Central Bank of Nigeria Communiqué No. 79 of the Monetary Policy
Committee Meeting, October 10, 2011

The Monetary Policy Committee (MPC) held an extraordinary
meeting on 10th October, 2011 in response to unusual developments
in the global and domestic economy, with potential negative
impact on domestic liquidity conditions and renewed threats to
price and exchange rate stability.
The global economic horizon remains highly uncertain, with the signs
getting more ominous as policy makers find it increasingly difficult to
take the necessary economic decisions that may avert a new wave
of recession. Three self-reinforcing negatives continue to define the
global economy: the sovereign debt crisis in the Eurozone, significant
undercapitalization of internationally-active banks, and negative
market sentiment leading to continuing flight to cash as a safe
haven and deleveraging. The first and second aspects intensify the
third, and without confidence and some appetite for financial assets
and credit, the debt crisis and financial solvency concerns in turn
become deeper.
As a result of these concerns about the Eurozone, coupled with the
US deficit problem, inflation in emerging markets, debates about a
soft or hard-landing in China and other pessimistic scenarios, there is
a trend towards reversal of capital flows to emerging and frontier
markets, and a recent depreciation in the national currencies of

many economies in Asia and Latin America including India,
Indonesia, Malaysia, South Korea, Brazil, Chile, Colombia, and
Mexico, among others. In Africa, the national currencies of Kenya,
South Africa, Gabon, Ghana and Nigeria have also been under
pressure. Central banks have generally responded through direct
intervention in the foreign exchange market to stabilize the currency
and, in some cases, a significant hike in policy rates. It is worthy of
note that fund managers have not been eager to exit environments
with relatively high real rates of interest and benign inflation outlook.

The Domestic Economy and Committee’s Deliberations
The growth outlook for the economy does not appear to have
changed much, driven largely by the positive forecasts for the nonoil sector as noted in the last MPC communiqué. Inflation had come
down to 9.3 per cent in August but, as indicated in the same
communiqué, a combination of monetary, fiscal and structural
factors continue to advise against complacency.
The naira has come under increasing pressure, and has recently
traded outside the band of N150 +/- 3.0 per cent. In the
Committee’s view, the increasing pressure on the domestic currency
has been emanating from a number of sources not all of which can
be addressed by purely monetary interventions. First, there are
concerns about the likely impact of a double dip recession on oil

prices and already declining foreign reserves. Second, there are also
concerns about the delay in implementing fundamental economic
decisions that will shore up reserves. Specifically, it is estimated that
simply passing the Petroleum Industry Bill (PIB) and removing subsidies
on Premium Motor Spirit (PMS) will add at least US$10 billion to
national reserves annually. The petroleum subsidy for 2011 alone is
estimated to be about US$6 billion. A substantial part of oil
production (about 40 per cent) is currently in deep offshore wells.
Based on the terms agreed in the 1990s when oil price was under
US$30, royalty from oil wells deeper than 1,000 metres is zero per cent
and the nation is paid only 20 per cent of the profit by oil companies
after deducting their expenses. As a result, the country has had
limited benefits from high oil prices and increasing output, with most
of the gains going to multinational oil companies under an
inequitable fiscal arrangement.

Similarly, the Committee expressed concerns about the genuineness
of demand for petroleum imports. This year alone, oil importers have
bought over US$7.0 billion from wDAS, thereby, depleting the
Nation’s external reserves. This demand, in the Committee’s view,
might have been fuelled by rent-seeking and subsidies.

It is imperative that the enabling legislation for correcting fiscal terms
be put in place under a Petroleum Industry Bill (PIB) that reflects

international best practice. Unfortunately, discordant voices are
delaying these processes to the long-term detriment of the
economy. Whereas the labour unions have genuine concerns
about the impact of subsidy removal on the poorer segments of
society, the stark reality is that the country is living above its means.

The Greek government recently passed a budget in which 33,000
public sector workers had to be retrenched as a result of failure to
take difficult but necessary economic decisions in the past. Nigeria
cannot afford to delay, any further, the reforms of the petroleum
industry.

