
Sharing System for Agricultural
Lending (NIRSAL)
Eleven (11) credit risk guarantees
(CRGs) valued at N3.089 billion
were
approved
for
eight
(8)
projects in the review period.

2.2.2 Industry

2.2.2.1 Industrial Production
The industrial sector grew by 15.94 per
cent in the third quarter of 2014 up
from 14.10 per cent in the preceding
quarter, in contrast to a decline of 2.54
per cent in the corresponding period
of 2013. At 16.0 and 11.79 per cent,
activities in the manufacturing and
solid minerals sub-sectors, respectively,
were the main drivers of growth, while
crude petroleum and natural gas
declined
by
3.6
per
cent.
This
compares with their respective growth
rates of 14.01, 20.95 and 5.14 per cent
in the second quarter of 2014.
In the fourth quarter, the sector grew
by 13.47 per cent compared with
15.94 per cent in the preceding
quarter, and 4.3 per cent in the


CBN Monetary Policy Review

corresponding period of 2013. At 13.57
and 13.47 per cent, activities in the
solid minerals and manufacturing subsectors, respectively, were the major
drivers
of
growth.
This
was
complemented
by
the
marginal
increase of 1.18 per cent in crude
petroleum and natural gas.
Figure 2.4
Quarterly Growth Rate of Industrial
Sector Activity in 2014


2.2.2.2


Industrial
Policy
and
Institutional Support
The performance of the industrial
sector during the period was driven by
the continuation of existing and new
reforms
and
incentives
discussed
below:

N300 Billion Power and Airline
Intervention Fund (PAIF)
Of the N3.70 billion released
under the scheme during the
review period, N3.192 billion was
for power and N0.508 billion for
airline projects. This brings the total
disbursements since inception to
N236.36 billion in respect of 53
projects (38 power and 15 airline
projects).


N200
Billion
SME
Restructuring/Refinancing Fund
(RRF)
Of
the
N200
Billion
SME
Restructuring/Refinancing
Fund
(RRF), N33.0 billion was disbursed
during the review period, bringing
the
total
disbursements
since
inception to N339.725 billion for

projects.
The
difference
between the initial amount set
aside
and
the
cumulative
disbursements under the scheme
was accounted for by the reinvestment of repayments.


Nigerian
Electricity
Market
Stabilization
Facility
(N213
billion)
As
part
of
commitment
to
strengthen the real sector, the
Bank in collaboration with the
Ministries of Petroleum Resources
and Power, the Nigerian Electricity
Regulatory
Commission
(NERC),
and
the
Nigerian
National
Petroleum
Corporation
(NNPC),
established
a
CBN-Nigeria
Electricity
Market
stabilization
Facility (CBN-NEMSF). The NEMSF is
aimed
at
providing
a
lasting
solution to the challenges facing
gas-to-power supply in Nigeria.


CBN Monetary Policy Review

Micro,
Small
and
Medium
Enterprises Development Fund
(MSMEDF)
The Fund which was launched on
August 15, 2013 commenced in
June 2014, with a total provision of
N220 billion, split into social (N21.45
billion)
and
commercial
(N198
billion)
components.
As
at
December 2014, a total of N4.629
billion had been disbursed under
the scheme.
2.2.3 Construction
The construction sector grew by 11.32
per cent in the third quarter of 2014 up
from 10.7 per cent in the preceding
quarter, but lower than the 13.78 per
cent in the corresponding period of
2013. The sector grew by 12.66 per
cent in the fourth quarter of 2014.
2.2.4 Trade
In the third quarter of 2014, activity in
the trade sector increased by 6.81 per
cent, up from 5.15 per cent in the
preceding quarter, and 6.75 per cent
in the corresponding period of 2013.
Trade performance, however, slowed
to 5.32 per cent in the fourth quarter of
2014. On an annual basis, the sector
grew by 5.88 per cent in 2014
compared with 6.64 per cent in 2013.
2.2.5 Services Sector
In the period under review, the sector
grew by 7.63 per cent in the third
quarter of 2014 up from 6.82 per cent
in the preceding quarter, but lower
than the 10.53 per cent in the
corresponding period of 2013. The
major drivers in the sector were
information and communication; real
estate; finance and insurance; and
education, with respective growth
rates of 8.32, 5.90, 8.56 and 8.78 per
cent. This development compares with
their respective growth rates of 7.95,
4.95, 7.0 and 7.34 per cent in the
second quarter of 2014. The services
sector slowed to 6.52 per cent in the
fourth
quarter,
largely
driven
by
information
and
communication
(5.21%); real estate (5.96%); finance
and insurance (8.14%); and education
(11.23%). Overall, the services sector
grew by 7.12 per cent in 2014
compared with 9.38 per cent in 2013.
Figure 2.5
Quarterly Growth Rate of Services
Sector Activity in 2014


Per cent

2014 Q1
2014 Q2
2014 Q3
2014 Q4

2.2.6 Oil Sector
The average daily production of
crude
oil
in
the
third
quarter
decreased to 2.15 million barrels per
day (mbd) from 2.26 mbd in the third


CBN Monetary Policy Review

quarter of 2013 and 2.21 mbd in the
second quarter. In the fourth quarter,
production improved marginally to
2.18 mbd, from 2.16 mbd in the fourth
quarter of 2013 and 2.15 mbd in the
third quarter.

Figure 2.6
Crude Oil Production
2013Q1 – 2014Q4


The international price of Nigeria’s
reference crude, the Bonny Light (370
API), which ranged from US$109.47 to
US$114.60 per barrel with an average
of US$111.23 in the first half of 2014, fell
to US$56.06 per barrel in December
2014.
The
development
in
the
international oil market led to a
significant fall in the price of oil which
was below the budget-benchmark
price of US$75 per barrel.

Factors that affected the performance
of the oil sector included increased oil
output in the United States of America
from the shale oil technology, geopolitical tension, OPEC’s refusal to cut
production and shore-up prices, and
weak global demand.


Figure 2.7
Bonny Light Price January
2014 – December 2014 in US
Dollars

US$


CBN Monetary Policy Review

BOX 2.0
NIGERIAN ELECTRICITY MARKET STABILIZATION FACILITY
One of the statutory functions of the CBN is to engage in developmental activities. A major
development challenge is the provision of adequate power to support the real economy, whose
funding needs became apparent following its privatization. Due to the long gestation period of power
projects and their large-scale financing requirements, Nigerian banks were unable to meet the funding
needs as they traditionally lend short term.
In 2010, the CBN initiated a major intervention in the sector by providing a long-tenored, single-digit
interest facility to encourage investment in private power plants. Under the programme, known as the
Power and Airlines Intervention Fund (PAIF), a total sum of N200 billion was earmarked for disbursement
to independent power producers and large scale manufacturing firms to establish power plants. This
was aimed at reducing reliance on the national grid and so far, the intervention has resulted in the
generation of additional 840 megawatts to the national grid. Despite the intervention, low power
generation remained a major feature of the sector, leading to large revenue shortfalls due to
inadequate gas supply to power generating plants. Other counteracting factors included legacy
debts inherited by the PHCN successor companies and the inability of distribution companies (DISCOs)
to optimize revenue collections from electricity consumers. In October 2014, the CBN, in collaboration
with the Ministry of Petroleum Resources, the Ministry of Power, the Nigerian Electricity Regulatory
Commission (NERC), and the Nigerian National Petroleum Corporation (NNPC), initiated a financing
scheme that would settle the legacy debts, and provide additional funds for the development of
electricity market in the country. The fund, known as the Nigeria Electricity Market Stabilisation Facility
(NEMSF) had a total financing provision of N213 billion for settling outstanding debts in the Nigerian
Electricity Supply Industry (NESI) and guaranteeing the take-off of the Transitional Electricity Market
(“TEM”). The interventions under the scheme are expected to add at least 370mmcf/day of gas and
guarantee a generation capacity of at least 5000MW within 4-5 months.
Under the scheme, all major stakeholders are expected to fulfil their obligations. The Nigeria Electricity
Regulatory Commission (NERC) has reset the Multi Year Tariff Order (MYTO) to make it cost-reflective
and provide a margin for the loan repayment. On their part, the Ministry of Petroleum
Resources/Nigeria National Petroleum Corporation have approved a new benchmark price of
$2.50/mcf for gas supply and $0.80/mcf as transportation costs for new capacity. Other value chain
stakeholders also committed to improve service delivery. Gas suppliers are to upgrade infrastructure
and improve gas supply; generating companies (GENCOs) are to enhance capacity utilization, and
the distribution companies (DISCOs) are to improve revenue collection through significant reductions in
commercial and collection losses.
The features of the NEMSF include: (i) The facility shall be administered through deposit money banks;
(ii) Funds are to be disbursed at an interest rate of 10% per annum with a ten-year tenor; (iii) Nigeria
Electricity Regulatory Commission (NERC) is to reset the Multi Year Tariff Order (MYTO) to provide for the
loan repayment; (iv) All parties that are licensed by the NERC to operate in the electricity market
accepted to be bound by performance agreements signed with the relevant authorities including the
Bureau of Public Enterprise (BPE); and (v) All parties are to be subjected to additional oversight
mechanism to be developed by NERC and CBN to ensure business continuity. Overall, the policy
measure is expected to enhance revenue collection by the DISCOS to ensure sustainability in the
sector.


CBN Monetary Policy Review

CHAPTER 3
CHAPTER 3
PRICE DEVELOPMENTS


CBN Monetary Policy Review

CHAPTER 3

3.0
PRICE DEVELOPMENTS
omestic prices were largely
subdued in the second half of
2014.
Inflationary
pressures
moderated during the period
primarily due to the sustained tight
monetary policy stance of the Bank.
On the supply side, there was a
decline in food prices and core
inflation was relatively stable during
the period. Although headline inflation
increased between July and August, it
subsequently declined from October
to December, 2014.
The exchange rate was relatively
stable between July and September
2014. However, from October 2014, it
depreciated
substantially
in
all
segments of the foreign exchange
market. In response, the Monetary
Policy Committee (MPC) in November
moved the midpoint of the official
exchange rate from ₦155/US$ to
₦168/US$ and widened the band
around the midpoint. The depreciation
was
driven
primarily
by
demand
pressures
arising
from
reversal
of
capital inflows due to normalization of
US monetary policy as well as reduced
supply
of
foreign
exchange
occasioned by lower accretion to
reserves from falling oil prices.
In the money market, the inter-bank
call and Open Buy Back (OBB) rates
remained
relatively
stable
and
oscillated largely around the standing
facilities corridor, reflecting liquidity
conditions
in
the
banking
system
during the period.
3.1 Trends in Inflation
Inflation
moderated
during
the
second half of 2014 owing largely to
the tight monetary policy stance of
the Bank. The core and food measures
of the CPI increased from 157.70 and
162.50 in July 2014 to 163.10 and 168.40
in December 2014, respectively. Food
inflation (year-on-year) declined from
9.90 per cent in July to 9.20 per cent in
December 2014. Core inflation (yearon-year) also declined from 7.10 to
6.20 per cent during the same period.
Consequently,
headline
inflation
decreased
to
8.0
per
cent
in
December 2014 from 8.30 and 8.50 per
cent
in
July
and
August
2014,
respectively. In effect, food inflation
exerted greater pressure on headline
inflation (Table 3.1 and figure 3.1).


D


CBN Monetary Policy Review

Table 3.1
Inflation Rates, January – December

Headline Inflation
Core Inflation
Food Inflation
Year/
Month
CPI
Y-on-Y
12MA
CPI
Y-on-Y
12MA
CPI
Y-on-Y
12MA
Jan-14 153.26

Feb-14 154.03

Mar-14 155.23

Apr-14 156.19

May-14 157.41

Jun-14 158.60

Jul-14 159.70

Aug-14 160.40

Sep-14 161.31

Oct-14 162.10

Nov-14 163.10

Dec-14 164.40

Figure 3.1
Headline, Core and Food Inflation
Rates (July –December 2014)

Food continued to be the major driver
of headline inflation in the second half
of
2014.
Other
factors
included
housing; water; electricity; transport;
clothing and foot wear, furnishing,
household equipment; and education.
In the
second
half
of
2014,
all
measures
of
food
price
inflation
experienced a decline unlike in the first
half of the year when there was a
general
increase.
Processed
food
component
recorded
the
largest
reduction in prices, declining by 0.22
percentage point to 4.68 per cent in
December 2014 from 4.90 per cent in
July (Table 3.4).
Figure 3.2
CPI Headline, Core and Food (JulyDecember 2014)

Prices
of
other
components
also
declined over the period, namely:
farm produce (0.50%); yam, potatoes
and
other
tubers
(0.03%);
meat
(0.04%); vegetables (0.05%); fish and
sea food (0.04%).
3.1.1 Headline Inflation
The
moderation
in
the
major
components
of
headline
inflation
explained the downward trend in
prices during the second half of 2014.
Food and non-alcoholic beverages
which continued to exert the greatest
influence
on
headline
inflation,
declined to 4.78 per cent in December
from 5.12 per cent in July 2014. This was
followed by housing, water, electricity,
gas and other fuels, whose price
declined to 1.06 from 1.08 per cent


CBN Monetary Policy Review

over the same period (Table 3.2 and
Figure 3.4).
Overall, headline inflation moderated
due to the combined effects of the
decline in the prices of food and nonalcoholic beverages; housing; water,
electricity, gas and other fuels; and
transport.
However,
the
prices
of
clothing and foot wear; furnishing,
household
equipment
and
maintenance; and education rose in
the review period.
The
moderation
in
inflation
was
attributable to the sustained tight
monetary policy stance such as the
maintenance of public sector CRR at
75.0 per cent, the additional increase
in the CRR on private sector deposits
by 500 basis points to 20.00 from 15.00
per cent as well as the increase in the
MPR by 100 basis points from 12.00 to
13.00 per cent in November 2014.
Table 3.2
Major Components of Headline
Inflation
(Y-on-Y), July-December 2014
Date
Headline
Food &
NonAlcoholic
Bev
Housing,
Water,
Elect.
Gas &
Other
Fuel
Clothing
&
footwear
Transpor
t
Furnishin
gs,
Househol
d Equip
& HH
Maint.
Educatio
n
Jul-14

Aug-14

Sep-14

Oct-14

Nov-14

Dec-14


Figure 3.4
Major Components of Headline
Inflation
(Y-on-Y), July-December 2014


On a month-on-month basis, headline
inflation trended upwards during the
review period in contrast to its year-onyear level. It rose from 0.65 per cent in
July to 0.82 per cent in December
2014.
The
major
component
responsible for the increase was the
price
of
food
and
non-alcoholic
beverages, which fluctuated between
0.26 and 0.49 per cent during the
period (Table 3.3 and Figure 3.5).

Table 3.3
Major Components of Headline
Inflation (M-on-M), July-December

Date
Headline
Food &
NonAlcoholic
Bev
Housing,
Water,
Elect.
Gas &
Other
Fuel
Clothing
&
footwear
Transpor
t
Furnishin
gs,
Househol
d Equip
& HH
Maint.
Educatio
n
Jul-14

Aug-14

Sep-14

Oct-14

Nov-14

Dec-14


CBN Monetary Policy Review

Figure 3.5
Major Components of Headline
Inflation
(M-on-M), July-December 2014

3.1.2 Food Inflation
Food inflation (year-on-year) trended
downwards from 9.90 per cent in July
to 9.20 per cent in December 2014,
due to decline in the indices of its
components; namely processed food
and farm produce. The price of
processed food declined to 4.70 from
4.90 per cent, and that of farm
produce to 4.50 from 5.00 per cent
during the review period. Of the 0.70
percentage point decline in food
inflation, farm produce contributed a
larger share of 0.50 percentage point,
while processed food contributed 0.20
percentage point. The key drivers of
the decline in the farm produce
category
were
vegetables,
which
declined by 0.05 percentage point;
and yam, potatoes and other tubers
by 0.03 percentage point. This was
due to good harvests during the
period (Table 3.4 and Figure 3.6).


Table 3.4
Major Components of Food Inflation
(Y-on-Y), July - December 2014
Item/Date
Jul.14
Aug.14 Sep.14
Oct.14 Nov.14 Dec.14
Change btw
Jul and Dec

FOOD

Processed Food

Farm Produce

Yams, Potatoes &
Other Tubers

Meat

Vegetables

Fish & Sea Food


Figure 3.6
Major Components of Food Inflation
(Y-on-Y), July - December 2014

On a month-on-month basis, food
inflation increased from 0.80 per cent
in July to 1.0 per cent in December
2014, in contrast to its year-on-year
trend. The price of processed food
increased to 0.50 from 0.30 per cent,
while farm produce stabilized at 0.50
per cent during the review period.
Accordingly,
the
0.20
percentage
point increase in food inflation was
majorly traced to processed food. The
key driver of the increase in the
processed food category was fish and
sea
food,
which
rose
by
0.01
percentage point (Table 3.5 and
Figure 3.7).


CBN Monetary Policy Review

Table 3.5
Major Components of Food Inflation
(M-on-M), July-December 2014
Item/Date
Jul.14
Aug.14
Sep.14
Oct.14
Nov.14
Dec.14
Change btw
Jul. and Dec.

FOOD

Processed Food

Farm Produce

Yams, Potatoes &
Other Tubers

Meat

Vegetables

Fish & Sea Food


Figure 3.7
Major Components of Food Inflation
(M-on-M), July-December 2014

3.1.3
Core Inflation
Core inflation (year-on-year) declined
by 0.91 percentage point from 7.11 in
July to 6.20 per cent in December
2014. Of the 0.91 percentage point
decline in core inflation, processed
food contributed the largest share of
0.50 percentage point, followed by
housing, water, electricity, gas and
other fuels (0.10 percentage point);
and
clothing
and
footwear
(0.07
percentage
point).
The
major
contributors to the decline in core
inflation were processed food (2.80 to
2.30%); housing, water, electricity, gas
and other fuel (1.47 to 1.37%); clothing
and footwear (0.77 to 0.72%); and
transport (0.59 to 0.52%) (Table 3.6 and
Figure 3.8).
In the processed food category, the
key drivers of the decline were meat
which fell from 0.62 to 0.53 per cent,
fish & sea foods (0.69 to 0.60%), milk,
cheese & egg (0.13 to 0.07%), and oil
& fats (0.40 to 0.28%). A major driver of
the
decrease
in
core
inflation
especially in the latter part of the
second half of 2014 was the decline in
energy prices.
Table 3.6
Major Components of Core Inflation
(Y-on-Y) July-December 2014
Item/Date
Jul-14 Aug-14
Sep-14
Oct-14 Nov-14
Dec-14
Change btw Jul
& Dec 2014
Core Inflation

Proc Food

Clothing &
Footwear

Housing,
Water, Elect.
Gas & Other
fuels

Health

Transport

Education

Restaurant

Miscellaneous


CBN Monetary Policy Review

Figure 3.8
Major Components of Core Inflation
(Y-on-Y) July-December 2014

On a month-on-month basis, core
inflation rose from 0.20 per cent in July
to 0.80 per cent in December, 2014.
Processed food remained the major
driver of core inflation, increasing from
0.08 to 0.30 per cent in the review
period. Other drivers were: housing,
water, electricity, gas & other fuels
which increased from 0.11 to 0.14 per
cent; education (-0.10 to 0.03 per
cent); clothing & footwear (0.03 to 0.09
per cent); and transport (0.01 to 0.07
per cent) (Table 3.7 and Figure 3.9).
Table 3.7
Major Components of Core Inflation
(M-on-M) July-December 2014
Item/Date
Jul-14
Aug-14
Sep-14
Oct-14 Nov-14
Dec-14
Change btw Jul
and Dec 2014
Core Inflation

Processed Food

Clothing &
f/wear

Housing, water..

Health

Transport

Education

Restaurant &
Hotels

Misc Goods &
Service


Figure 3.9
Major Components of Core Inflation
(M-on-M) July-December 2014

-0.2
-0.1


Jul-14
Aug-14
Sep-14
Oct-14
Nov-14
Dec-14

3.1.4
Seasonally-Adjusted Inflation
Actual
and
seasonally-adjusted
headline inflation trended downwards
during most of the second half of 2014
(Table 3.8 and Figure 3.14). Both actual
and seasonally-adjusted inflation rates
recorded
upward
movements
between July and September 2014.
While
the
actual
began
on
a
downward path in August, that of
seasonally-adjusted inflation started in
September. The higher inflation rates
during these months were largely due
to hikes in food prices as a result of the
depletion of existing stock of farm
produce from previous year’s harvests.
However,
since
September,
both
measures of inflation were largely on a
downward trend till the end of the
year.
This
trend
reflected
the
dampening effects of the harvest
season on food prices. There was,
however, an uptick in actual inflation
in December largely due to increased
consumption
spending,
associated
with festive and social celebrations
during the period.


CBN Monetary Policy Review

Table 3.8
Actual and Seasonally Adjusted
Headline Inflation July -December

Date
Inflation
S-A Inflation
Jul 14
8.30
8.10
Aug 14
8.50
8.30
Sep 14
8.30
8.40
Oct 14
8.10
8.30
Nov 14
7.90
8.10
Dec 14
8.00
8.00


Figure 3.14
Actual and Seasonally Adjusted
Headline Inflation July - December

3.2
Key
Factors
that
Influenced
Domestic Prices
The year-on-year headline and core
measures of inflation were at single
digit,
with
food
inflation
trending
downwards during the second half of
2014, reflecting the sustained tight
monetary policy. However, there were
fluctuations in all measures of inflation
during the period as a result of both
domestic
and
global
economic
conditions. These include amongst
others: excess liquidity in the banking
system, insurgency in the North Eastern
part of the country as well as decline
in crude oil prices.
3.2.1 Demand-Pull Factors
The pre-election spending, additional
expenditure on security, and the
depreciation in the exchange rate of
the naira, combined to exert pressure
on consumer prices. In addition, the
relatively high oil prices in the first half
of the year was accompanied by an
increase in public expenditure; this was
not followed by a cut in spending
during the second half of the year
when international crude oil prices fell.
This sustained the level of aggregate
demand pressure; however, the tight
monetary policy stance of the Bank
stabilized headline inflation at single
digit.
3.2.2. Cost-Push Factors
Security
challenges
particularly
insurgency in the north east affected
the production and distribution of
agricultural
products
thus
accentuating the rise in food prices. In
addition, the Ebola epidemic during
the
review
period
affected
the
production, distribution and service
channels of several activity sectors in
the economy, thereby feeding into
prices. Additionally, the wide premium
between the interbank and BDC


CBN Monetary Policy Review

exchange rates continued to pass
through to domestic prices.

3.2.3 Moderating Factors
The
main
moderating
factor
to
domestic prices in the second half of
2014 included the continued tight
monetary policy stance of the Bank.
The
ongoing
government
reforms
aimed
at
stimulating
real
sector
activities,
in
addition
to
other
incentives for micro, small and medium
scale
enterprises
(MSMEs)
helped
lower
production
costs.
The
rehabilitation
of
railways
and
improvements
in
the
nationwide
supply of fuels moderated energy
costs with salutary effects on price
developments.


CHAPTER 4
CHAPTER 4
MONETARY POLICY AND
LIQUIDITY MANAGEMENT


CBN Monetary Policy Review

CHAPTER 4
4.0
MONETARY
POLICY
AND
LIQUIDITY MANAGEMENT
onetary policy in the second
half
of

reflected
uncertainties regarding the
exit of the US from QE and the
attendant risks to monetary policy and
financial stability. Added to these were
the continued crisis and fragility in
Europe, the geo-political tensions in
the Middle East as well as the RussianUkrainian stand-off. The downside risks
to growth from softening commodity
prices and the drop in revenues of oil
exporting countries as well as capital
flow reversals exerted pressure on
emerging market exchange rates.
On the domestic front, the major
policy challenges included banking
system
liquidity
surfeit
and
the
associated
cost
of
liquidity
management; loss of fiscal buffers due
to
dwindling
external
reserves;
widening gap between the official
and BDC exchange rates; anticipated
increase in spending towards the 2015
general elections and the possible
effects of US tapering on the domestic
market. These developments and the
desire
to
consolidate
on
the
achievement of price and exchange
rate stability provided the context for
monetary
policy
decisions
in
the
second half of 2014.

4.1.0 Decisions of the Monetary Policy
Committee (MPC)
The decisions of the Monetary Policy
Committee (MPC) in the second half
of 2014 were influenced by major
developments in the domestic and
global economy. The key domestic
challenges during the period included:
liquidity surfeit in the banking system,
speculative attacks on the naira,
depletion of and slower accretion to
foreign reserves occasioned by falling
oil
prices,
lower
output
growth,
gradual uptick in inflation and high
unemployment, among others. On the
global front, the risks posed by sluggish
global recovery, the continued fragility
in Europe, geo-political tensions in the
Middle
East
and
a
number
of
emerging and developing economies,
were key concerns that influenced
MPC decisions during the period.

4.1.1
July 2014 MPC Meeting
The
July

MPC
reviewed
developments in the monetary policy
environment
and
expressed
satisfaction with the relative stability in
the macro-economy as reflected in
impressive output growth rates, stable
consumer prices and exchange rate
as well as robust external reserves. The
Committee was, however, concerned
about the weak translation of stability
to
microeconomic
gains
in
employment and access to finance
especially by small and medium scale
businesses. It, therefore, emphasized
the need for MPC decisions to take
M


CBN Monetary Policy Review

into account the long-run impact of
stable macroeconomic indicators on
employment level, wealth creation
and growth of businesses.

The Committee noted the potential of
the power sector to stimulate output
growth and investment with spill-over
effects on employment generation if
the challenges confronting the sector
were properly addressed. Specifically,
it
observed
that
gas-to-power
remained a binding constraint to
realizing the benefits of the recentlyconcluded power sector reforms, while
urging
the
government,
private
investors and the banks to collectively
resolve the problem. The Committee
further expressed concern about the
liquidity
level
and
the
uptick
in
inflation,
which
may
not
be
unconnected with the poor harvest in
some agricultural producing areas,
particularly the north eastern and
central states of the country. Others
included the underlying pressure from
food inflation and the likely risks from
increase in aggregate spending in the
run-up to the 2015 general elections.

The Committee was also
worried
about the effects of the on-going US
QE3 tapering on inflows and external
reserves. It noted the volatile and nonemployment generating nature of
portfolio flows which were, however,
essential in the absence of adequate
external reserves and fiscal buffers. It,
however, welcomed the moderation
in the rate of depletion in external
reserve in recent months, noting that
reserves accretion needed to improve
much faster to provide a strong and
more
resilient
buffer
to
fiscal
operations. The MPC urged a gradual
reduction in the country’s import bills
through domestic production of some
of the major food imports as a key
element in the overall strategy to stem
reserve depletion.

The
Committee
recognized
the
necessity of balancing the objective
of sustaining a stable naira exchange
rate with the need for a low interest
rate regime. Overall, the Committee
indicated that the policy direction on
inflation, exchange rate and interest
rate must be seen not only in the
context of price and financial stability
but also in promoting employment
and enhancing the quality of life of
Nigerians.

In view of these developments, the
Committee decided to retain the MPR
at 12.0 per cent, with the symmetric
corridor of +/- 200 basis points around
the midpoint. The MPC also retained
the Liquidity Ratio at 30.0 per cent,
public sector Cash Reserve Ratio at
75.0 per cent and private sector Cash
Reserve Ratio at 15.0 per cent.

4.1.2
September 2014 MPC Meeting
At the September 2014 meeting, the
MPC expressed satisfaction with the
relative stability in the economy while
noting
the
risks
ahead.
The
risks
included: the possibility of capital


CBN Monetary Policy Review

reversals as the US Fed’s QE was to be
concluded in October, 2014; dwindling
oil
output
and
prices,
domestic
security
challenges
and
upward
trending
headline
inflation.
The
Committee also expressed concern
about banking system liquidity surfeit
and its potential effects on inflation
and
the
exchange
rate.
Consequently, the policy challenge
was sustaining the stability of the naira
exchange rate against the backdrop
of
managing
the
vulnerability
to
capital flow reversals, building fiscal
buffers,
managing
inflation
and
exchange rate expectations, and the
buildup of election-related spending
for the 2015 general elections.

The Committee welcomed the efforts
by government to address some of the
constraints and risks to economic
activity like the insurgency in the NorthEast and the Ebola Virus epidemic. It
noted that progress in these areas as
well as in improving power supply and
SME financing, would brighten growth
prospects
and
moderate
upward
pressure on prices. The Committee
further noted that the restrictive stance
of monetary policy provided important
defenses against structural liquidity in
the banking system and reaffirmed
willingness to manage expectations
around
the
exchange
rate
and
inflation.

The
Committee
was,
however,
concerned that banks were holding
large excess reserves averaging over
N300 billion even when there were
ample opportunities for productive
and profitable lending to the real
sector of the economy. The concern
was further aggravated by the reality
of
the
impending
injection
of
additional N866 billion into the system
through the redemption of maturing
AMCON bonds in October, 2014.
Given the apathy to lending, the
Committee reasoned that banks may
be inclined more to place these new
funds at the Standing Deposit Facility
(SDF)
window,
acquire
treasury
instruments or use it to increase
pressure on the exchange rate. The
MPC, therefore, advised the Bank to
explore
ways
of
encouraging
commercial banks to lend such excess
reserves to the real sector.

In the light of the foregoing, the
Committee weighed the merits of
retaining
the
current
stance
of
monetary
policy
against
the
consequence of further tightening. The
MPC, however, decided to maintain
the current tight monetary stance and
voted to retain: the MPR at 12.0 per
cent with a corridor of +/- 200 basis
points around the midpoint; the public
sector Cash Reserve Requirement at
75.0 per cent; and the private sector
Cash Reserve Requirement at 15.0 per
cent, and liquidity ratio at 30.0 per
cent.


CBN Monetary Policy Review

4.1.3
November 2014 MPC Meeting
The November 2014 MPC expressed
satisfaction with the deceleration in all
the three measures of inflation since
September
2014,
a
development
which provided headroom for policy
flexibility. The Committee felt that the
robust output expansion amidst strong
headwinds
from
weakening
international
oil
market
provided
credence
to
the
efficacy
of
macroeconomic
policy.
It
also
observed
that
unlike
in
previous
episodes, the current downturn in oil
prices appears to be permanent,
being a product of advancement in
oil exploration technology. As at the
fourth quarter of 2014, the US which
used to be Nigeria’s major oil export
destination now obtains about 80 per
cent of its domestic oil demand from
local shale oil production and exports
over 8 million barrels of crude oil daily.
The Committee was of the view that
the softening crude oil prices could
provide
leverage
for
the
fiscal
authority to reduce budgetary outlay
on fuel subsidy and channel the
savings to growth-enhancing sectors
of the economy. In this regard, the
MPC
noted
the
supportive
fiscal
stance and public sector commitment
to take advantage of the low oil price,
to reduce fuel subsidy spending and
liberalize prices as done in many
emerging economies. Given the not
too impressive fiscal revenue outlook,
the Committee urged sub-national
governments to seize the opportunity
to reduce reliance on allocations from
the Federation Account. To this end,
the MPC commended the efforts of
state
governments
that
recorded
significant growth in their internally
generated revenues (IGRs) in 2013.
The Committee, being fully aware of
the short run implications of a tight
monetary policy stance on lending
and growth, reiterated its commitment
to the goal of promoting inclusive
growth through lower interest rates in
the
medium-
to
long-term.
The
Committee also noted the gradual
improvement
in
labor
market
conditions
which
resulted
in
the
creation of additional 349,343 jobs in
the third quarter of 2014.
A major issue considered by the
Committee was the declining level of
external reserves, which arose from
adverse demand and supply forces.
On the supply side, falling oil prices led
to a considerable lowering of foreign
exchange earnings, resulting in low
accretion to external reserves. The
demand side reflected the funding to
stem demand pressure in the foreign
exchange market. The pressure was
exacerbated by capital reversals and
drop in the flow of easy money to
emerging
markets,
following
the
gradual normalization of US monetary
policy and tepid recovery in some
advanced economies. The current
situation
demands
that
the
Bank
confronts
the
issue
of
declining
external reserves head-on in order to
strengthen the value of the domestic


CBN Monetary Policy Review

currency.
Consequently,
stabilizing
prices and maintaining exchange rate
stability and charting a sustainable
path for medium to long-term growth
remained the top priorities.
The Committee was worried that
pressures in the foreign exchange
market were aided by excess liquidity
in the banking system and speculative
activities.
The
MPC
expressed
dissatisfaction that improvement in
liquidity conditions in the banking
system,
designed
to
enhance
its
resilience
and
stability,
has
not
translated to increased credit to the
real sector for inclusive growth and
employment. This development rather
led to an upward pressure in the
foreign
exchange
market
and
increased patronage of the SDF, with
banks continually exhibiting a cautious
approach to lending. The MPC viewed
the challenge as requiring bold policy
moves in both monetary policy and
foreign exchange management.
In the Committee’s opinion, a more
flexible naira in the face of almost
nonexistent fiscal buffers was the most
viable policy option at a time of
heightened
demand
for
foreign
exchange and falling oil prices. The
Committee reasoned that failure to
proactively take appropriate policy
actions, could lead to the market
dictating the path of policy in the area
of exchange rate management.
In
the
light
of
the
above
considerations, the MPC decided to:
increase the MPR by 100 basis points
from 12.00 to 13.00 per cent; increase
the CRR on private sector deposits by
500 basis points from 15.00 to 20.00 per
cent;
move
the
exchange
rate
midpoint from N155/US$ to N168/US$;
widen the band around the official
foreign exchange midpoint by 200
basis points from +/-3.00 to +/-5.00 per
cent; retain public sector CRR at 75.00
per
cent;
maintain
a
symmetric
corridor of +/- 200 basis points around
the MPR; and retain the net open
foreign exchange trading position limit
at 1.00 per cent.

4.2.0
Instruments
of
Liquidity
Management
The
choice
of
monetary
policy
instruments
was
guided
by
the
objectives of price stability and overall
macroeconomic management. The
MPC, therefore, deployed a range of
monetary policy instruments including:
the
MPR,
CRR,
Open
Market
Operations
(OMO)
and
Discount
window
operations
in
the
review
period.

4.2.1 Monetary Policy Rate (MPR)
The Bank’s benchmark policy rate,
the MPR, continued to be the prime
instrument for monetary policy, with a
symmetric
corridor
(standing
lending/deposit
facility
rates).
The
sustained decline in oil prices and its
impact
on
accretion
to
foreign
reserves, coupled with the liquidity
surfeit in the banking system, led the


CBN Monetary Policy Review

MPC to embark on further tightening
of monetary policy in November, 2014
by raising the MPR to 13.0 from 12.0 per
cent.

4.2.2 Open Market Operations (OMO)
Open
Market
Operations
(OMO)
remained the key tool of liquidity
management in the review period.
During the second half of 2014, actual
OMO sales amounted to N3,937.76
billion, compared with N4,485.17 billion
in the first half of 2014 and N3,348.39
billion in the corresponding period of
2013. This represented a decrease of
12.20 per cent below the level in the
first half of 2014 but an increase of
17.60 per cent over the corresponding
period of 2013. Cumulatively, total
sales declined by 19.38 per cent from
N10,447.93 in 2013 to N8,422.93 in 2014
(Table 4.1).

Table 4.1
OMO Bills Auction
(January 2013 – December 2014)
(N’million)
Date

%
Change
Jan
1,756.66
1,091.49

Feb
1,351.59
307.40

Mar
1,265.25
714.80

Apr
1,516.69
285.94

May
127.40
905.99

Jun
81.95
1,179.54

1st Half
7,099.54
4,485.17
-36.82
Jul
508.14
810.92

Aug
91.72
654.53

Sep
150.51
989.58

Oct
1,206.86
652.50

Nov
791.09
830.23

Dec
599.47
0.00

2nd Half
3,348.39
3,937.76
17.60
Cumulative
Figure
10,447.93
8,422.93
-19.38


4.2.3
Reserve Requirements
The MPR is often complemented by
OMO
and
other
macroprudential
instruments of liquidity management
such as the cash reserve ratio (CRR)
and liquidity ratio (LR). During the
period
under
review,
the
MPC
increased
CRR
on
private
sector
deposits by 500 basis points from 15.0
to 20.0 per cent and retained the CRR
on public sector deposits at 75.0 per
cent. It also retained the liquidity ratio
at 30.0 per cent. These measures were
taken to curb continued liquidity surfeit
in the banking system.