Third, the draft 2012 budget and the underlying assumptions are
based on an oil price of US$75 per barrel and an output of 2.4 million
barrels per day. This makes the 2012 budget even more
expansionary than the 2011 budget and further dampens any hope
for an early fiscal retrenchment. The fiscal authorities have clearly
signaled a commitment to medium-term consolidation and indeed
the projected deficit in 2012 is lower than the deficit in the 2011
budget. This notwithstanding, the projected increase in spending,
particularly the high levels of recurrent expenditure, would suggest
increasing pressure on prices in general.

Fourth, structural bottlenecks in the Nigerian economy that
perpetuate import dependence make import-demand highly
inelastic.
Finally, real interest rates have been low, partly driven by a cautious
approach to monetary tightening at a time of financial system
instability. Although the MPC recognized inflationary pressures and
has consistently acted prudently in policy tightening based on
expectations, a gradualist approach has been the pattern thus far,
given the situation with the banking system and equity markets.

Policy Issues and Dilemmas
In the face of the spectre of declining oil prices, declining foreign
reserves, increased demand for foreign exchange, fiscal dominance
and capital flow reversals, monetary policy must bear a larger
burden of economic adjustment. The MPC has, therefore, to make
difficult choices, each of which has clear costs and benefits.
One option is protecting reserves by reducing the supply of dollars at
the wDAS. This will lead to a rapid depreciation of the currency and
the emergence of a parallel market, leading to further pressures on
the Naira, imported inflation and a general loss of confidence on the
part of investors.
Indeed, the impact on price and exchange rate stability will be such
as to undermine the key mandates of the Central Bank. Given the

highly inelastic demand for imports, it is doubtful that increasing the
cost of dollars will significantly reduce quantity demanded. Indeed,
genuine demand will be compounded by high levels of speculative
demand.
A second option is to address monetary and liquidity conditions
more aggressively. By tightening liquidity and raising domestic
interest rates, a number of advantages follow. First, this is the logical
response to fiscal expansion, especially with the anticipated capital
releases in the fourth quarter as well as repayment of backlog of
Nigeria National Petroleum Corporation (NNPC) debt to the
Federation
account.
Second,
it
provides
an
incentive
for
reallocation of portfolios by improving real returns of holding the
naira as a store of value. Third, it increases, after a lag, the rates paid
on deposits and savings, thus reversing any tendency towards
disintermediation and capital flight. Finally, it increases the cost of
foreign currency positions held for speculative purposes, and
reduces the tendency to pre-pay dollar obligations with naira
liabilities.
The option has disadvantages in the form of high lending rates,
financial cost to the banking system and possible losses on fixed
income instruments due to capital losses. Besides, tightening of
liquidity would run the risk of slowdown in credit growth.

Having considered the pros and cons of each option (and
combinations of options), the Committee is of the view that given
the completion of shareholder meetings on all banks and approvals
from the courts for many, the risks to the banking system of tighter
liquidity conditions have been significantly reduced, as the banks
are in the process of receiving all approvals and fresh capital
including AMCON bonds.
Now that the
banking system
recapitalization is complete, monetary policy can be freed from
concerns about its impact on financial system stability.
The Committee reaffirmed its belief that maintaining exchange rate
stability, especially in times of global uncertainty, is crucial to the
mandate of price stability. Moreover, the interest of the economy is
best served, by maintaining an unequivocal stance of nonaccommodative
monetary
policy,
given
the
existing
fiscal
conditions.
The Committee also reaffirmed its commitment to improving returns
on naira assets and protecting the capital of investors against
erosion due to huge exchange rate losses, in order to encourage
appropriate asset allocation decisions.
The Committee recognized the need to remain very clear on the
Bank’s primary mandate and maintain the credibility it has
established so far by sending strong signals of continuing
commitment to price and exchange rate stability.

Finally, the Committee noted that the Committee of Governors has
already commenced full investigation of compliance with rules
governing foreign exchange transactions by authorized dealers and
endorsed the declared commitment to sanction all infractions and
improve the level of supervision and compliance in the market.