4.2.4
Standing Facilities
Deposit money banks (DMBs) and
discount houses (DH) continued to
access the standing facilities window
(lending/deposit) to meet their daily
liquidity requirements in the second
half of 2014. The request for Standing
Lending
Facility
(SLF),
however,
declined by 17.67 per cent from
N2,021.19 billion in the first half of 2014
to N1,664.00 billion in the second half
of 2014. The volume of SLF at endDecember

represented
a
decrease of 75.97 per cent compared
with the corresponding period of 2013
(Table 4.2). The significant decrease in
the
volume
of
SLF
transactions
reflected
the
liquidity
surfeit
that
persisted in the banking system arising
from FGN Bonds, NTBs and AMCON
bond maturities in the review period.


CBN Monetary Policy Review

The Standing Deposit Facility (SDF)
window witnessed substantial increase
in the volume of deposits during the
period. The cumulative volume of
deposits stood at N29,410.96 billion in
the second half of 2014, representing
9.49 per cent increase over N26,862.21
billion recorded in the corresponding
period of 2013 (see Table 3). The level
of deposit in the SDF as at endDecember 2014, represented a 36.75
per cent decrease from the level at
the end of the first half of 2014. The
increase in the overall volume of SDF
deposits reflected increased systemwide liquidity in the review period.


Table 4.2
CBN Standing Lending Facility
(January 2013 – December 2014)
(N’billion)

Date

% Change
Jan
669.75
615.59

Feb
1,115.64
653.74

Mar
993.47
560.27

Apr
778.7
50.29

May
796.89
44.88

Jun
894.25
96.42

1st Half
5,248.70
2,021.19
-61.49
Jul
793.07
96.42

Aug
2,465.79
55.46

Sep
2,407.54
133.80

Oct
263.36
23.84

Nov
314.22
224.59

Dec
679.88
1,129.89

2nd Half
6,923.86
1,664.00
-75.97
Total
12,172.56
3,685.19
-69.73


Table 4.3
CBN Standing Deposit Facility
(January 2013 – December 2014)
(N’billion)
Date

% Change
Jan
2,132.70
13543.87

Feb
3,047.91
4953.72

Mar
6,101.42
5844.76

Apr

8190.69

May
1718.53
8061.09

Jun
1667.22
5902.5

1st Half
17,484.78
46,496.63
165.93
Jul
6,341.59
7,049.30

Aug
5,282.96
4,309.30

Sep
2,905.72
6,734.45

Oct
8,328.91
7,436.35

Nov
5,321.54
2,804.84

Dec
4,003.03
1,076.73

2nd Half
26,862.21
29,410.96
9.49
Total
44,346.99
75,907.59
71.17

4.2.5
Foreign Exchange Intervention
The Bank continued its interventions in
the
foreign
exchange
market
to
sustain the stability of the naira in the
review period. Total supply of foreign
exchange declined by 8.95 per cent
to US$16,263.03 million in the second
half of 2014, from US$17,861.69 million
in the corresponding period of 2013.
This also represented a decline of
US$4,488.98 million (21.63%) compared
with US$20,752.01 million supplied in
the preceding half year (Table 4.4).

The decrease in the supply of foreign
exchange reflected the Bank’s desire
to stem the depletion of foreign
reserves and encourage BDCs and


CBN Monetary Policy Review

other
participants
in
the
foreign
exchange market to seek alternative
sources.

Table 4.4
Foreign Exchange Supply by the CBN
(US$ Million)
Date
Sales to
rDAS
Sales to
BDC
Total
Supply
(RDAS +
BDC)
Sales to
rDAS
Sales to BDC
Total
Supply
(RDAS +
BDC)
Jan

Feb

Mar
1801.54


Apr

May

Jun


1st Half
10,711.03

2,263.62

12,974.65

17,233.85

3,518.16

20,752.01

Jul


Aug

Sep

Oct

Nov

Dec

2nd Half
14,813.51

3,048.18

17,861.69

15,330.85

932.18

16,263.03

Total
25,524.54

5,311.80

30,836.34

32,564.70

4,450.34

37,015.04

4.3.0
Developments in the Monetary
Aggregates
The
weak
performance
of
the
monetary aggregates continued in
the second half of 2014, indicating the
tight monetary policy stance of the
Bank
and
reluctance
of
deposit
money banks to extend credit to the
real sector. Accordingly, the decline
in most monetary aggregates was
moderated leading to an overall slight
increase in the money stock.

4.3.1
Broad Money (M2)
Broad Money (M2) grew by 4.1 per
cent to N16,833.24 billion at endDecember 2014 from N16,171.62 billion
at end-June 2014. Compared with the
end-December

figure
of
N15,688.96 billion, M2 increase by 3.07
per cent, which was below the growth
benchmark of 15.02 per cent for 2014.

Figure 4.4
Money Supply (M1) and (M2)
(December 2013 – December 2014)


N'Billion
MONEY SUPPLY (M1)
MONEY SUPPLY (M2)


Figure 4.5
Growth in Money Supply
(M1) and (M2) (December 2013 – June

Dec-13
Jan-14
Feb-14
Mar-14
Apr-14
May-14
Jun-14
Jul-14
Aug-14
Sep-14
Oct-14
Nov-14
Dec-14
Per cent
M1 Growth (%)
M2 Growth (%)


4.3.2
Narrow Money (M1)
Narrow Money (M1) decreased by
8.25 per cent to N6,266.69 billion at
end-December 2014 from N6,830.53
billion at end-June 2014. Compared
with the end-December 2013 figure of
N7,032.84 billion, M1 declined by 10.89
per cent, which was below the growth
benchmark of 16.23 per cent for 2014
(Figures 4.4 and 4.5).


CBN Monetary Policy Review

4.4.0
Developments in the Major
Monetary Aggregates

4.4.1
Net Foreign Assets (NFA)
The
Net
Foreign
Assets
(NFA)
decreased
by
6.1
per
cent
to
N7,358.15 billion at end-December
2014 from N7,837.25 billion at end-June
2014.
Compared
with
the
endDecember 2013 figure of N8,658.65
billion, NFA declined by 15.01 per cent,
in contrast to the growth benchmark
of
5.58
per
cent
for
2014.
This
development was due to increased
capital outflows precipitated by the
flight to quality owing to US monetary
policy normalization, improvement in
the
US
and
UK
economies.
Consequently, the domestic economy
was perceived as having a relatively
high sovereign risk during the period. In
addition
the
period
witnessed
a
precipitous fall in crude oil prices
which resulted in a decrease in foreign
exchange
earnings
and
deaccumulation of external reserves.

4.4.2
Net Domestic Assets (NDA)
The Net Domestic Assets (NDA) rose
by 7.47 per cent to N16,129.49 billion at
end-December 2014 from N15,008.41
billion at end-June 2014. Compared
with the end-December 2013 figure of
N14,535.20 billion, NDA increased by
10.97 per cent, which was below the
growth benchmark of 23.60 per cent
for 2014.

Figure 4.6
Net Domestic Asset (NDA)
(December 2013 – December 2014)


Figure 4.7
NDA, NDC and Other Assets (net)
(December 2013 – December 2014)


4.4.3
Credit to the Government (Cg)
Credit to government (Cg) contracted
by 2.22 per cent to N2,017.54 billion at
end-December 2014 from N1,973.60
billion
at
end-June
2014.
When
compared with the end-December
2013 figure of N1,656.27 billion, Cg
contracted by 21.81 per cent, which
was still below the growth benchmark
of 31.55 per cent for 2014. In effect,
the government sector was a net
creditor to the banking system in 2014.


CBN Monetary Policy Review

4.4.4
Credit
to
the
Private
Sector(Cp)
Credit to the private sector (Cp)
increased by 6.8 per cent to N18,147.0
billion at end-December 2014 from
N16,982.02 billion at end-June 2014.
Compared with the end-December
2013 figure of N16,191.36 billion, Cp
rose by 12.08 per cent, which was,
however,
below
the
growth
benchmark of 23.07 per cent for 2014.

Figure 4.8
Domestic Credit to Private Sector
(December 2013 – December 2014)


4.4.5
Reserve Money (RM)
Reserve Money (RM) grew by 24.61
per cent to N5,964.75 billion at endDecember 2014 up from N4,786.36
billion at end-June 2014. The endDecember figure was 17.18 per cent
above the level in the corresponding
period of 2013 and 1.8 per cent above
the benchmark of N6,076.01 billion in
2014. This development was largely
due to the increase in the CRR on
private sector deposit by 500 basis
points as well as increased spending
on end-of-year festivities in the review
period.

A summary of the major monetary
aggregates
and
the
provisional
outcome as at end-December 2014
are
shown
in
Table
4.5
below.


CBN Monetary Policy Review

Table 4.5
Monetary Aggregates Outcomes
(Growth in % except otherwise stated)

Change in
H1 2014
Change in
H2 2014

Actual Dec

Actual
June

Actual
Dec

Benchmark

Deviation
(N'b)
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

CHAPTER 5
CHAPTER 5
DEVELOPMENTS IN THE
FINANCIAL MARKETS


CBN Monetary Policy Review

CHAPTER 5
5.0
DEVELOPMENTS
IN
THE
FINANCIAL MARKETS
he
Nigerian
financial
landscape
was
significantly
influenced by global economic
developments,
such
as
the
gradual normalization of the US
monetary policy and the declining oil
prices which began since the end of
the first half of 2014. The tapering of
QE3 and its conclusion in October 2014
led to a redirection of global capital
flows out of emerging and developing
markets
owing
largely
to
rising
sovereign risk in these countries and
the prospect of improved interest rate
regime in the U.S.
The money market was active with
improvements
in
banking
system
liquidity conditions. In the foreign
exchange market, sustained pressure
on the naira stemming from the
reversals of capital flows resulted in
substantial
depreciation
of
the
exchange rate in the face of declining
external reserves. As a result, the
capital market declined.
5.1
Money Market
The money market remained active
with transactions in CBN bills and
government securities in the second
half of 2014. The improvement in
liquidity conditions in the banking
system continued to influence market
activities along with demand pressure
in the foreign exchange market and
increase in private sector CRR. The
interbank and OBB rates remained
within the retained policy rate corridor
of MPR +/-200 basis points in the review
period. The continuing rebound of
activities
in
the
uncollateralized
segment of the market, OMO and
standing facilities dominated activities
in the market. There were increased
transactions in the interbank segment
of
the
market.
Previously,
uncollateralized interbank transactions
were moribund due to low patronage.
Transactions in the repo segment of
the market also remained low during
the period.

5.1.1

Short-term
Interest
Rate
Developments
During the review period, money
market interest rates remained largely
stable but rose sharply following the
November 2014 increase in the MPR by
100 basis points from 12.00 to 13.00 per
cent. The Bank conducted a number
of OMO auctions to contain the
effects of liquidity surge associated
with Federation Accounts Allocation
Committee
(FAAC)
disbursements,
and maturity of treasury securities. The
average interbank call rate ranged
between 10.50 and 26.15 per cent,
while the OBB rate and 30-day NIBOR
were between 10.52 and 23.46 per
cent; and 12.15 and 15.79 per cent,
respectively.

T


CBN Monetary Policy Review

Table 5.1
Weighted Average Money Market
Interest Rates
(June – December 2014)
Months
Interbank
rate
Open
Buy
Back
rate
NIBOR
30-Day
MPR
Jun. 14

Jul. 14

Aug. 14

Sept. 14

Oct. 14

Nov.14

Dec. 14


Figure 5.1
Weighted Average Money Market
Interest Rates
(June – December 2014)


(i)
Interbank Call Rate
In the second half of 2014, the
interbank call market witnessed a
rebound in activity evidenced by
more
days
of
transactions
which
resulted in the call rate rising from
10.50 per cent in July to 11.91 per cent
in August, 2014 before declining to
8.98 per cent in November. However,
the rate rose significantly by 1565 basis
points to 26.15 per cent in December
2014. This development was due to
liquidity shortage in the interbank
market following the implementation
of the decisions of the MPC meeting of
24 – 25 November, 2014, which raised
the MPR by 100 basis points and the
CRR on private sector deposits by 500
basis points as well as the withdrawal
of NNPC funds in preparation for FAAC
meetings. The increase in activities at
the interbank segment was attributed
to: (i) availability of funds within the
system through consistent maturities of
OMO and NTBs; (ii) more confidence
by
DMBs
in
the
uncollateralized
segment of the market; (iii) better
appreciation of the earlier introduced
Real Time Gross Settlement System
(RTGS) and the Scriptless Security
Settlement
System
(S4)
that
transparently simplifies settlement of
secured transactions; and (iv) liquidity
from AMCON bond redemptions in
November 2014 (Figure 5.2).
Figure 5.2
Daily Interbank Call Rate
(July - December 2014)


CBN Monetary Policy Review

(ii)
Open Buy Back Rate
The weighted average OBB rate fell
by 32 basis points to 10.20 per cent in
November, 2014 from 10.52 per cent in
June, 2014. The rate, however, rose
significantly to 23.46 per cent in
December, 2014, following a 500 basis
points increase in the private sector
CRR in November 2014 (Figure 5.3).
Transactions
in
the OBB
segment
remained active and relatively stable
in the review period. The relative
stability was attributed to liquidity
surfeit
in
the
banking
system,
occasioned by the release of statutory
revenue
to
the
state
and
local
governments as well as matured FGN
bonds and CBN bills. Thus, between
end-June and end-December 2014,
OBB rose by 1294 basis points to 23.46
from 10.52 per cent.
Figure 5.3
Open Buy Back Rate
(July - December 2014)

(iii)
Nigeria Interbank Offered Rate
(NIBOR)
Nigeria’s reference rate, the NIBOR,
was relatively stable across tenors in
the review period with occasional
spikes. The weighted average 30-day
NIBOR, which was 12.42 per cent in
July, fell to 12.37 in September, rising to
15.79 per cent in December 2014,
owing primarily to the upward review
of private sector CRR in the fourth
quarter of the year (Table 5.1).
5.2
Foreign Exchange Market
The Bank’s policy of maintaining an
official exchange rate corridor of +/-
3.0 per cent around a mid-point of
N155/US$ was difficult to sustain in the
face of increasing pressure on the
naira. The pressure was due to the
effects of capital reversals induced by
the
Fed’s
QE3
tapering
and
speculative activities in the foreign
exchange market. The Committee
thus voted to move the mid-point to
N168/US$, and widened the band to
+/-5.0 per cent. The depreciation was
targeted at stemming the dwindling
reserves occasioned by falling oil
prices and capital reversals as well as
curbing the heightened demand for
foreign exchange in the market.
Figure 5.4
Daily Naira-US Dollar Exchange Rate
(July - December 2014)


CBN Monetary Policy Review

5.2.1
Average Exchange Rate
The rDAS spot rate depreciated by
1.62 per cent to an average of
N159.86/US$ in the second half of 2014
from N157.30/US$ in the first half. Also,
at the interbank foreign exchange
market (IFEM), the exchange rate
depreciated by 2.86 per cent to
N167.21/US$ from N162.56/US$ during
the same period. Similarly, the BDC
rate depreciated by 2.3 per cent to
N173.41/US$
from
an
average
of
N169.49/US$ in the first half of 2014.
Compared
with
the
average
of
N165.23/US$ recorded in the second
half of 2013, the rate depreciated by
4.95 per cent in the review period
(Table5.2).
Table 5.2
Average Monthly Spot Exchange Rates (July
2013 – December 2014) (N/ US$)
Date
CBN
IFEM
BDC
Jul. - 13
157.32
161.12
162.43
Aug. - 13
157.31
161.15
162.28
Sept. - 13
157.32
161.96
163.14
Oct. - 13
157.42
159.83

Nov. - 13
157.27
158.79
167.14
Dec. - 13
157.27
159.05
171.4
Average
157.32
160.32
165.23
Jan. - 14
157.29
160.23
171.71
Feb. - 14
157.31
163.62
169.45
Mar. - 14
157.3
164.61
171.5
Apr. - 14
157.29
162.19
170.25
May. - 14
157.29
161.86
166.85
Jun. - 14
157.29
162.82
167.17
Average
157.3
162.56
169.49
Jul. - 14
157.29
162.25
167.71
Aug. - 14
157.29
161.99
170.36
Sept. - 14
157.3
162.93
168.64
Oct. - 14
157.31
164.64
169.43
Nov. - 14

171.1
175.85
Dec. - 14
169.68
180.33
188.45
Average
159.86
167.21
173.41

5.2.2
End-Period (Month) Exchange
Rate
The naira depreciated in all the three
segments of the foreign exchange
market
at
end-December
2014,
compared with end-December 2013.
At the rDAS, the naira depreciated by
7.90 per cent to N169.68/US$ at endDecember 2014 from N157.26/US$ at
end-December
2013.
When
compared with the end-June 2014
figure
of
N157.29/US$,
the
naira
depreciated by 7.88 per cent.
At the interbank market, the naira
depreciated by 10.66 per cent from
N162.95/US$ at end-June 2014 to
N180.32/US$ at end-December 2014.
At
the
BDC
segment,
the
naira
depreciated by 13.99 per cent from
N168.00/US$ at end-June 2014 to
N191.50/US$ at end-December 2014
(Figure 5.5 and Table 5.3).


CBN Monetary Policy Review

Table 5.3
End-Month Exchange Rates
(January 2013 – December 2014)
(N/US$)
Date
CBN
IFEM
BDC
13-Jul
157.32
160.55

13-Aug
157.32
161.9

13-Sep
157.31
160.65

13-Oct
157.36
158.85

13-Nov
157.28
158.52

13-Dec
157.26
159.9

14-Jan
157.31
162.5

14-Feb
157.31
164.7

14-Mar
157.3
164.9

14-Apr
157.29
160.63

14-May
157.29
162.73

14-Jun
157.29
162.95

14-Jul
157.29
161.9

14-Aug
157.29
162.4

14-Sep
157.31
163.7

14-Oct
157.32
165.55

14-Nov
166.65
176.8
182.5
Dec-14*
169.68
180.32
191.5


Figure 5.5
End-Month Exchange Rates
(July 2013-December 2014) (N/U$$)


The CBN interventions through spot
and
forward
foreign
exchange
transactions
at
both
rDAS
and
interbank
segments
continued
to
douse pressures on the exchange rate
experienced in the second half of
2014.
5.2.3
Nominal and Real Effective
Exchange Rates
The Nominal Effective Exchange Rate
(NEER) appreciated by 0.73 per cent
to 95.22 in the second half of 2014
from 95.92 in the first half. There was
relative stability in the NEER as it also
appreciated by 0.77 per cent when
compared with the corresponding
period of 2013. The Real Effective
Exchange Rate (REER) appreciated by
3.43 per cent from 60.70 in the first half
2014 to 58.62 in the second half of
2014. When compared with the
corresponding period of 2013, the
average
REER
appreciated
significantly by 19.20 per cent (Table
5.4). In general, the trend indicated
that the naira appreciated minimally
in nominal terms, but significantly in
real terms relative to the currencies of
Nigeria’s major trading partners. This
trend contrast with the depreciation of
the naira against the US dollar, due to
the effects of the bilateral exchange
rate of the naira with currencies of
other trading partners.


CBN Monetary Policy Review

Table 5.4
Nominal and Real Effective Exchange Rates
Indices (January 2013 – December 2014)
NEER
REER
January '13
99.05
77.84
February '13
98.12
77.08
March '13
97.16
76.1
April '13
97.88
76.34
May '13
96.56
75.02
June '13
95.78
74.15
Average H1 2013
97.43
76.09
July '13
95.83

August '13
94.5
72.96
September '13
96.08
73.71
October '13
96.85
73.79
November '13
96.14
72.74
December '13
96.34
72.34
Average H2 2013
95.96
73.26
January '14
94.96
60.43
February '14
95.84
60.93
March '14
96.26
61.06
April '14
96.37
61.02
May '14
96.08
60.53
June '14
96.01
60.2
Average H1 2014
95.92
60.7
July '14
95.23
59.47
August '14
94.84
58.96
September '14
92.67
57.32
October '14
92.75
57.07
November '14
97.7
59.62
December '14
98.1
59.27
Average H2 2014
95.22
58.62


5.2.4
Demand and Supply of Foreign
Exchange
Total demand for foreign exchange
at the rDAS in the second half of 2014
rose marginally by 2.95 per cent to
US$24,611.87 million at end-December
2014 from US$23,905.82 million at endJune. Compared with US$18,727.85
million in the corresponding period of
2013, it rose significantly by 31.42 per
cent.
This
development
was
attributable to the effect of the
tapering
of
QE3
and
improving
economic
conditions
in
some
advanced
economies
which
encouraged
net
capital
outflow
during the period. The total supply of
foreign
exchange
at
the
rDAS
decreased significantly by 11.04 per
cent from US$17,233.85 million in the
first half of 2014 to US$15,330.85 million
in the second half of the year. When
compared with US$14,813.51million in
the corresponding half of 2013, it
decreased slightly by 3.49 per cent
(Figure 5.6 and Table 5.5). Thus, during
the review period, the demand-supply
gap was US$9,281.02, which reflected
the intensity of demand pressure in the
market
and
the
consequent
depreciation of the naira exchange
rate.

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


CBN Monetary Policy Review

Figure 5.6
Demand and Supply of Foreign
Exchange at rDAS

Table 5.5
Foreign Exchange Demand and Supply
(January 2013 – December 2014)
(US$’Million)
Date
rDAS Demand
rDAS Supply
Jul-13
3,325.56
3,000.00
Aug-13
2,179.38
2,437.08
Sep-13
2,660.13
2,297.82
Oct-13
3,541.93
2,274.38
Nov-13
3,095.32
2,796.47
Dec-13
3,925.53
2,007.76
2013: H2 Total
18,727.85
14,813.51
Jan-14
6,236.67
2,989.43
Feb-14
4,096.46
3,101.87
Mar-14
4,320.04
3,151.59
Apr-14
3,045.49
2,663.92
May-14
2,805.74
2,928.49
Jun-14
3,401.41
2,398.55
2014: H1 Total
23,905.82
17,233.85
Jul-14
2784.93
2494.76
Aug-14
3,661.36
3,201.10
Sep-14
4,132.26
2,598.45
Oct-14
4,570.64
3,498.48
Nov-14
6,148.84
2,296.93
Dec-14
3,313.84
1,241.13
2014: H2 Total
24,611.87
15,330.85


5.2.5 Foreign Exchange Flows through
the CBN
Gross
foreign
exchange
inflows
through the CBN rose by 3.67 per cent
to US$23,728.32 million in the second
half of 2014 from US$22,888.75 million in
the first half. It rose by 11.28 per cent
when compared with US$21,322.85
million in the corresponding period of
2013. On the other hand, gross foreign
exchange outflows declined by 7.62
per cent to US$26,327.84 million in the
second half of 2014, from US$28,501.98
million in the first half. When compared
with
US$
23,456.99
in
the
corresponding
half
of
2013,
it
increased by 12.24 per cent.
Thus, in the review period, there was a
net outflow of US$2,599.51 million,
compared
with
the
outflow
of
US$5,613.24 million in the first half of
2014. This development compares with
the net outflow of US$2,134.04 million in
the second half of 2013 (see Table 5.6
and Figure 5.7).
Table 5.6
Monthly Foreign Exchange Flows
through the CBN (July 2013 – December
2014)
Date
Inflow
Outflow
Net Flow
Jul-13
5,778.32
4,891.29
887.02
Aug-13
3,132.99
3,467.97
-334.97
Sep-13
2,946.00
4,308.10
-1,362.00
Oct-13
3,175.31
3,177.75
-2.44
Nov-13
3,125.46
3,837.85
-712.39
Dec-13
3,164.77
3,774.03
-609.26
2013: H2 Total
21,322.85
23,456.99
-2,134.04
Jan-14
2,543.55
4,652.19
-2,108.65
Feb-14
2,797.57
6,612.99
-3,815.41
Mar-14
4,880.32
4,430.48
449.83
Apr-14
3,779.45
4,155.76
-376.31
May-14
3,171.28
4,819.22
-1,647.94
Jun-14
5,716.58
3,831.34
1,885.24
2014: H1 Total
22,888.75
28,501.98
-5,613.24
Jul-14
5,103.82
3,299.90
1,803.92
Aug-14
3,760.04
4,254.45
-494.41
Sep-14
4,230.38
4,250.56
-20.17
Oct-14
3,228.46
5,298.36
-2,069.90
Nov-14
4,120.82
5060.15
-939.33
Dec-14
3,284.80
4164.42
-879.62
2014: H2 Total
23,728.32
26,327.84
-2,599.51
2014: Total
46617.07
54829.82
-8212.75


CBN Monetary Policy Review

Figure 5.7
Monthly Foreign Exchange Flows through the
CBN (July 2013 – December 2014)

5.2.6 Foreign Exchange Flow through
the Economy
Gross foreign exchange inflow to the
economy increased by 3.17 per cent
to US$78,372.90 million in the second
half of 2014 from US$75,966.99 million in
the first half. When compared with
US$74,234.57
million
in
the
corresponding period of 2013, it rose
by 5.57 per cent. Conversely, gross
foreign exchange outflow declined by
6.64 per cent to US$27,161.04 million in
the
second
half
of

from
US$29,092.92 million in the first half.
When compared with US$24,579.59
million in the second half of 2013, it
rose by 10.50 per cent.
Thus, during the review period, total
foreign exchange flows through the
economy resulted in a net inflow of
US$51,211.88 million compared with
the net inflow of US$46,874.06 million in
the first half of 2014 and US$49,654.99
million in the second half of 2013,
representing increases of 9.25 and 3.14
per cent, respectively. The significant
increase in the net inflow for the period
reflected the positive impact of the
new measures introduced by the Bank
to mitigate the impact of capital flow
reversal from the normalization of US
monetary policy (Table 5.7 and Figure
5.8). Some of these measures included
the decision by the MPC to move the
midpoint of official exchange rate
band from N155/US$ to N168/US$ and
widening of the band from +/- 3.0 to
+/- 5.0 per cent in the review period.


CBN Monetary Policy Review

Table 5.7
Monthly Foreign Exchange Flows through the Economy
(January 2013 – December 2014) (US$ Million)
Date
Total Inflow
Inflow
(CBN)
Inflow
(Autonomo
us)
Total
Outflow
Outflow
(CBN)
Outflow
(Autonom
ous)
Net Flow
Net Flow
(CBN)
Net Flow
(Autonomo
us)
Jul-13

Aug-13

Sep-13

Oct-13

Nov-13

Dec-13

2013: H2
Total

Jan-14

Feb-14

Mar-14

Apr-14

May-14

Jun-14

2014: H1
Total

Jul-14

Aug-14

Sep-14

Oct-14

Nov-14

Dec-14

2014: H2
Total

Total


CBN Monetary Policy Review

Figure 5.8
Monthly Foreign Exchange Flows
through the Economy (July 2013 –
December 2014) (US$ Million)

5.3
Capital Market
The
performance
of
the
capital
market declined in the second half of
2014.
This
development
was
due
largely to external factors such as the
recovery
in
some
developed
economies and the effects of QE3
tapering.
Several
macroeconomic
developments also contributed to the
decline
in
market
performance,
including: (i) fall in crude oil prices and
associated pressure on the naira; (ii)
depreciation of the exchange rate; (iii)
continued insurgency in the NorthEastern
part
of
the
country;
(iv)
uncertainty
around
the
upcoming

elections;
and
(v)
weak
corporate
earnings.
The
level
of
uncertainty in the Nigerian capital
market in the second half of 2014 led
investors to adopt a 'flight to safety’
strategy.
5.3.1
Equities Market
The All-Share Index (ASI) decreased
by 18.42 per cent to 34,657.15 at endDecember 2014, from its level of
42,482.48 at end-June 2014, and by
16.14 per cent, when compared with
41,329.19 recorded at end-December
2013. Market Capitalization (MC) of
equities also decreased by 18.18 per
cent
to
N11.48
trillion
at
endDecember 2014 from N14.03 trillion at
end-June 2014, and by 13.22 per cent
when compared with the N13.23 trillion
recorded at end- December 2013
(Table 4.8 and Figure 4.9).

The ASI’s 16.14 per cent year-on-year
decrease was driven mainly by weak
performance
in
the
Banking,
Consumer
Goods
and
Insurance
sectors which declined by 21.53, 17.88
and 2.11 per cent, respectively, over
their levels at end-December 2013. The
NSE Oil and Gas index, however, grew
by 11.84 per cent.


CBN Monetary Policy Review

Table 5.8
NSE All-Share Index (ASI) and Market
Capitalization (MC)
(December 2013 – December 2014)
Date
ASI
MC
(Equities)
(N’ Trillion)
Dec-13
41,329.19
13.23
Jan-14
40,571.62
13.01
Feb-14
39,558.89
12.71
Mar-14
38,748.01
12.45
Apr-14
38,485.48
12.67
May-14
41,474.40
13.69
Jun-14
42,482.48
14.03
Jul-14
42,097.46
13.90
Aug-14
41,532.31
13.71
Sep-14
41,210.10
13.61
Oct-14
37,550.24
12.44
Nov-14
34,543.05
11.40
Dec-14
34,657.15
11.48
Source: NSE

Figure 5.9
NSE ASI and MC
(December 2013 – December 2014)

Dec-13
Jan-14
Feb-14
Mar-14
Apr-14
May-14
Jun-14
Jul-14
Aug-14
Sep-14
Oct-14
Nov-14
Dec-14
MC
ASI
ASI
MC (Equities)

Source: NSE
Figure 5.10
NSE ASI and MC
(July – December 2014)


Jul-14
Aug-14
Sep-14
Oct-14
Nov-14
Dec-14
MC
ASI
ASI
MC (Equities)

Source: NSE

5.3.2 Market Turnover
Aggregate stock market turnover in
the second half of 2014 increased by
5.55 per cent to 55.69 billion shares,
valued at N758.24 billion, in 591,755
deals, compared with 52.76 billion
shares valued at N579.69 billion, in
623,155 deals in the first half of 2014.
Relative to the second half of 2013,
market turnover however, decreased
by 47.73 per cent from 106.54 billion
shares valued at N1,043.31 billion, in
1,380,789 deals. This development can
be attributed to the rapid outflow of
Foreign Portfolio Investment (FPI) due
to
heightened
sovereign
risk
by
investors and the flight to quality,
following
the
normalization
of
US
monetary
policy.
Consequently,
foreign portfolio investment outflows
exceeded inflows by 22 per cent in
2014.

5.3.3 Sectoral Contribution to Equities
Market Capitalization
The building materials sub-sector had
the highest valuation thus making the


CBN Monetary Policy Review

construction
sector
the
most
capitalized. Its share in overall market
capitalization rose to 32.7 per cent at
end-December 2014 from 32.3 per
cent in the first half of 2014. Other
leading sub-sectors were banking,
breweries, and food & beverages, with
respective market shares of 20.62,
14.24 and 10.80 per cent, at endDecember 2014 (Figure 4.12).
Figure 5.11
NSE Market Capitalisation by Sector as
at End-June 2014
Breweries
12.1%
Banking
20.3%
Food &
Beverages
10.9%
Conglomerates
2.3%
Insurance
1.1%
Oil and Gas
7.6%
Building
Materials
32.3%
Other Sectors
13.3%

Source: NSE

Figure 5.12
NSE Market Capitalisation by Sector as
at End-December 2014
Food and Beverages
10.80%
Banking
20.62%
Insurance
1.38%
Breweries
14.24%
Conglomerates
1.75%
Oil and Gas
6.58%
Building Materials
32.65%
Other Sectors
11.97%
Source: NSE
5.3.4
Warren Buffett Valuation Metric
and Nigeria’s Equities Market
The
Warren
Buffett
valuation
approach of using the market value of
publicly
traded
securities
as
a
percentage of GDP was applied to
evaluate the appropriateness of the
price of Nigerian equities to guard
against incidence of any bubble in the
stock market during the review period.
With the trend of 53.0 per cent in the
first quarter and 47.0 per cent in the
fourth quarter of 2014, the Nigerian
stock market was undervalued as it
was below the threshold of 75.0 to
115.0
per
cent
for
appropriate
valuation.
Despite the undervaluation of the
market during the review period,
investors
adopted
a
cautious
approach
due
to
uncertainties
surrounding
the

general
elections,
winding
down
of
quantitative easing in the US, and
falling
oil
prices
leading
to
low
accretion to reserves, all of which
combined to increase sovereign risk.


CBN Monetary Policy Review

Figure 5.13
Warren Buffet Valuation of Nigerian
Equities Market

2013Q1
2013Q2
2013Q3
2013Q4
2014Q1
2014Q2
2014Q3
2014Q4
Percent
WARREN BUFFET INDICATOR


5.3.5 Bond Market
The Federal Government of Nigeria
(FGN) bonds continued to dominate
the fixed income securities market in
Nigeria. Sub-national government and
corporate
bonds
witnessed
some
activities, with the corporate bonds
segment having the least share by
market volume. During the review
period, two new issues totaling N193.54
billion were made: 20-year FGN bond
valued at N178.00 billion and 10-year
corporate bond valued at N15.54
billion.

5.3.5.1 FGN Eurobond
The yield on the 10-year dollardenominated bond increased to 6.23
per cent at end-December 2014, from
4.80 and 5.33 per cent at end-June

and
end-
December
2013,
respectively
(Figure
5.14).
This
development
was
attributed
to
investor preference for higher premium
to compensate for perceived higher
sovereign risk.

Figure 5.14
10-Year U.S. Dollar-denominated Bond
Yield for Nigeria (December 31, 2013 –
December 31, 2014)

Yields (%)
Nigeria

Thus, the FGN bond yield curve at endDecember 2014 trended upwards by
337 basis points, compared with the
position at end-June 2014, and 192
basis
points
compared
with
the
position at end-December 2013 (Figure
5.15). At this level, FGN bond yields
were positive and well above the
December 2013 – December 2014
rates
of
inflation,
reflecting
the
sustained tight monetary policy stance
of the Bank.


CBN Monetary Policy Review

Figure 5.15
FGN Bonds Yield Curves: endDecember 2013 vs. end-June. 2014 vs.
end-December 2014

Yield
Years to Maturity
FGN Bond Yield Curves: Dec 31, 2013 vs. Jun 30, 2014 vs. Dec 31, 2014
Dec 31, 2013
Jun 30, 2014
Dec 31, 2014

5.3.5.2 State/Local Government Bonds
Activity in the sub-national bonds
market segment was low as no new
bond was issued during the review
period. The total value of outstanding
state/local
governments
bonds
at
end-December

was
N524.67
billion compared with N528.87 billion at
end-June 2014 and N558.50 billion at
end-December 2013.

5.3.5.3 Corporate Bonds
At end-December 2014, the value of
outstanding
corporate
bonds
was
N144.96 billion, compared with N169.90
billion at end-June 2014 and N139
billion at end-December 2013. One
new 10-year bond valued at N15.54
billion was issued by Stanbic IBTC Plc.,
on September 30, 2014. The general
slowdown of activities in the corporate
segment of the bond market was due
to investor preference for other asset
classes in the review period in the face
of perceived sovereign risk.