Decisions:
1. The monetary policy rate (MPR) is raised by 275 basis points
from 9.25 per cent to 12.0 per cent (by a vote of 8 in favor and
1 in favor of status quo);
2. Maintain the current symmetric corridor of +/-200 basis points
around the MPR (by unanimous vote);
3. The cash reserve ratio(CRR) is increased from 4.0 per cent to 8.0
per cent from the maintenance period beginning October 11,
2011 by a vote of 7 to 2 (2 members voted for a 6.0 per cent
CRR);
4. The net open position (NOP) is reduced from 5.0 per cent to 1.0
per cent of share-holders funds with immediate effect and with
full compliance by Friday, October 14, 2011 (by unanimous
vote); and

5. It was further agreed that the reserve averaging method of
computation be suspended in favour of daily maintenance
until further notice.


Sanusi Lamido Sanusi, CON
Governor
Central Bank of Nigeria

October 10, 2011

PERSONAL STATEMENTS BY MPC MEMBERS:
1.0
ALADE, SARAH
The renewed pressure on the foreign exchange market despite
strong economic fundamentals is of serious concern to the
conduct of monetary policy. To stabilize the foreign exchange
market and restore confidence in the economy, there is need for
monetary policy intervention to stem the sharp decline of the
naira and reduce the pressure in the short run. Nigeria is not alone
as emerging markets around the world are making efforts to shore
up their falling currencies amid concerns that the global
economic growth may stall. These responses have ranged from
increasing monetary policy rate and/or reserve requirements, or
restricted use of foreign reserves/sales. To rein in the intense
pressure on the foreign exchange market and better anchor
inflation expectation, I support an increase in monetary policy
rate and Cash Reserve Requirements (CRR).

Global growth prospect has become grimmer. Developments in
the global economy over the past few weeks are a matter of
serious concern. The downgrading of the US sovereign debt
rating, the continuing sovereign debt crisis in the euro zone and
volatile commodity prices have led to increasing global anxieties.
These events are taking place against the backdrop of a

slowdown in growth in many of the advanced economies.
Growth momentum is weakening in the advanced economies
amidst heightened concerns that recovery may take longer than
earlier expected. Although Nigeria’s exports have performed well
in the recent period, this trend is unlikely to be sustained in the
face of weakening global demand. This combined with intense
pressure on the foreign exchange market calls for policy
responses to help restore confidence and anchor inflation
expectation.
While headline inflation declined to 9.3 percent in August, upside
risk to inflation still exist. The global food and energy prices remain
elevated, and as an import dependent country, global food
prices could spill over to higher domestic prices. Food inflation
inched up to 8.7 percent in August from 7.9 percent in July even in
the middle of the harvest season. As global commodity prices
continue to remain at an elevated level and given that the
country import food stuff such as rice, there may be heighten
upside risks to domestic inflation.
The planned removal of fuel subsidy and the increase in electricity
tariff could pose upside risk to inflation in the short-run. The Federal
Government resolve to remove the fuel subsidy coupled with the
increase in electricity tariffs is bound to increase price inflation.
Furthermore, real interest rate compared to neighboring
countries continue to be negative. To attract inflows into

the country, this condition needs to be corrected with sensible
monetary policy tool.

Fourth quarter capital releases by the Federal Government is
expected to be huge. Expenditure in the fourth quarter is
expected to be expansionary as government aims to complete
capital projects started during the year by the end of the budget
period. This bundled expenditure is bound to put upward pressure
on both inflation and exchange rate as some of the capital
procurement would have high import content.

While there are still pockets of downside risks in the domestic
banking sector, the resolution action taken by AMCON is
stabilizing the system. The return in confidence to the banking
sector, and the AMCON injection of funds through sale of AMCON
bonds could impact the level of liquidity in the banking sector.
Rising policy rate may help channel the additional liquidity to
productive uses in the economy rather than non-productive and
speculative activities.