5.3.5.4
Overall
Analysis
of
Fixed
Income Securities
The value of FGN bonds increased by
8.21 per cent to N4.70 trillion at end-
December 2014 from N4.35 trillion at
end-June 2014 and by 18.46 per cent
over the level at end-December 2013.
FGN bonds accounted for 27.9 per
cent
of
aggregate
market
capitalization as at end-December
2014.
Also,
the
value
of
state/municipal bonds and corporate
bonds closed at N524.67 billion and
N144.96 billion, accounting for 3.1 and
0.9 per cent of the aggregate market
capitalization, respectively. The value
of supranational bonds remained at
N12.00 billion, accounting for 0.1 per
cent
of
aggregate
market
capitalization.
The
equity
market
accounted for
68.1
per cent of
aggregate market capitalization as at
end-December
2014,
while
the
combined
shares
of
FGN
bonds,
state/municipal
bonds,
corporate
bonds
and
supranational
bonds
accounted for the remaining 31.9 per
cent (Figure 5.16).


CBN Monetary Policy Review

Figure 5.16
Structure of the Nigerian Capital Market
(December, 2014)
FGN Bonds
27.9%
State/Municipal
bonds
3.1%
Corporate bonds
0.9%
Supranational
bonds
0.1%
Equities
68.1%

5.4
Global
Financial
Market
Developments
The global financial market was
relatively stable in the review period,
with
performance
differing
across
regions.
Japan’s
expansion
of
its
quantitative and qualitative monetary
easing in the fourth quarter of 2014
also improved the liquidity conditions
in the stock and fixed income markets.
Following the exit of the US from QE in
the last quarter of 2014, there was
increased
demand
for
dollardenominated assets, reflected in a
sharp appreciation of the dollar and
massive sell-offs in most emerging and
developing economies. The euro area
continued
to
be
plagued
by
widespread fragmentation of financial
markets
along
national
borders,
indicating weak credit conditions.

5.4.1 Money Market and Central Banks
Policy Rates
Liquidity conditions in the global
financial market remained a source of
concern as the US Federal Reserve
Bank terminated its QE3 programme in
October 2014. At about the same
period, the continued weakening of
the Euro area economy prompted the
European
Central
Bank
(ECB)
to
initiate
plans
for
a
round
of
quantitative easing commencing in
February 2015. The programme would
involve a monthly injection of 60 billion
euro over an 18-month period and
possibly beyond as determined by
market
conditions.
These
developments,
coupled
with
continued monetary easing by Japan
had implications for liquidity conditions
in the global economy. Accordingly,
policy
rates
in
the
advanced
economies
remained
largely
accommodating as they were kept
unchanged during the review period.
In emerging and developing markets,
financial
conditions
tightened
in
response
to
developments
in
advanced economies. The central
banks of Ghana, Russia, Brazil, and
Nigeria
raised
their
policy
rates
between July and December 2014,
owing
to
inflationary
concerns,
pressure on the foreign exchange
market,
and
the
effect
of
the
normalization of US monetary policy.


CBN Monetary Policy Review

Table 5.9
Policy Rates of Selected Countries
July-December 2014
COUNTRY/
MONTH
JULY
AUGUST
SEPTEMBER OCTOBER
NOVEMBER DECEMBER
USA

UK

EU

JAPAN

S. AFRICA

KENYA

GHANA

RUSSIA

CHINA

5.6
5.6
INDIA

BRAZIL

11.25
11.25
NIGERIA

5.4.2
Capital Market
The
major
world
stock
indices
performed poorly during the review
period. In Europe, all major indices
decreased by 2.6, 3.4, 0.3 and 5.4 per
cent for the UK FTSE 100, France CAC
40, German DAX and Russian MICEX,
respectively. In North America, the S&P
500 and Mexican Bolsa increased by
5.0 and 1.0 per cent between June
and December 2014, respectively,
although
the
Canadian
S&P/TSX
Composite decreased by 3.4 per cent.
The Asian market was, however, on
the bullish trajectory, with all major
indices rising during the period under
review. The Japanese Nikkei, the
Chinese Shanghai SE A and the Indian
BSE Sensex rose sharply by 15.1, 58.0
and 8.2 per cent between June and
December 2014.
In Africa, the Nigerian ASI, South
African JSE All Share Index and Ghana
GSE All Share Index declined by 18.4,
2.3 and 4.7 per cent, respectively,
while Egypt EGX Case 30 and Kenya
NSE 20 increased by 9.4 and 4.7 per
cent. The relatively poor performance
of African markets was due to pressure
from capital reversals, caused by the
normalisation of the US monetary
policy. In addition, the capital markets
of
oil
exporting
countries
were
affected by the recent fall in oil prices.


CBN Monetary Policy Review

Table 5.10
Selected International Stock Market Indices
as at December 31, 2014


Country
Index
End-Dec,

End-Jun,

End-Dec,

% Change
Jun 14 - Dec

% Change
Dec 13 - Dec 14
AFRICA
Nigeria
ASI

South Africa
JSE African AS

Kenya
Nairobi NSE 20

Egypt
EGX CSE 30

Ghana
GSE All Share

NORTH AMERICA
US
S&P 500

Canada
S&P/TSX Composite

Mexico
Mexico Bolsa (IPC)

SOUTH AMERICA
Brazil
Bovespa Stock

Argentina
Merval

Colombia
COLCAP

EUROPE
UK
FTSE 100

France
CAC 40

Germany
DAX

Russia
MICEX

ASIA
Japan
NIKKEI 225

China
Shanghai SE A

India
BSE Sensex

Source: Bloomberg


CBN Monetary Policy Review

5.4.3
Commodities
Global commodity prices remained
weak in the second half of 2014, as
indicated by the S&P Goldman-Sachs
Commodity
index
(GSCI),
with
accelerated decline in the last quarter
of the year. The energy component of
the index was down by 42 per cent as
at end-December 2014, with crude oil
accounting for the largest share of the
decline.
The Food and Agriculture Organization
(FAO) Food Price Index declined by
11.06 per cent from 208.9 in June to
185.8 in December 2014. The subindices of meat, sugar, dairy, cereal,
and vegetable oil all declined during
the review period.
The prices of industrial metals were
also affected by weak economic
conditions. Copper was down by 13.0
per cent in 2014, largely due to
slowdown in the Chinese economy.
Similarly, the price of silver fell by 19.0
per cent in the same period. This
development was due to the cut back
on
construction
and
infrastructure
spending, weakening the demand for
base metal around the world.
In addition, a major reason for the
softening of commodity prices was the
recent appreciation of the U.S. dollar
during the period. In many countries, a
rising dollar makes dollar-denominated
commodities more expensive in localcurrency terms, thereby weakening
global demand and prices.
However, prices of some commodities
were bullish during the period. Coffee
prices trended upwards, with the
Coffee Index posting a 44 per cent rise
in 2014, owing to a drought in the key
growing regions of Brazil. Overall, the
attractiveness of other asset classes
and the appreciation of the U.S. dollar
weakened investment in commodities.
5.4.4
Foreign Exchange market
Most currencies around the world
depreciated against the US dollar in
the review period, owing to continued
investor
appetite
for
dollardenominated assets, the end of the US
QE3 tapering, leading to capital flow
reversals, and declining commodity
prices. In the advanced economies,
the Japanese yen, the euro, the British
pound
and
the
Canadian
dollar
depreciated by 15.40, 12.05, 9.38, and
7.76 per cent, respectively.
In the emerging and developing
markets, the Russian ruble recorded
the highest depreciation of 44.06 per
cent in the review period. Other
emerging
market
currencies
depreciated with the Brazilian real,
Indian rupee, South African rand and
Chinese yuan losing 16.92, 4.52, 8.04
and 0.16 per cent, respectively. The
Colombian
Peso,
Nigerian
Naira,
Argentine Peso and Kenyan Shilling
depreciated by 21.00, 7.31, 4.01 and
3.31 per cent, respectively. On the
other
hand,
the
Ghanaian
Cedi
appreciated by 3.73 per cent, while
on a year-to-date basis, it lost 26.1 per

CBN Monetary Policy Review

cent of its value. The Egyptian Pound
remained stable in the review period.


Table 5.11
Exchange Rates of Selected Countries
(Value in currency units toUS$)
Source: CBN/ Bloomberg


CBN Monetary Policy Review

Box 5.0: Oil Price Volatility
Crude oil is unarguably one of the most important driving forces of the global economy, and changes
in its price have had significant effects on economic growth and welfare around the world. Historically,
oil prices have displayed greater volatility than other commodity prices, with substantial financial and
macroeconomic implications.

The oil market was stable until the 1970s and 1980s when political instability in the Middle East disrupted
production and supply with severe effect on global oil prices. Since then, oil price shocks due to
exogenous forces have increased in size and frequency (Figure 1). Oil demand tends to increase
slowly, largely driven by weather, industrialization and economic growth, while future supply prospects
are becoming more uncertain, considering the persistent political tensions in oil-producing countries
and the issues surrounding the discovery of new oil reserves. With such developments, oil prices could
undergo further fluctuations in the medium term.

Figure 1: Percentage changes of the quarterly price of crude oil

Source: Thomson Reuters
Prices of most crude globally tend to move together and as shown in figure 2, the prices of all crude
streams, including low and high sulfur grades, declined remarkably in 2014.


CBN Monetary Policy Review

Figure 2: Trend in Major Crude Oil Prices

While a given oil price decrease may be perceived negatively by oil exporting countries and positively
by importers, an increase in oil price volatility (i.e. consecutive positive and negative oil price shocks)
increases perceived price uncertainty in the market. Such oil price volatility disrupts planning by
governments and investors, cause firms to postpone investments, and may require costly reallocation
of resources. Formulating and implementing national budgets become more difficult, as exporting
countries face volatile revenues, and importing countries face uncertainty regarding import costs and
fuel subsidies. This is usually a profound problem in an oil dependent country like Nigeria, which relies on
oil exports as the main source of foreign earnings and public revenue.
Oil prices dropped sharply in the second half of 2014 with the price of Bonny Light (370API), Nigeria’s
reference crude, falling significantly from an average of US$108.59 p/b in June to US$56.06 p/b in
December 2014. This drop was caused largely by increased supply from non-OPEC sources, particularly
the US, where 0.9 million barrels per day (about 1 per cent of global supply) was produced using shale
oil technology, OPEC’s decision to maintain its production level and decreased oil demand reflecting
weaker global economic growth. This development had adverse consequences of revenue shortfalls
for oil exporting economies like Nigeria. The private sector is affected through the reduction in earnings
of oil companies, constraining their ability to finance investments in exploration and new technology. In
an economy where commercial banks are heavily exposed to the oil industry, fall in crude oil prices
increases the risk of a build-up in non-performing loans with adverse implications for financial system
stability. Measures used in the market to mitigate the effects of oil price volatility are based on hedging,
using futures, options and swaps. A number of emerging and developing market economies
responded swiftly to the perceived vulnerabilities and associated exchange rate risks from falling oil
prices by raising policy rates to curtail possible outflow of capital.


CBN Monetary Policy Review

CHAPTER 6
CHAPTER 6
ECONOMIC OUTLOOK


CBN Monetary Policy Review

CHAPTER 6
ECONOMIC OUTLOOK
6.1
Overview
lobal
economic
growth
stabilized at 3.3 per cent in
2014,
driven
largely
by
recoveries in the US and the UK as well
as lower oil prices. The global output
growth was projected to be positive in
2015,
with
the
improved
outlook
expected mainly from high income
countries, notably the US and the Euro
Area, as a result of higher pass-through
of the falling oil prices to consumers.
The inflation outlook indicates a slight
uptick in the United States, and is likely
to remain subdued in other advanced
economies as well as in emerging and
developing economies, due largely to
the decline in commodity prices.
The global economy grew by 3.75 per
cent in the third quarter of 2014, up
from 3.25 per cent in the second
quarter. The IMF World Economic
Outlook
(WEO,
January
2015)
estimated global growth in 2014 at 3.3
per cent, same as in 2013. The Fund
also projected global growth in 2015
and 2016 at 3.5 and 3.7 per cent,
respectively,
reflecting
downward
revisions of 0.3 percentage point
relative
to
the
October

projections. The revisions were based
on the IMF re-assessment of prospects
in China, Russia, the Euro Area, and
Japan,
and
weaker
economic
activities
in
selected
major
oil
exporting countries due to the sharp
drop in oil prices.
Global growth in 2014 was enhanced
by recovery in the US and the UK, while
the
performance
of
other
major
economies, especially Japan, fell short
of expectation, due to the protracted
adjustment to weakening mediumterm growth prospects. Growth was
further boosted by lower oil prices from
higher supply, due to increased shale
oil production.
In the advanced economies, growth
was projected at 1.8 per cent in 2014
up from 1.3 per cent in 2013. Growth in
the United States was estimated at 2.4
per cent in 2014, up from 2.2 per cent
in

despite
the
contraction
experienced in the first quarter of 2014.
The
Euro
area
economy
was
estimated to grow at 0.8 per cent in
2014 from a decline of 0.5 per cent in
2013. Activities in the Euro Area were
boosted by lower oil prices, further
monetary easing, a more neutral fiscal
policy stance, as well as depreciation
of the euro. These factors were,
however, offset by weaker investment
prospects and threat of deflation in
the region.
In
the
Emerging
Market
and
Developing Economies, growth was
projected to slow to 4.4 per cent in
2014 from 4.7 per cent in 2013. The
slowdown
reflected
weakness
in
China, weaker outlook in Russia, and
downward
revisions
to
growth
in
commodity
exporting
countries.
G


CBN Monetary Policy Review

Growth in China declined to 7.4 per
cent in 2014 from 7.8 per cent in 2013,
while leading economic indicators
point to a further slowdown. In Russia,
the sharp decline in oil prices, the
depreciation of the ruble as well as
unrelenting
geopolitical
tensions
weakened economic activity during
the review period. The slowdown of
the Russian economy to 0.6 per cent in
2014 from 1.3 per cent in 2013
affected the performance of other
economies in the Commonwealth of
Independent States (CIS).
In Sub-Saharan Africa (SSA), growth
was estimated at 4.8 per cent in 2014
down from 5.2 per cent in 2013 with
lower
oil
and
commodity
prices
accounting
for
the
weaker
performance in the region. In South
Africa, growth slowed to 1.4 per cent
in 2014 from 2.2 per cent in 2013, due
to the impact of labour unrest and
energy challenges. However, growth
continued to be strong in Nigeria,
owing to the relatively robust non-oil
sector, despite security challenges in
the North-Eastern part of the country.
The Nigerian economy grew by 6.22
per cent in 2014, up from 5.50 per cent
in 2013.
6.2
Outlook for Global Output
Developments in the global economy
had conflicting implications for growth
forecast. The decline in oil prices
underlined largely by supply factors,
which is expected to reverse only
gradually, could boost global growth
in
the
medium
term
by
lifting
purchasing
power
and
private
demand in oil importing countries. The
impact of fall in oil prices is forecast to
be stronger in advanced oil importing
economies, where the pass-through to
end-user prices is expected to be
significant relative to the emerging
market and oil importing developing
countries, where energy prices are
usually subsidized by governments.
Global economic growth was forecast
to rise to 3.5 per cent in 2015 and 3.7
per cent in 2016 from an annual rate
of 3.3 per cent in 2014. The IMF
projected annual growth of 2.4 per
cent
in

for
the
advanced
economies. Growth in the emerging
markets and developing economies
(EMDEs) was also projected at 4.3 per
cent, while that of Sub-Saharan Africa
was 4.9 per cent (Table 6.1). The
improved growth outlook is expected
mainly from high income countries,
notably the US and the Euro Area, as a
result of higher pass-through of the
falling oil prices to consumers.
In the US, growth is expected to rise to
3.6 per cent in 2015 and moderate to
3.3 per cent in 2016. In the Euro Area,
the projections for 2015 and 2016 are
1.2 and 1.4 per cent, respectively.
Growth would continue to be bumpy
in the region, with subdued outlook in
the high-debt countries. The forecast
for
the
United
Kingdom
is
comparatively robust at 2.7 and 2.4
per
cent
in

and
2016,
respectively.
Growth
forecast
for


CBN Monetary Policy Review

Japan is 0.6 and 0.8 per cent in 2015
and 2016 respectively, in spite of the
country’s recession in the third quarter
of 2014. The improved outlook is
expected to be underpinned by the
additional quantitative easing, delay
in
the
second
consumption
tax
increase, yen depreciation and a
boost from falling oil prices.
In the EMDEs, growth is forecast at 4.3
and 4.7 per cent in 2015 and 2016,
respectively. Growth in China is
forecast to moderate to 6.8 per cent in
2015, as the government is focused on
reducing vulnerabilities arising from
rapid credit and investment growth.
Slower growth in China is expected to
have
implications
for
much
of
emerging Asia. Brazil is forecast to
grow by 0.3 per cent in 2015, owing to
tighter
financial
conditions
and
continued weakness in business and
consumer confidence.
In
Sub-Saharan
Africa,
growth
is
projected at 4.9 and 5.2 per cent in
2015 and 2016, respectively, due
largely to the expected recovery of oil
prices and efforts to end the Ebola
Virus Disease (EVD). Growth in South
Africa is projected at 2.1 per cent in
2015.
Growth in the Middle East and North
Africa (MENA) region is projected to
trend upwards to 3.3 and 3.9 per cent
in 2015 and 2016, respectively. This
would be led by the oil-exporting
economies in the region, where high
public spending is expected to boost
non-oil activities.
6.3
Downside
Risks
to
Global
Outlook
Future oil price uncertainties, along
with the drivers of the current price
downturns, are the major risks to the
global economic outlook. The impact
of falling oil prices on global demand
could be greater than is currently
envisaged, especially in the advanced
economies. Oil prices could, however,
go lower or rebound earlier than
expected, if supply-side reaction to
falling
prices
is
stronger
than
projected.