Based on the above, I will recommend an increase in monetary
policy rate by 275 basis points and an increase in Cash Reserve
Requirement (CRR) to help stabilize the currency and fend off
inflationary pressures.

2.0 BARAU, SULEIMAN
A.
Strictly guided by the context and framework that influenced
my voting decision at the last Monetary Policy Committee
meeting, I voted again today to support further tightening
through the following specific measures;

A.1 Upward adjustment of the MPR by 2.75% to 12%
A.2 Upward adjustment of the Cash Reserve Ratio (CRR) from 4.0%
to 8%.
A.3 Retention of symmetric corridor of plus and minus 2% around
the MPR (Standing Deposit Rate of 10% and Standing Lending
Rate of 14%).
A.4 Support other administrative measures to reign in demand for
foreign exchange namely; reduction of the Deposit Money
banks Net Open Position and adoption of appropriate
sanctions for foreign exchange infractions and so on.
B.
The rationale for voting the way I did is summarized as follows;

B.1
Current liquidity levels have supported increased speculative
demand for foreign exchange. There is evidence of huge
liquidity in the banking system as demonstrated by liquid asset
holding of banks and their liquidity ratios. In effect, the huge
liquidity injected in 2008 and the subsequent quantitative
easing monetary policy measures in response to the global

financial crises have not been mopped up in spite of the
recent aggressive stance. In addition, the system liquidity has
been exacerbated by Governments fiscal operations including
the monetization of excess crude account balances.
B.2 The liquidity outlook is also not so good in the light of
anticipated AMCON liquidity injection and Government’s fiscal
operations particularly relating to further drawdown from the
Excess Crude Account and the normal year and capital
related activities of Ministries, Departments and Agency of
Government.
B.3
The obvious speculative attacks on the Naira in the foreign
exchange market continued in spite of various policy measures
recently adopted by the MPC. Foreign reserves have
continued to decline in spite of the recent significant
improvement in inflows from the NNPC. Speculative demand
could only be sustained in a regime of relatively low interest
rates, lack of alternative profitable investment outlets, current
and future anticipated liquidity position in the market. It has
therefore become necessary to take further steps to tighten
liquidity.
B.4
Inflation is still a threat and further tightening stance would help
to arrest the threat. It is recognized that the measures
recommended would increase money market and lending

rates and may affect lending and output growth. With inflation
trending down, however, real interest rates would therefore be
positive as a result of further tightening. Besides, in the context
of current liquidity situation, liquidity outlook, threat to Naira
exchange rates and declining foreign reserves, the measures
recommended become even more compelling. Given the
structure of our economy and observed historical reactions
when the Naira depreciates, the greatest threat to inflation is a
depreciating Naira and we have to do whatever is necessary
to eliminate the liquidity driven speculative demand.
In effect, I hold the very strong view that any depreciation in
the value of the Naira must be driven by fundamental and real
factors. I’m convinced that the recent demand pressure on
the Naira exchange rate is powered by factors that are
speculative and technical factors, of course supported by
huge market liquidity.
C.
The measures recommended are no doubt very strong and
would produce unintended impact on interest rates and credit
growth. I am however aware that the next MPC meeting
scheduled to hold in November, does provide an opportunity
for a quick review of market developments and the measures
taken.

3.0 LEMO, TUNDE
I have closely followed the review of the domestic and international
economic
and
financial
environments
and
observed
some
worrisome developments. Global economic conditions deteriorated
as shown by the increased downside risks and sluggish growth
caused by fiscal constraints and declining confidence in the
resilience of the financial system. The potential eurozone banking
system undercapitalization, rising global inflationary trends, declining
public confidence in the euro and the US fiscal problems, are
manifests of uncertain global economic outlook.
On the domestic front, the fragile global output, negative market
sentiments and declining international oil prices have serious
consequences for the domestic economy, particularly, the foreign
exchange market and the country’s external reserves position. I
have also noted of late elevated forex demand, largely driven by
speculation which resulted in the recent trading of the naira outside
the band of N150 +/- 3.0 per cent. I also observed that although,
headline inflation declined to 9.3 per cent in August from 9.4 per
cent, in July, 2011, inflationary pressures may persist for the rest of the
year due to the recent announcement effect of the proposed
removal of petroleum subsidy, increase in electricity charges,
anticipated expansionary fiscal stance in the fourth quarter of 2011,
injection of new capital into the intervened banks by the new core