In the global financial markets, risks
could arise from monetary policy
normalization in the U.S. This could
offset global recovery to a large
extent, while exposing emerging and
developing
market
economies
to
major
shocks
from
capital
flow
reversals. Already, the plunge in oil
prices has been accompanied by
reversals in capital flows in some oil
exporting countries, as external and
balance sheet vulnerabilities intensify,
while oil importing countries gained
buffers. This development will continue
to pose threats to exchange rate
management
in
oil
exporting
countries, further accentuating their
monetary policy vulnerabilities.
In the Euro area, the risk of deflation
remains elevated as prices continue to
fall, and conventional monetary policy


CBN Monetary Policy Review

tools
appear
largely
ineffective.
Growth
in
emerging
market
economies continues
to be fairly
stable, although still exposed to risks
arising from domestic and external
weaknesses, which could worsen their
financial conditions.
In sub-Saharan Africa, the plunge in oil
prices
could
also
have
mixed
implications. As oil exporting countries
continue to struggle with dwindling
reserves and exchange rate pressures,
oil importing countries are expected to
gain buffers.
To overcome the downside risks, the
IMF recommends structural reforms in
both the advanced and emerging
economies.
In
the
advanced
economies,
with
output
gap
still
substantial and inflation below official
target, monetary policy should remain
accommodative through other means
to support growth. Emerging markets,
on the other hand, should strive to
increase
macroeconomic
policy
space for inclusive growth.
A further consideration would be for
the oil exporting countries, without
substantial
savings,
to
allow
for
significant
exchange
rate
depreciation to cushion the impact of
the oil price shock to their economies.
Overall, the situation presents a unique
opportunity for both oil importing and
exporting
countries
to
implement
appropriate energy subsidies and tax
reforms.

Table 6.1
Global Output and Inflation Outlook

A. World Output


World Output 3.3
3.3
3.5
3.7
Advanced Economies 1.3
1.8
2.4
2.4
USA 2.2
2.4
3.6
3.3
Euro Area -0.5
0.8
1.2
1.4
Japan 1.6
0.1
0.6
0.8
UK 1.7
2.6
2.7
2.4
Canada 2.0
2.4
2.3
2.1
Other Advanced Economies 2.2
2.8
3.0
3.2
Emerging & Developing
Economies

Commonwealth of
Independent States

Latin America and the
Caribbean

Middle East and North
Africa

Sub-Saharan Africa 5.2
4.8
4.9
5.2
B. Commodity Prices (US'
Dollars)


Oil -0.9
-7.5
-41.1
12.6
Non-fuel -1.2
-4.0
-9.3
-0.7
C. Consumer Prices


Advanced Economies 1.4
1.4
1.0
1.5
Emerging & Developing
Economies


Source: IMF WEO Update, January 2015
6.4
Outlook for Domestic Output
Growth
Nigeria’s real GDP declined by 0.3
percentage point to 5.94 per cent
year-on-year in the fourth quarter of
2014, compared with 6.23 per cent in
the third quarter. The impact of softer
global oil prices as well as significant
reduction in the nation’s oil production
contributed
to
the
slower
output
growth during the last quarter.


CBN Monetary Policy Review

GDP
growth
in

has
been
projected downwards to 5.5 per cent
from 6.2 per cent in 2014 on the back
of lower oil price benchmark of US$65
p/b (later revised downwards to US$53
p/b) and oil production of 2.28 mbpd
(FGN 2015 Budget), compared with
US$77.50
p/b
and
2.39
mbd
respectively, in 2014. The downward
growth forecast is conservative, when
compared with the 7.3 per cent
estimated by the IMF (WEO, October
2014)
which
has
however,
been
reviewed downward to 4.8 per cent
(WEO,
January
2015).
With
the
declining oil prices and production
challenges in the oil sector, achieving
the growth projection requires greater
coordination of fiscal and monetary
policies.
Improvement
in
growth
outlook
is
largely
hinged
on
a
sustained implementation of the ongoing economic reforms and support
from various macroeconomic policies.
In particular, the implementation of
the power sector reform as well as
accompanying
investments
in
the
sector, are expected to improve
power generation and supply and
boost output growth.
The risks to the growth outlook are
developments
in
the
external
environment, particularly the decline
in oil prices with negative implications
for fiscal sustainability, and security
concerns in the North East as well as
uncertainties
surrounding
the

general elections.

6.5
Global Inflation Outlook
Global
inflation
remained
largely
subdued. The average global inflation
rate is projected to stay close to 3.00
per cent, same as observed in the last
two years. Trends at the regional levels
may vary, ranging from deflation risks
in the Euro area to high inflation in
some developing countries.
In the United States, inflation is forecast
to rise marginally to 1.8 per cent in
2015 from 1.7 per cent in 2014. The
Euro area inflation is projected to
increase gradually to 0.9 per cent
in 2015 and 1.2 per cent in 2016 as
recovery strengthens and output gaps
decline.
Notwithstanding,
price
pressures are expected to remain
largely subdued due to a combination
of persistent output gaps, weak credit
conditions,
and
financial
fragmentation
in
distressed
economies. With the foregoing, Euro
Area inflation rates would remain
substantially below the ECB’s price
stability target of 2.0 per cent through
to 2019. Inflation in Japan is projected
to fall to 2.0 per cent in 2015 from
2.7 per cent in 2014, reflecting the
waning effect of the consumption tax
increase in 2014.
In the emerging and developing
economies, inflation is projected to rise
to 5.6 per cent in 2015 from 5.5 per
cent in 2014. The marginal increase in
inflation may be due to the effect of
pass-through of recent exchange rate
depreciation
to
domestic
prices.


CBN Monetary Policy Review

China’s inflation rate is forecast to inch
upwards to 2.5 per cent in 2015 from
2.3 per cent in 2014. On the other
hand, consumer prices in India are
forecast to decline to 7.5 per cent in
2015 from 7.8 per cent in 2014.
In Sub-Saharan Africa (SSA) inflation is
forecast to rise to 7.0 per cent in 2015
up from 6.7 per cent in 2014. The
forecast for South Africa is 5.8 per cent
for 2015 down from 6.3 per cent in
2014, while that of Ghana is 16.8 per
cent from 15.7 per cent over the same
period.
6.6
Outlook for Domestic Inflation
Headline
inflation
(year-on-year)
remained in single digit, declining to
8.0 per cent in December 2014 from
8.5 and 8.3 per cent in August and
September,
respectively,
indicating
the effectiveness of sustained tight
monetary policy stance.
Staff estimates indicate that inflation is
expected to rise gradually, and remain
within single digits in the first half of
2015 (Table 6.2 and Figure 6.1). The
moderate increase in inflation rate
would be due to the liquidity impact of
the

election
spending;
depreciation of the naira and its passthrough to consumer prices; and
continued disruption of supply and
distribution chains by insurgency in
some parts of the country. Other
factors expected to raise food inflation
rate include food scarcity due to the
commencement
of
the
planting
season, and the expected increase in
electricity tariff.
On the other hand, receding global
inflation, especially in the advanced
economies as well as reduction in the
pump
price
of
refined
fuels
is
expected to cushion the impact of
import costs on domestic prices. Also,
the continued tight monetary policy
stance of the Bank could minimize the
downside risk posed by inflation to
growth.
Table 6.2
Inflation Forecast (staff estimates)

Status
Month
Headline
inflation
Food
inflation
Core
inflation
Jul-14
8.3
9.9
7.1
Aug-14
8.5
10.0
6.3
Sep-14
8.3
9.7
6.3
Oct-14
8.1
9.3
6.3
Nov-14
7.9
9.1
6.3
Dec-14
8.0
9.2
6.2
Jan-15
8.6
9.6
7.2
Feb-15
8.8
10.1
7.5
Mar-15
8.8
9.9
7.9
Apr-15
9.1
10.0
8.3
May-15
9.2
10.3
8.4
Jun-15
9.4
10.6
8.4
Jul-15
9.5
10.6
9.2
Aug-15
9.9
10.9
9.6
Sep-15
10.2
11.3
9.6
Oct-15
10.6
11.9
9.8
Nov-15
11.0
12.3
10.0
Dec-15
10.8
12.1
9.8
Forecast
YEAR-ON-YEAR INFLATION RATE
Actual


CBN Monetary Policy Review

Figure 6.1
Inflation Fan chart

Jul-12
Aug-12
Sep-12
Oct-12
Nov-12
Dec-12
Jan-13
Feb-13
Mar-13
Apr-13
May-13
Jun-13
Jul-13
Aug-13
Sep-13
Oct-13
Nov-13
Dec-13
Jan-14
Feb-14
Mar-14
Apr-14
May-14
Jun-14
Jul-14
Aug-14
Sep-14
Oct-14
Nov-14
Dec-14
Jan-15
Feb-15
Mar-15
Apr-15
May-15
Jun-15
Headline Inflation (Y/Y) in %
Headline Inflation (Y/Y) in %
Month/Year
Actual
Forecast

6.7
Outlook for Monetary Policy In

The outcome of monetary policy
largely depends on the domestic
economic
environment
and
the
institutional
framework.
Achieving
stable prices in 2015 would require the
monetary authority to adopt a policy
stance
that
promptly
reacts
to
developments
in
economic
and
financial
conditions.
The
Nigerian
monetary
policy
environment
has
become challenging, following the
recent fall in crude oil prices, capital
flow reversals from the normalization of
the US monetary policy, 2015 general
election
spending
and
security
concerns. In particular, oil price shocks
continue to exert pressure on the
country’s balance of payments (BoP),
fiscal operations, accretion to external
reserves and the general price level.
Appropriate
monetary
and
fiscal
policies are, therefore, required to
mitigate
the
effects
of
the
macroeconomic shocks.
The
immediate
challenges
to
monetary policy implementation in
2015 would include exchange rate
volatility, induced by demand pressure
and speculative attack in the foreign
exchange
market;
dwindling
oil
revenues, impacting on government
finances and accretion to reserves;
capital flow reversals; declining stock
market performance; and sluggish
growth in private sector credit.
The prevailing excess liquidity in the
banking system despite high interest
rates in the economy, continue to
constrain the potency of monetary
policy. The result is that the flow of
credit to the real sector is undermined.
Therefore,
monetary
policy
should
adopt measures to lower lending rates
and
encourage
financial
intermediation. Accordingly, the Bank
continues
to
provide
wholesale
funding to the economy through
development finance institutions such
as the Bank of Agriculture (BoA) and
the Bank of Industry (BoI). These,
however, need to be weighed against
measures to moderate the recent
uptick in headline inflation, exchange
rate volatility and external reserves
depletion.
Given the challenges clouding the
monetary policy outlook in 2015, the
success of policy measures would
require
a
greater
coordination
between the monetary and fiscal
authorities to minimize the risks of
economic downturn in the short-tomedium term.


CBN Monetary Policy Review

CBN Monetary Policy Review

Appendices
Central Bank of Nigeria Communiqué
No.

of
the
Monetary
Policy
Committee Meeting, July 21-22, 2014

The Monetary Policy Committee (MPC)
met on July 21 and 22, 2014 against
the
backdrop
of
continuing
QE3
tapering by the U.S Federal Reserve
which has resulted in the slowing of
inflows to emerging markets and
frontier economies; and the attendant
uncertainties
in
the
outlook
for
monetary policy and financial stability
in
the
post-tapering
period.
The
meeting
was
attended
by

members. A new member, Prof. Dahiru
Hassan Balami, whose appointment
had recently been confirmed by the
Senate, was also in attendance. The
Committee
deliberated
on
key
external
and
domestic
economic
developments and considered the
Banking Stability Report since the MPC
meeting of May 2014 as well as the
outlook for the rest of the year.

The
global
monetary
policy
environment appears to be further
complicated
by
risks
posed
by
continued currency crisis and fragility
in Europe, geo-political tensions in the
Middle
East
and
a
number
of
emerging and developing economies.
Domestically, the policy challenges
remain. These include the uptick in
inflation,
anticipated
increased
spending
towards
the
general
elections and the possible effects of US
tapering on the domestic market.
International Economic Developments
The
Committee
noted
that
the
rebound in global economic activity
strengthened in the first half of 2014;
although
at
levels
lower
than
previously
projected.
The
tapered
growth
arose
mainly
from
the
emerging and developing economies
owing to the rising real interest rates
and geo-political crisis. On the whole,
the effects of the global financial crisis
have continued to wane even as the
issues of rising income inequality,
unemployment and poverty appear to
be gaining prominence; engaging the
attention of the monetary authorities.
These latest projections indicate that
the euro area is gradually coming out
of recession, as growth projection for

is
positive
for
all
member
countries
albeit
with
significant
variation. Growth is expected to be
stronger in the core EU countries while
high debt and financial fragmentation
continue to weigh on aggregate
domestic demand in the peripheral
countries. For the entire euro zone,
there is a risk of low inflation or outright
deflation which could result in higher
real interest rates that may constrain
output expansion.

In the emerging and developing
economies, growth is projected at 5.0
per cent in 2014 from 4.7 per cent in
2013, buoyed by stronger external
demand
from
the
advanced
countries. The key downside risks in the
developing and emerging economies
include:
political
uncertainty,


CBN Monetary Policy Review

exchange
rate
realignment
in
response to changing fundamentals,
further monetary tightening to address
emerging currency crisis, and tighter
external financing conditions arising
from the rapid normalization of the US
monetary policy. Inflation is projected
to remain subdued in 2014 and 2015,
partly reflecting the significant output
gaps in the developed economies,
weaker
domestic
demand
in
developing and emerging economies,
and
sliding
commodity
prices,
especially fuels and food. In the
advanced
economies,
inflation
is
currently below target and its return to
the long run trend could take a while
due to the slow pace of economic
recovery.
Likely
depreciation
in
currencies,
domestic
demand
pressure, and capacity constraints
could pose upside risks to inflation in
the emerging market economies.

The Committee noted that the stance
of monetary policy could diverge
across regions over the medium term
on account of variations in risks and
other challenges confronting various
economies. The US is expected to
commence tightening by the second
half of 2015 as inflation hits the long run
target and unemployment rate falls to
the threshold level. The euro area and
Japan are expected to continue with
supportive monetary policy due to low
inflation including threat of deflation in
some
countries,
weak
recovery,
weakness in bank balance sheets, and
strong demand for their bonds as a
result of low sovereign risk.

Majority of the central banks remained
cautious with regard to the stance of
monetary
policy.
While
most
advanced economies are likely to
maintain an accommodative stance
for monetary policy for the rest of the
year to firm up aggregate demand
and employment, the major impetus
for monetary policy adjustments in the
emerging markets and developing
economies could come from the
effects of the US Fed’s tapering of QE3
on their currencies and the financial
markets.

Domestic
Economic
and
Financial
Developments Output
The National Bureau of Statistics (NBS)
reported revised growth numbers from
2010 to 2013 and the first quarter of
2014, as part of the GDP rebasing
exercise. Accordingly, the estimated
growth rate for 2013 now stands at
5.49 per cent, compared with 5.31 and
4.21 per cent recorded in 2011 and
2012, respectively. Similarly, the revised
estimate of 6.77 per cent for the fourth
quarter of 2013 was an improvement
over the 5.17 and 3.64 per cent in the
previous
quarter
and
the
corresponding
period
of
2012,
respectively. In the first quarter of 2014,
real GDP growth was 6.21 per cent,
which
was
higher
than
the
corresponding quarter of 2013. In line
with the trend, the non-oil sector was
the main driver of growth in the first


CBN Monetary Policy Review

quarter of 2014, recording 8.21 per
cent growth. The key growth drivers in
the non-oil sector in the first quarter of
2014 remained industry, agriculture,
trade, and services which contributed
1.77, 1.26, 1.26 and 3.15 per cent,
respectively. The oil sector continued
to
record
improvements
in
performance with its growth rate
improving from -9.36 and -11.40 per
cent, respectively, in the fourth and
first quarters of 2013, to -6.60 per cent
in the first quarter of 2014.

The
Committee
welcomed
the
impressive growth performance but
noted
that
the
country
has
the
potential to do better with appropriate
supportive macroeconomic policies.
The Committee, therefore, stressed the
imperatives for monetary policy to
sustain efforts aimed at supporting
non-inflationary growth in key sectors
of the economy. The Committee also
emphasized the need for government
to sustain and deepen tax revenue
and enhance efforts aimed at fasttracking the structural transformation
of the economy with a view to making
it resilient to adverse shocks as well as
creating the necessary platforms for
reducing
unemployment,
income
inequality, and poverty in the country.

Prices
Developments in the aggregate price
level suggest an underlying inflationary
pressure since January 2014. The yearon-year
headline
inflation
steadily
inched up marginally from 7.9 per cent
in April to 8.0 per cent in May 2014 and
further to 8.2 per cent in June. The uptick in June was, however, largely
attributed to the rise in food inflation
which rose from 9.7 per cent in May
2014 to 9.8 per cent in June while core
inflation, on the other hand, rose from
7.7 per cent in May 2014 to 8.1 per
cent in June. The Committee noted
that all measures of inflation have
witnessed progressive upward trend
since February 2014 and agreed that
this trend should be monitored closely
to achieve a reversal.

Monetary,
Credit
and
Financial
Markets’ Developments
Broad money (M2) rose by 1.66 per
cent in June 2014 over the level at
end-December 2013, indicating an
annualized growth rate of 3.31 per
cent. The annualized growth rate was
considerably lower than the growth
benchmark of 15.52 per cent for fiscal
2014.
For
the
same
period,
net
domestic credit increased by 0.88 per
cent compared with the growth rate
of
15.39
per
cent
over
the
corresponding period of 2013. When
annualized, net domestic credit rose
by 1.77 per cent, compared with the
growth benchmark of 28.5 per cent for
fiscal
2014.
The
expansion
in
aggregate domestic credit was mainly
due to the increase in claims on the
private sector which increased by 2.75
per cent in June 2014, which was
however,
moderated
by
the
contraction
in
net
credit
to
Government.


CBN Monetary Policy Review

Meanwhile,
money
market
rates
remained within the MPR corridor
during the review period. The monthly
weighted average OBB rate was 10.38
per cent in May 2014 but it increased
by 14 basis points to 10.52 per cent in
June. The uncollaterized overnight rate
was 10.50 per cent in June 2014,
compared with 10.63 per cent in May
2014. Overall, both the OBB and
overnight call rates were trading closer
to the lower bound of the MPR corridor
on account of liquidity surfeit in the
banking
system.
Activities
in
the
capital market were bullish during the
period with the All-Share Index (ASI)
increasing by 2.8 per cent from
41,329.19 at end-December 2013 to
42,482.48 at end-June 2014. Market
capitalization also moved in the same
direction.

External Sector Developments
All
the
segments
of
the
foreign
exchange
market
witnessed
a
considerable degree of stability during
the period. The exchange rate at the
retail-Dutch Auction System Segment
(rDAS) of the market was flat at
N157.29/US$ in the review period. At
the interbank market, the selling rate
opened at N162.20/US$ and closed at
N162.95, representing a depreciation
of N0.75 or 0.46 per cent. Conversely,
at the BDC segment, the exchange
rate opened at N167.00/US$ and
closed at N168.00/US$, representing a
depreciation of N1.00 or 0.6 per cent.
Gross official reserves rose to US$40.20
billion by 18 July from US$37.31 billion
at end-June 2014. The increase in
reserves was mainly due to increased
accretion and moderation in the rate
of depletion.

The Committee’s Consideration
The Committee was satisfied with the
relative stability in the macroeconomy
as reflected in the impressive growth
rates, stable consumer prices and
exchange rate as well as increased
external reserves. It was however
concerned about the weak translation
of stability to microeconomic gains in
employment and access to finance
especially by small and medium scale
businesses. It, therefore, emphasized
the need for the MPC decisions to take
into account the long run impact on
employment level, wealth creation
and growth of businesses.

The Committee noted the potential of
the power sector to stimulate output
growth through enhanced investment
and
the
spill-over
effect
in
employment
generation
if
the
challenges confronting the sector are
effectively
and
appropriately
addressed. Specifically, it noted that
gas-to-power has remained a binding
constraint in reaping the benefits of
the recently-concluded power sector
reforms; urging for the collective efforts
of government, private investors and
the banks to resolve. Other pressure
points include the underlying pressure
from food/core inflation and the risks
that could emanate from the likely
increase in aggregate spending in the


CBN Monetary Policy Review

run up to the 2015 general elections.
The Committee was also concerned
about the implications of the on-going
QE3 tapering for inflows and external
reserves. The Committee recognized
the necessity of sustaining a stable
naira exchange even as it has to deal
with the delicate balancing of the
need for a low interest rate regime.
The Committee noted that portfolio
flows
were
not
employment
generating but were essential in the
absence of adequate fiscal buffers.

The
Committee
welcomed
the
moderation in the rate of depletion in
external reserves in recent months,
noting that reserves accretion needed
to improve much faster to provide a
strong and more resilient buffer to
fiscal
operations.
The
Committee,
however,
noted
that
a
gradual
reduction in the country’s import bills
through domestic production of some
of the major food imports should be a
key element in the overall reserves
accretion strategy. It welcomed the
decision of the Bank to collaborate
with other stakeholders in this regard.

The
Committee
further
expressed
concern about the liquidity level and
the trending uptick in inflation which
may not be unconnected with the
poor harvest in some agricultural
producing areas, particularly in the
north eastern and central states of the
country. It however, noted that other
reform measures could dampen food
prices in the short to medium term and
restore inflation to a sustainable longrun path. Overall, the Committee
noted that the policy direction of
inflation, exchange rate and interest
rate must be seen not only in the
context of price and financial stability
but also in enhancing the quality of life
of
Nigerians
and
promoting
employment generation.

The Committee’s Decisions
In view of these developments, the
Committee decided by a unanimous
vote to retain the current stance of
monetary policy with one member
voting for an asymmetric corridor
around the MPR. Consequently, the
MPC voted to:
(i) Retain the MPR at 12 per cent with a
corridor of +/- 200 basis points around
the midpoint;

(ii) Retain the Liquidity Ratio at 30 per
cent;
(iii) Retain the public sector Cash
Reserve Requirement at 75.0 per cent;
and
(iv) Retain the private sector Cash
Reserve Requirement at 15.0 per cent.
Thank you.

Godwin I. Emefiele
Governor, Central Bank of Nigeria
22nd July 2014


CBN Monetary Policy Review

CENTRAL
BANK
OF
NIGERIA
COMMUNIQUÉ
No.

OF
THE
MONETARY
POLICY
COMMITTEE
MEETING, SEPTEMBER 18-19, 2014

The Monetary Policy Committee (MPC)
met on September 18 and 19, 2014
with
all
the

members
in
attendance. The Chairman welcomed
the new member, representing the
Board of the Central Bank of Nigeria,
Mr. Stanley I. Lawson to membership of
the Committee. The meeting held
against
the
backdrop
of
the
increasingly
limited
choices
for
monetary policy, particularly, in the
emerging
market
and
developing
economies; tapered recovery in the
euro area coupled with the social and
political tensions in the domestic and
global environment, some of which
have had fundamental impact on
domestic
macroeconomic
management.
The
Committee
reviewed key developments in the
global and domestic economy up to
mid-September 2014, and the outlook
for the near-term.

International Economic Developments
The Committee noted the slow global
growth prospects as the IMF, in July,
marked down its projection by 0.3 per
cent to 3.4 per cent, reflecting weak
economic recovery, particularly in the
Euro Area, and a less than optimistic
outlook for several emerging market
economies.
Global
growth
which
moderated more than expected in
the first quarter of 2014 regained
momentum in the second quarter
although recovery remained largely
uneven. The United States provided
strong tailwinds for growth recovery
but fiscal constraints continued to limit
robust possibilities. Similarly, economic
activity
in
the
United
Kingdom
maintained a strong momentum in the
second
quarter,
supported
by
improved household confidence and
an impressively recovering housing
market.
Growth
in
China
also
recovered following the fiscal policy
stimulus and a surge in credit. In
contrast, growth moderated in Japan
after the VAT hike in April, but the
quantitative easing programme of the
Bank of Japan continues to support
recovery. Growth in the Euro area is
expected to strengthen to 1.1 per cent
in 2014 and 1.5 per cent in 2015, but
would remain uneven across the
region, reflecting continued financial
fragmentation, impaired private and
public sector balance sheets, and high
unemployment in some EU economies.
In
the
emerging
markets
and
developing
economies,
growth
is
projected at 4.6 per cent in 2014,
which is 0.2 percentage point lower
than the earlier projection. The sources
of growth include strong external
demand
from
the
advanced
economies; however, tight financial
condition is expected to dampen
growth
in
domestic
aggregate
demand.
Global
inflation
has
remained relatively stable while spare
capacity remains large, suggesting no
significant inflationary pressures in the


CBN Monetary Policy Review

short-to-medium-term. The stance of
monetary
policy
has
remained
unchanged across most advanced
and emerging economies in view of
the unclear outlook for monetary
conditions
and
financial
stability
especially in the post-QE tapering era.

The expectations of increase in policy
interest rate remain in focus in the US
and the UK, even though the Fed
reaffirmed that it would maintain the
current
highly
accommodative
monetary policy stance. The European
Central Bank (ECB) and Peoples Bank
of China (PBoC) have also announced
new monetary stimulus programmes
which will moderate the impact of the
end of QE3 on frontier markets.

Domestic
Economic
and
Financial
Developments Output
The Committee noted the continued
resilience of the economy as real GDP
grew by 6.54 per cent in Q2, 2014
compared with 5.40 per cent in the
corresponding quarter of 2013. The
observed growth rate also surpassed
the 6.21 per cent recorded in the Q1
of 2014. The non-oil sector remained
the main driver of growth recording
6.71 per cent in Q2, 2014; although
lower than the 8.21 and 8.88 per cent
recorded
in
Q1,

and
the
corresponding
quarter
of
2013,
respectively. The decline in growth of
non-oil GDP was traced to the decline
in agricultural output, construction,
trade and services relative to the levels
recorded in Q1, 2014. The slowdown in
agricultural output was attributed to
the insurgency activities in the North
Eastern axis and some parts of the
North Central States which led to
displacement of farming communities,
thereby limiting agricultural activities
and, hence, output from that region.

Growth in the services and industry
sectors
remained
relatively
stable
compared with the corresponding
period
in
2013.
The
Committee
commended all levels of government
and the general population for the
coordinated, prompt and effective
response to the Ebola Virus Disease
(EVD) in Lagos and Port Harcourt; two
cities that are commercial hubs and
leading growth axes for the service
and industry sectors of the economy.
The oil sector grew by 5.14 per cent in
Q2 2014, a marked reversal from the
decline recorded in the preceding
four
quarters.
The
Committee
welcomed the intensification of efforts
by
government
at
addressing
vandalism of oil facilities and theft of
crude oil in the Niger Delta region as
well as efforts towards addressing gas
supply shortages to the power plants.
The
Committee
reiterated
its
commitment to continue to support
the efforts, in addition to facilitating
other measures aimed at promoting
inclusive noninflationary growth.

Prices
Headline inflation rose to 8.5 per cent
in August from 8.3 in July 2014. The mild
but sustained underlying inflationary


CBN Monetary Policy Review

pressures were attributable mainly to
food
production
and
distribution
challenges posed by the insurgency
activities. From 9.4 per cent in April
2014, food inflation, measured on a
year-on-year basis, rose to 10.0 per
cent in August while core inflation
moderated consecutively in the last
two months since June 2014. In August
2014, the year-on-year core inflation
was 6.3 per cent, down from 8.1 and
7.1 per cent in June and July,
respectively.
The
Committee
was
concerned that the insurgency was
forcing a switching from domestic to
imported food to meet domestic
shortfall with huge impact on external
reserves and underscored the need to
expedite action to restore normalcy to
the troubled region to sustain the
tempo of growth. The Committee
further reaffirmed its commitment to
sustain
efforts
at
ensuring
price
stability.

Monetary,
Credit
and
Financial
Markets’ Developments
Broad money supply (M2) grew by 2.94
per cent in August 2014 over the level
at end-December 2013 compared
with
4.83
per
cent
in
July.
The
annualized growth of 4.41 per cent in
August 2014 was below the growth
benchmark of 14.52 per cent for the
year. Net domestic credit, however,
increased by 5.31 per cent in August
relative to the end-December 2013
level. When annualized, net domestic
credit
rose
by
7.96
per
cent,
compared
with
the
growth
benchmark of 28.5 per cent for fiscal
2014. The rather slow expansion in
money supply in August reflected the
10.17 per cent contraction in net
foreign assets of the banking system
(NFA).

Money market interest rates, however,
remained within the MPR corridor as
the overnight and collaterized OBB
rates moderated from 11.30 and 11.49
per cent in August to 11. 08 and 10.62
per cent on 11 September 2014,
respectively. The MPC noted that both
rates traded around the lower band of
the MPR corridor on account of the
liquidity surfeit in the banking system.

Activities in the capital market were
bearish during the period with the AllShare Index (ASI) decreasing by 4.3
per cent from 42,482.48 on June 30,
2014 to 40,672.94 on September 12,
2014. Market Capitalization (MC) also
decreased by 4.3 per cent from N14.03
trillion on June 30, 2014 to N13.43 trillion
on
September
12,
2014.
Market
indicators declined owing to the profit
taking activities of investors.

External Sector Developments
The average naira exchange rate
remained considerably stable in all
segments of the foreign exchange
market. The exchange rate at the
retail-Dutch Auction System Segment
(rDAS) was stable at N157.29/US$, but
depreciated at the inter-bank and
substantially at the BDC segments
between July and August 29, 2014. At


CBN Monetary Policy Review

the interbank segment, the naira
depreciated slightly by N0.32 or 0.20
per cent to $/N162.40 from $/N162.08.
Similarly, at the BDC segment, the
exchange rate depreciated by N2.00
or 1.2 per cent from US$/N167.00 to
U$/N169.00. The premium between the
rDAS and interbank rates was 3.25 per
cent while that between the rDAS and
BDC rates stood at 7.45 per cent in the
review period. Gross official reserves
rose from US$39.1 billion at end-July to
US$40.7 billion on 17th September, 2014.
The current level of external reserves
provides approximately 7 months of
imports cover.

The Committee’s Considerations
The MPC expressed satisfaction with
the relative stability in the economy
while also noting the risks that lie
ahead. The key risks include: the
possibility of capital reversals as the
Fed’s Quantitative Easing in the US
finally
ends
in
October,
amidst
dwindling oil output and declining oil
prices, domestic security challenges
and
upward
trending
headline
inflation.
The
Committee
further
expressed
concern
about
high
banking
system
liquidity
and
its
potential effects on inflation and the
exchange rate. The policy challenges,
the Committee noted, would include
sustaining the stability of the naira
exchange
rate,
managing
the
vulnerability to capital flow reversal,
building fiscal buffers to insure against
global shocks, managing inflation and
exchange
rate
expectations
and
safeguarding
the
financial
system
stability as well as a buildup in election
related spending.

The Committee welcomed the efforts
by government to address some of the
constraints and risks to economic
activity like the insurgency in the NorthEast and the Ebola Virus Disease
epidemic. It noted that as progress is
made in these areas and in respect of
other
constraints
like
power
and
improving SME financing, the outlook
for
growth
appears
bright
and
prospects for upward price pressure
would be moderated. The Committee
further noted that the restrictive stance
of monetary policy provided important
defenses against structural liquidity in
the
banking
system
and
also
reaffirmed the willingness to play a key
role in managing expectations around
exchange
rate
and
inflation
vulnerabilities.

Consequently,
adequate
consideration would need to be accorded the
goal of reining-in banking system
liquidity to safeguard the objective of
price stability. The Committee was,
however, concerned that banks were
holding
large
excess
reserves
averaging over N300 billion even when
there were ample opportunities for
productive and profitable lending to
the real sector of the economy. The
concern was further strengthened by
the reality of injecting an additional
N866 billion into the system through the
redemption
of
maturing
AMCON


CBN Monetary Policy Review

bonds in October. Given the apathy to
lending, banks may be inclined more
to placing these new funds in the SDF
or use it to increase pressure on the
exchange
rate.
The
Committee
advised the Bank to explore ways of
encouraging
banks
to
lend
such
excess reserves to the real sector.
In
light
of
the
foregoing
and
consideration of other key risk factors,
the Committee was of the view that
the direction for policy in the short- to
medium term would be either to retain
the current tight stance of monetary
policy or further tighten monetary
policy.

The Committee’s Decisions
In view of these developments, the
Committee
was
split
between
retaining
the
current
stance
of
monetary
policy
and
further
tightening. Consequently, 6 members
voted to retain the current stance of
monetary policy. Five members voted
to increase private sector CRR while
one member voted to increase public
sector CRR. In addition, one member
voted for an asymmetric corridor
around the MPR. Consequently, the
MPC decided by a majority vote to:

(i) Retain the MPR at 12 per cent with a
corridor of +/- 200 basis points around
the midpoint;

(ii) Retain the public sector Cash
Reserve Requirement at 75.0 per cent;
and
(iii) Retain the private sector Cash
Reserve Requirement at 15.0 per cent.
Thank you.

Godwin I. Emefiele
Governor, Central Bank of Nigeria
19th September 2014


CBN Monetary Policy Review

Central Bank of Nigeria Communiqué
No.

of
the
Monetary
Policy
Committee Meeting of Monday 24th
and Tuesday 25th November, 2014

The Monetary Policy Committee (MPC)
met on November 24th and 25th 2014
against the backdrop of moderate but
uneven growth in the global economy
and build up of vulnerabilities in the
domestic economy. In attendance
were all 11 members, following the
expiration of the tenure of Dr. Kingsley
C. Moghalu as a Deputy Governor of
the Bank on 5th November 2014. The
Committee
reviewed
key
developments
in
the
global
and
domestic economies during the first
ten months of 2014 and assessed the
short-to-medium term risks to price and
financial stability as well as the outlook
for the rest of the year up to the first
half of 2015.
International Economic Developments
The
global
economic
space
continued to be dominated by strong
downside risks to growth, including the
softening
commodity
prices,
rising
geo-political tensions, and heightening
threats to financial markets in the
emerging and frontier economies in
the aftermath of the termination of
Quantitative Easing by the US Federal
Reserve at the end of October 2014.
Developments in the international oil
market have intensified the risks and
vulnerabilities faced by oil exporting
countries in the wake of a new
episode of falling oil prices. The
uncertainty is complicated by the
absence of clear signals on how far
and how long this episode would last.
While the revenue impact of falling oil
prices was severest on the oil exporting
countries, it was largely positive on the
oil importing countries led by the
United States, which has also emerged
as a major oil exporter.
With considerable divergence across
regions, global growth picked up in
the second half of 2014 at a lower
than predicted pace. In view of the
perceived
vulnerabilities
and
associated
risks,
the
International
Monetary Fund (IMF) has recently
downgraded
its
global
growth
forecast for 2015 to 3.3 per cent from
an earlier projection of 3.7 per cent.
The expected tepid performance in
2015 reflects the impact of the strong
headwinds arising from the negative
spillover effects of the unwinding of
the US monetary stimulus, deteriorating
geo-political tensions in many regions,
uncertainty about the direction of the
US-led economic sanctions on Russia;
a development which in combination
with the shale oil revolution has
created a glut in the oil market at
below
long
run
price
trends,
unsustainable
fiscal
stance
and
absence of fiscal buffers in a number
of countries and declining aggregate
demand in others. These risks were,
however,
moderated
by
the
expansionary monetary stimulus of the
European Central Bank and the Bank
of Japan which has led to increased
consumption, particularly in the wake
of falling oil prices.