investors and the expected liquidity injections by AMCON before the
end of the year, as well as high household expenditures associated
with end of year festivities.
Overall, the recent unusual developments evidenced in the liquidity
surfeit in the banking system fuelled the unprecedented demand
pressures in the foreign exchange market. This situation had negative
effects on the level of external reserves and sustenance of
exchange rate stability. It is, therefore, necessary that a very non –
accommodative stance be taken by the MPC so as to halt further
deterioration in domestic economic conditions.
In view of the foregoing, I recommend further aggressive monetary
tightening stance. In this regard, I vote for an increase of 275 basis
points in the Monetary Policy Rate (MPR) and maintain the
symmetric corridor of plus or minus 2 per cent around the MPR; an
increase in the Cash Reserve Ratio from 4 per cent to 8 per cent and
a reduction of the Net Open Position of banks from 5 per cent of
shareholders’ funds to 1 per cent. In conclusion, I also agree that the
reserve averaging method of computation of Cash Reserve Ratio be
suspended in favour of daily maintenance until further notice.
4.0 MOGHALU, KINGSLEY CHIEDU
At this Extraordinary Meeting of the Monetary Policy Committee,
confronted with the context of a threatening economic
environment
–
the
naira
under
increased
pressure,
the

announcement of the Federal Government’s plan to remove
petroleum subsidy in the forthcoming 2012 budget and the
inflationary expectations thus unleashed, and imminent, massive
liquidity injections by the fiscal authorities and the Asset
Management Corporation of Nigeria (AMCON) – the MPC clearly
needs to take strong action.
This is so especially in relation to the naira as a store of value, with
the markets factoring in widespread but mistaken sentiment that
the naira is about to be devalued. Should this mistaken notion
take hold, it will result in a massive run on the naira. Combined
with
the
ongoing
and
anticipated
liquidity
injections,
a
depreciation of the naira at this time would undoubtedly result in
a marked increase in inflation that would have a destabilizing
impact on the Nigerian economy.
It is necessary to reassert the commitment of the Central Bank of
Nigeria to the stability of the naira and to restraining inflation in no
uncertain terms. The restoration of increased stability to the
banking system through the successful recapitalization of the
eight intervened banks makes such strong action at this time
possible without significant adverse consequences for financial
stability. This time, however, the MPC needs to deploy a
combination of tools designed to prevent the excess liquidity -
including within the banking system - that is feeding continued

speculation on the value of the naira. Against this backdrop, I
vote for:
(i) An increase of the Monetary Policy Rate by 275 basis points
from the current 9.25 per cent, and maintaining a symmetric
corridor of plus or minus 2 per cent.
(ii) An increase in the Cash Reserve Ratio of 100 per cent from the
current 4 per cent to 8 per cent.
(iii)
A reduction of the Net Open Position of banks from 5 per
cent of shareholders’ funds to 1 per cent.

5.0 OLOFIN, SAM
This is an emergency meeting which by its very nature suggests
new developments that have implications for the economy have
occurred since our last meeting, and for which urgent corrective
measures may be` required before the next statutory meeting of
the MPC. Without necessarily wanting to sound like an alarmist
reading of the current situation, recent developments at the
foreign exchange market which no doubt reflect market reaction
to both domestic as well as external disturbances have been
quite worrisome. The various market signals suggest a declining
confidence in the Naira as a store of value, and hence the
unabated ever rising demand for the dollar. This has led to a sharp

decline in the level of foreign reserves by US$2.65 to $31.36 billion
or nearly 8 percent decline by Oct. 6, 2011, compared with the
figure of $34.01 billion as at September 20, 2011. Similarly the rate
of exchange has over the same period moved above the upper
three percent bound set around the target rate of N150: $1 that
has been sustained over the last several months. Evidence
available to us at this meeting shows that Reserve Money (RM)
has fluctuated above the quarterly indicative benchmarks set for
quarters 1, 2 and 3, in 2011 suggesting the existence of excess
liquidity in the system that may among other factors be fuelling
the hedging against the Naira, and the resulting rapid decline in
the level of reserves. If these facts are put side by side with the
developments in the global economy which suggest the
likelihood of a double-dip recession in the advanced economies
and likely fall in demand for energy in both developed and
emerging economies, we are likely to be confronted in the short
to medium term with a possible decline in the price of oil which
would further accentuate the pressure on the Naira.
As a highly import depend economy with less than elastic
demand for imports and exports, it would be futile to contemplate
foreign exchange adjustment or outright devaluation to ease the
pressure on the Naira. It is our strong view that not only would
devaluation further exacerbate the pressure on the Naira, it would
heighten the current surge in the demand for foreign exchange.

We may therefore in no time have to be confronted with the
bleak prospects not only of halting the accretion but of a possible
wiping out of existing reserves! There is therefore an urgent need
for a combination of both administrative and appropriate
monetary policy measures to stem the growing speculative attack
on the Naira and level of foreign reserves. Given the current and
foreseeable developments in a turbulent if not depressing outlook
of the global economy, a stable exchange rate and a rising
accretion rate in the level of reserves are about the most effective
insurance
the
economy
has
against
any
likely
external
disturbances, and for being able to sustain current level of
economic activity as well as promote growth.
Every indication on the fiscal side shows that inflationary pressure
reduction through fiscal consolidation is not likely to be
achievable in the short term, at least not in the 2011-2012 budget
periods. Similarly the structural constraints to growing credit and
lending to the real sector are not likely to improve in the short run,
given the current interest inelasticity of investment in the real
sector. We are therefore still left with a considerable room of
leverage for a policy stance that may raise the level of interest
rate without necessarily or unduly harming the prospects for
growth in the short to medium term. Secondly we are still far
behind competing countries like Ghana and South Africa in
bringing our MPR to a positive level that would make us more

competitive in attracting both FDI and portfolio capital. A positive
real interest rate is also desirable for encouraging growth in
domestic saving.
In the light of the foregoing, our current challenging situation
leaves the MPC with little or no choice but to utilize every
available means within its reach to halt the current run on foreign
reserves and weakening of the Naira. This would require a
combination of very strong monetary tightening signal beyond
the symbolic levels hitherto undertaken, coupled with necessary
administrative measures, to arrest the growing attack on the level
of reserves and the Naira. I would therefore vote for an upward
adjustment of the CRR from its current level of four to eight
percentage points, and the MPR raised by 275 basis points from its
current level of 9.25 to 12 percent, and retaining existing
symmetric corridor. Our next meeting within the next one month
would offer the opportunity for evaluating the effectiveness of
these measures in achieving the desired goals of reducing
inflation rate, maintaining a stable exchange rate and drastically
reducing the speculative demand for foreign exchange.

6.0 OSHILAJA, JOHN
Inflation expectations in Nigeria are correlated with expectations
of adverse changes in exchange rates for the Naira. Nigeria’s is

currently a highly import-dependent economy. Accordingly, a
goal of Monetary Policy has to been to maintain relative price
stability by also supporting (using tools at its disposal) relatively
stable exchange rates. Since FY 2009, it has been the policy of
the Central Bank to maintain exchange rates for the US Dollar
within a +/- 3% range around N 150.00; i.e. at a “quasi-pegged
rate”. There are fundamentally only two ways to do this. The
Central Bank can ensure the supply of sufficient foreign currency,
by drawing upon its reserves to meet the nation’s demands at the
desired price. Or, it can adjust levels of available Naira needed
to pay for foreign currency. The first approach has been the
CBN’s principal Exchange Rate Management strategy. This mostly
explains why, over a 2-year period characterized by high oil prices
and high capacity export production, the CBN’s holdings of
foreign
currency
reserves
have
fallen
from
a
high
of
approximately N 60 billion, and have been hard pressed to
exceed the top of a N 32-36 billion range observable so far in FY
2011.
Since our meeting of 20 September, despite repeatedly expressed
concerns about the impact of fiscally-sponsored liquidity in our
markets, and measures taken to mitigate clear threats to local
currency values, exchange rates for the Naira have breached
and remained above desired target-levels. Which brings us to
where we stand today – with the Naira trading as high as N 164 in