CBN Monetary Policy Review

Growth in the advanced economies is
projected at 1.8 per cent in 2014
compared with 1.2 and 1.4 per cent in
2012 and 2013, respectively. The US is
estimated to grow at 2.2 per cent in
2014,
driven
by
strong
private
consumption,
export
growth,
and
contraction in imports. A stronger
dollar, softening global growth, and
sharp
financial
market
correction
could,
however,
undermine
confidence and favorable terms of
trade. In addition, the growth could be
met
by
rising
wage
demands,
obviating the Federal Reserve’s early
normalization of monetary policy with
negative impact on global interest
rates.
In the United Kingdom, at 3.2 per cent
in 2014, output has remained above its
long run average compared with 0.3
and 1.7 per cent in 2012 and 2013,
respectively.
The
Euro
area
performance, however, seem to be at
variance with the trend in other key
advanced economies. Fundamental
fiscal headwinds, high unemployment,
and weak bank lending extended into
Q3 of 2014, reflecting largely the
failure of its comprehensive assessment
program designed to reduce financial
fragmentation.
The
Committee
observed that the monetary stimulus of
the
ECB
has
neither
stimulated
aggregate
demand
nor
restored
growth to a sustainable long run path
as the prospects of a deepening
recession looms large. A key for the
ECB is that decoupling the euro zone
from the US monetary conditions
would create its own shocks but the
impact would be even more severe
when
the
Federal
Reserve
commences
monetary
policy
normalization. An uptick in global
demand, a weakening euro and the
ECB’s monetary stimulus could create
a benign environment for growth. The
depth of the slowdown, however,
suggests that the ECB may need to
implement full quantitative easing to
return the Euro area to its long run
growth path.
The emerging markets and frontier
economies remain constrained by
limited
macroeconomic
space
to
implement
demand-enhancing
monetary stimuli. A retrenchment of
portfolio flows has already begun
following the end of Quantitative
Easing by the Federal Reserve, thus
scaling up exchange rate pressures.
Thus,
growth
has
been
revised
downwards to 4.4 per cent in 2014 with
China facing its lowest growth of 7.4
per cent since 1990 due to the cooling
of its property market. The divergence
in the monetary policy stance of the
US, China, and Japan has further
heightened risk in most emerging
economies, elevating financial market
fragility
and
currency
risk
in
the
balance sheet of banks and corporate
bodies.
In Sub-Saharan Africa, growth was
revised downwards to 5.1 per cent in
2014 from the earlier projection of 5.4
per cent to reflect the ongoing
sluggish global growth and declining


CBN Monetary Policy Review

commodity prices. In addition, political
crisis, infrastructural challenges, and of
late the Ebola outbreak in Guinea,
Liberia
and
Sierra
Leone
have
moderated
earlier
robust
growth
outlook. The key risks remain declining
aggregate
demand,
falling
commodity prices, delayed recovery
and potential intensification of the
euro
zone
financial
stress,
sharp
adjustment in the bonds and equities
markets in the US, and muted growth
in China.
Domestic
Economic
and
Financial
Developments Output
Available data from the National
Bureau of Statistics (NBS) has indicated
that the domestic economy remains
strong and resilient in the face of
strong global headwinds. Nevertheless,
key vulnerabilities are emerging. Real
Gross Domestic Product (GDP) was
estimated at 6.23 per cent for the third
quarter of 2014. Although lower than
the 6.54 per cent in the preceding
quarter, it was higher than the 5.2 per
cent achieved in the corresponding
period of 2013. The non-oil sector
remained the major driver of growth
recording 7.5 per cent in contrast to
the oil sector, which contracted by 3.6
per cent. Overall, output is projected
to grow at about 7.0 per cent in 2014,
compared with the 4.2 and 5.5 per
cent, recorded in 2012 and 2013,
respectively. The Committee noted
that the robust expansion in domestic
output in the third quarter of 2014
against the tepid growth in the global
economy
was
anchored
by
the
improved performance in services,
agriculture, trade, and industry.
The
Committee
welcomed
the
impressive output growth performance
but cautioned that the continuing
insurgency in the North East of Nigeria
in combination with other risks could
adversely affect the growth outlook.
The Committee noted with concern
the
continued
decline
in
the
contribution of the oil sector to growth
and urged the political authorities for
the speedy passage of the Petroleum
Industry Bill to halt the trend. The
Committee
commended
government’s efforts to sustain the
tempo of the power sector reforms,
especially the amortization of the
legacy
debt
owed
to
major
stakeholders in the power value chain
and enjoined the political authorities
to fast track the implementation of
other complementary measures that
would improve power generation and
distribution.

Employment
The
November

national
unemployment survey by the National
Bureau of Statistics (NBS) revealed that
a total of 349,343 new jobs were
created in Q3 of 2014 compared with
259,353 jobs in the preceding quarter.
The
Central
Bank
of
Nigeria’s
development initiative under the N200
billion Commercial Agriculture Credit
Scheme (CACS) has created 166,790
jobs since inception in September
2009.
The
Committee
noted
with
satisfaction that the reforms in the


CBN Monetary Policy Review

power
sector
and
other
complementary policies if followed
through; would promote investment
and create the needed jobs for
inclusive growth and development.

Prices
Inflationary pressure moderated across
the three measures of inflation during
the
review
period.
Consequently,
headline
inflation
(year-on-year)
declined further to 8.5, 8.3 and 8.1 per
cent
in
August,
September
and
October, respectively. Core and food
inflation decelerated from 6.28 and
9.68 to 6.25 and 9.34 per cent in
September and October, respectively.
The deceleration in food inflation was
traced to the decrease in the prices of
both processed foods (from 4.4 to 4.3
per cent) and farm produce (from 5.3
to 5.0 per cent). The Committee noted
with satisfaction that all the measures
of inflation were within single digit. The
Committee, however, recognized the
upside risks to inflation in the near-term
to include increased spending in the
build up to the 2015 general elections,
depreciated exchange rate arising
from
the
falling
oil
prices
accompanied by external reserves
depletion, and food supply shocks
arising from the increased insurgency
activities in the major agricultural belts
of the country. The Committee was
satisfied,
as
indicated
by
Staff
forecasts that headline inflation would
remain well anchored at single digit
within the band at year-end if the
necessary
macroeconomic
policy
actions were taken.
Monetary,
Credit
and
Financial
Markets’ Developments
Broad money supply (M2) grew by 4.17
per cent in October 2014 over the
level at end-December, 2013, which
annualized to 5.01 per cent. The
annualized growth rate reflects an
improvement over the decline of 6.16
per
cent
achieved
in
the
corresponding period of 2013 but
lower than the growth benchmark of
15.02 per cent for 2014. Net domestic
credit grew by 9.09 per cent in
October
relative
to
the
endDecember 2013 level. On annualized
basis, net domestic credit rose by 10.91
per
cent
compared
with
the
benchmark level of 28.5 per cent for
2014. The sluggish growth in broad
money was largely due to Net Foreign
Assets, which contracted by 18.74 per
cent in October 2014. The tapered
growth in money supply also helped in
moderating inflationary pressures.
Interest rates in all segments of the
money
market
showed
further
moderation between September and
October
2014,
reflecting
persisting
liquidity surfeit in the banking system.
Average
interbank
call
rate
moderated from 10.96 to 10.81 per
cent while the collaterised Open Buy
Back (OBB) rate moderated from 10.76
to 10.48 per cent during the period.
Both rates hovered around the lower
band of the MPR during the period.
The Committee, however, noted that


CBN Monetary Policy Review

the structure of rates at the retail end
of
the
credit
market
did
not
significantly reflect banking system
liquidity conditions as both the prime
and maximum lending rates remained
largely
elevated.
The
maximum
lending rate declined marginally from
25.77 to 25.75 per cent between
September and October while the
prime lending rate on the other hand
increased from 16.44 to 16.48 per cent.
The high interest rates notwithstanding,
credit to private sector rose by 7.75 per
cent during the period. To improve the
efficiency of monetary policy, the
Committee, urged the Bank to ensure
that credit levels reflected liquidity
conditions in the banking system.
The bearish conditions in the capital
market continued as the equities
market indicators trended downwards
in the review period. The All-Share
Index (ASI) declined by 17.9 per cent
from 41,329.19 to 33,962.18 between
December 31, 2013 and November 21,
2014.
Also,
Market
Capitalization
(MC)
decreased by 15.0 per cent from
₦13.23 trillion to ₦11.24 trillion during
the same period. The decline in
equities
market
performance
was
largely
due
to
increased
capital
outflows, as some foreign investors sold
off, amidst concerns over currency
depreciation in the face of the steady
declines
in
external reserves
and
international crude oil prices.


External Sector Developments
Developments in the external sector
since September 2014, manifested in a
buildup of pressures in the foreign
exchange market. While the Bank
sustained its efforts to maintain the
stability of the naira exchange rate at
the rDAS window, a considerable
degree of weakening was recorded at
both the interbank and Bureau de
Change (BDCs) segments.
The exchange rate
at the rDAS
window during the review period
opened at ₦157.31/US$ and closed at
₦157.32/US$, reflecting a marginal
depreciation of ₦0.01. To maintain and
stabilize the exchange rate at that
level, gross official reserves declined
from
US$40.7
billion
on
17th
September, 2014 to $36.75 billion at
end-October 2014. From year to date,
substantial currency depreciation has
occurred in comparator oil exporting
countries
but
the
naira
has
depreciated by only 1.74 per cent.
At the interbank segment, the naira
depreciated by ₦1.75 or 1.06 per cent
to $/₦165.55 from $/₦163.80. In the
same
vein,
the
exchange
rate
depreciated by ₦1.00 or 1.19 per cent
from US$/₦169.00 to $/₦170.00 at the
BDC segment. The depreciation at
both the interbank and the BDC
segments
largely
reflected
recent
demand pressures arising from the
falling oil prices and dwindling external
reserves. As part of the demand
management measures, the Bank in
two recent circulars excluded certain


CBN Monetary Policy Review

import items from the rDAS window.
Despite the tight measures, the high
demand for foreign exchange has
continued unabated. This demand
does not seem to have any bearing on
the genuine foreign exchange needs
of the country, which the Bank stands
ready and has the capacity to meet.
The current level of external reserves
provides approximately 7 months of
imports cover.

Committee’s Consideration
The Committee noted with satisfaction
the deceleration in all the three
measures of inflation since September
2014;
a
development
which
has
provided headroom for policy flexibility
and maneuver. The robust output
expansion amidst strong headwinds
arising from a weakening of the
international
oil
market
gives
credence to the efficacy of our
macroeconomic
policy.
The
Committee also noted that unlike in
previous
episodes,
the
current
downturn in oil prices is not transitory
but appears to be permanent; being a
product
of
technological
advancement. Currently, the US which
use to be Nigeria’s former major oil
export destination now meets on
average 80 per cent of its domestic oil
demand from local shale oil retorting
technology production and exports
over 8 million barrels of crude oil daily.
The Committee found credence in the
permanency theory of current oil price
dynamics in the fact that the political
restiveness in the Middle East and
North Africa (MENA) region has not
created uncertainty in oil supplies as
both Libya and Iraq (Southern) have
open and strong supply lines in the
market. A nuclear deal with Iran could
further
complicate
the
situation,
opening up the supply space for new
oil supplies from Iran. Available data
shows that a number of 6-month oil
futures are currently signed at below
US$70/barrel while improvements in
technology have driven down the
break-even
cost
of
shale
oil
production to an average range of
US$52-US$70 per barrel. In the light of
this development, the Committee is of
the view that the oil price benchmark
of US$73/barrel proposed in the 2015
Federal Government budget may be
overly
optimistic,
requiring
considerable caution on the budget’s
revenue projections. A weak public
finance may impinge adversely on
growth prospects as it shows up in
reduction in critical public and private
consumption
and
investment
spending.
Without prejudice to this position, the
Committee is of the view that the
softening
crude
oil
prices
could
provide necessary leverage for the
fiscal authority to reduce budgetary
outlays on fuel subsidy and channel
such savings to growth enhancing
sectors
of
the
economy.
The
Committee
took
note
of
the
supportive fiscal stance in this regard
and
public
commitment
to
take
advantage of the low oil price to
reduce fuel subsidy spending and


CBN Monetary Policy Review

liberalize prices as in many emerging
economies.
Furthermore,
the
Committee expressed satisfaction with
the recent demand management
measures announced by the fiscal
authorities to contain pressure in both
the goods and money markets and
provide some respite in the near term.
Notwithstanding,
efforts
should
be
geared
towards
addressing
the
binding supply side constraints such as
the
insecurity,
infrastructural,
and
institutional
challenges.
The
Committee also noted the gradual
improvement
in
labor
market
conditions
which
resulted
in
the
additional employment of 349,343 in
the
third
quarter
of
2014.
The
dominance of the informal sector in
the new jobs profile, suggests the
preponderance of underemployment
over
the
unemployment
phenomenon, requiring intensification
of reforms to unlock the growth
potential of the formal sector.
Given the not too impressive fiscal
revenue
outlook,
the
Committee
challenged
the
sub-national
governments
to
seize
this
unique
opportunity to reduce reliance on
allocations
from
the
Federation
Account in funding their operations. To
this end, the Committee commended
the efforts of some states which
recorded unprecedented growth in
Internally Generated Revenues (IGRs)
in 2013. Consequently, the Committee
enjoined other states of the Federation
to
emulate
these
states
by
strengthening their IGR mechanisms
with a view to minimizing reliance on
FAAC
allocations
with
attendant
disruptions
to
their
budget
implementation arising from dwindling
oil revenues.
A major issue considered by the
Committee,
however,
was
the
declining level of external reserves,
which arose from demand and supply
constraints. On the supply side, the
falling
oil
price
has
considerably
reduced the accretion to external
reserves thus constraining the ability of
the Bank to continually defend the
naira and sustain the stability of the
naira exchange rate. The supply side is
further
weakened
by
the
commencement of normalization of
monetary policy by the US Federal
Reserve following the termination of
the third quantitative easing on 29th
October, 2014; a development which
has accentuated capital outflows.
These developments are against the
backdrop of considerable loss of fiscal
space following from our inability to
build sufficient reserves during the
boom days.
On the demand side, the pressures in
the foreign exchange market were
aided mostly by the excess liquidity
conditions in the banking system and
speculative activities. It has become
increasingly
worrisome
that
improvement in liquidity conditions in
the
banking
system,
designed
to
enhance the resilience and stability of
the banking system, has not translated


CBN Monetary Policy Review

to increased credit expansion to the
real sector to engender inclusive
growth
and
boost
employment.
Rather, it has led to an upward
pressure in the foreign exchange
market and Standing Deposit Facility
window of the Bank while banks
continually
exercise
a
cautious
approach to lending.
Against
this
background,
the
Committee is of the view that the
current challenge requires bold policy
moves on both the demand and
supply sides of the foreign exchange
market. Consequently, bold policy
and administrative measures in the
management of the nation’s stock of
foreign
exchange
reserves
have
become inevitable in order to align
the
market
towards
its
long-run
equilibrium path.
On this note, the Committee wishes to
reiterate
that
the
Bank
remains
committed to a stable exchange rate
within the limits of available resources
and
would
continue
to
maintain
sufficiently strong level of external
reserves
to
meet
its
short
term
obligations and other regular balance
of payments commitments. Without
prejudice to this commitment, our
foreign
exchange
management
framework would have zero tolerance
for infractions and would penalize
economic
agents
whose
primary
objective
is
to
speculate
in
the
Nigerian market.
The Committee is fully aware of the
short
run
implications
of
a
tight
monetary policy stance on lending
and growth. However, available data
indicates that banking system liquidity
has been lavishly deployed in pursuit
of
speculative
foreign
exchange
trading at the short-end of the market.
While the Committee remains fully
committed to the goal of promoting
inclusive growth through lower interest
rates in the medium- to long-term,
banks
as
agents
of
financial
intermediation have a critical role to
play in the nation’s development
process. A banking system with an
overly high profit motive negates the
core tenets of banking and purpose of
a
banking
license.
Under
the
circumstance, monetary policy must
be bold and emphatic on the goals
macroeconomic management seeks
to achieve and encourage the flow of
credit along those lines.
The current situation demands that the
Bank confronts the issue of declining
external reserves head-on in order to
strengthen the value of the domestic
currency.
Consequently,
stabilizing
prices and maintaining exchange rate
stability and charting a sustainable
path for medium to long-term growth
are the immediate top priorities. The
Committee
remains
committed
to
these in order to sustain the credibility
of
our
policies
and
anchor
the
expectations of our core stakeholders.
In the Committee’s opinion, a more
flexible naira in the face of nonexistent


CBN Monetary Policy Review

fiscal buffers was the most viable
policy option at a time of heightened
demand
pressure
for
foreign
exchange and falling oil prices. The
Committee was, therefore, of the view
that if it failed in taking the right policy
actions now, the market would force
the Bank to take more drastic actions
in the future with far less foreign
exchange reserves. Also, given the
level of excess liquidity in the banking
system, it becomes imperative for the
Bank to address the sources of the
foreign exchange demand pressure.
In
the
light
of
the
above
considerations, the Committee was of
the opinion that the economy stood to
gain by:
a) Further tightening of monetary
policy stance to anchor inflation
expectations; and
b) Allowing some flexibility in the
exchange rate to stem
speculative activities and depletion of
reserves.
Consequently,
the
Committee
decided as follows:

Decision
Having considered all the issues above
the Committee decided as follows:
a) Nine members voted to increase
the MPR to 13 per cent while two
members voted to retain the MPR at
12 per cent
b) Ten members voted for a symmetric
corridor of +/- 200 basis points around
the MPR, while one member voted for
an asymmetric corridor of +200 and -
500 basis points around the MPR
c) All the 11 members voted to
increase
CRR
on
Private
Sector
deposits from 15 to 20 per cent with
immediate effect
d) All the 11 members voted to retain
CRR on Public Sector deposits at 75
per cent
e) All the 11 members voted to move
the midpoint of the official window of
the foreign exchange market from
₦155/US$ to ₦168/US$
f) All the 11 members voted to widen
the band around the midpoint of the
exchange rate from +/-3 per cent to
+/-5 per cent.
g) All the 11 members voted to retain
the
net
open
foreign
exchange
trading position at 1 per cent.
Consequently, the MPC decided as
follows:
i. Increase the MPR by 100 basis points
from 12.00 to 13.00 per cent;
ii. Increase the CRR on private sector
deposits by 500 basis points from 15.00
to 20.00 per cent with immediate
effect;
iii. Move the midpoint of the official
window of the foreign exchange
market from ₦155/US$ to ₦168/US$;
iv.
Widen
the
band
around
the
midpoint by 200 basis points from +/-3
per cent to +/-5 per cent;
v. Retain public sector CRR at its
current level of 75.00 per cent;
vi. Maintain a symmetric corridor of +/-
200 basis points around the MPR; and


CBN Monetary Policy Review

vii.
Retain
the
net open
foreign
exchange trading position at 1.00 per
cent.
I thank you all for Listening

Godwin I. Emefiele, CON
Governor, Central Bank of Nigeria
25th November, 2014


CBN Monetary Policy Review

CBN Monetary Policy Review