interbank markets, annual inflation at 9.3%, and the Monetary
Policy Rate progressively increased from 6% to 9.25% within a 12month time span. Market behavior and expectations now seem
to be running well ahead of policy action, thus compounding the
Central Bank’s targeting efforts. Fast-breaking developments of
the past few weeks also bring into stark relief the challenge
Monetary Policy faces in utilizing exchange rate targeting to
anchor price stability when Fiscal Policy is lax. The effectiveness of
Central Bank liquidity management tends to be harmfully diluted
when Naira amounts drained by the Central Bank are inevitably
replenished, and thus cancelled out, by Government spending
operations. This is the liquidity that invariably throws the currency
market system out of balance by promoting disproportionately
outsized demands for foreign currency, which thereby weakens
the Naira. Under these circumstances it makes little sense to
throw good reserves (i.e. hard currency) after bad (i.e. soft
currency). Especially, when further options remain available for
tackling demand sides of this currently, unbalanced equation.
The MPC decisions taken today may be characterized as a
“stake” the Committee has driven into the ground – a stake
based on Central Bank Liquidity Demand Management measures.
Tethered around this stake will be a number of administrative and
market-oriented measures to be rolled out, for the following
purposes expressly:

1.
Increase the Naira’s attractiveness as a store of value
2.
Ensure that non-speculative demands for foreign currency

continue to be met
3.
Promote
a
conducive
Monetary
environment
for

enhanced Foreign Investment
Accordingly, the first thing that has to go is the implicit costsubsidy the investing public affords governments for sovereign
and sub-national investment securities; i.e. Bills and Bonds. Savers
utilizing domestic fixed-income markets must be paid competitive,
real-term, rates of interest. Hence the MPC’s initiation of a real
interest rate regime, by an elevated increase in the MPR to 12%,
with corresponding normal symmetries for the CBN’s Deposit and
Lending Facilities; i.e. -/+ 2% respectively.
The second measure entails addressing the level of perverse
investment incentives in the banking sector. Nigerian DMB’s
appear to be holding (and funding) extraordinarily high levels of
Naira assets, in the form of tax-free Government Treasury Bills and
Bonds. This represents a conversion of surplus bank liquidity into
comparatively risk-free assets. Most seem to be paying for these
lucrative holdings with far cheaper deposit monies. I see nothing
wrong with any bank turning an easy Naira profit, given prudent
and legal opportunities to do so. However, in the current
environment, I believe the costs our banks incur in temporarily

transforming such holdings into cash, to meet higher yielding
demands (such as for business loans), is unacceptably low. This is
also to say that current spreads between FGN Government
securities’ yields and penal CBN repo rates – for which the same
securities are required as collateral – are too low. Especially given
that a significant proportion of the proceeds of such credits are
likely to hit currency markets under fiscally-boosted demand for
imports. The increase in the Cash Reserve Ratio is intended
immobilize further surplus banking liquidity; with added aims of
compelling our banks to moderate their current security holding
preferences,
and
challenging
current
cash
management
practices in the industry.
Lastly, upon our review of the available evidence, Committee
Members concurred with the Central Bank’s view that changes to
present exchange rate targets remain unwarranted. Such
considerations cannot be justified by present and near-term
trends in the country’s current account balance. Neither would
investment needs of the country be served by target-adjustment
at this time.
As I see it, conditions in current Naira markets have been brought
about by cumulatively ineffectual Liquidity Management by the
Central Bank. This is not to imply that the CBN has been derelict in
its duties. The Central Bank, in recent quarters, regrettably failed
to adequately compensate (monetarily) for large doses of

liquidity periodically injected into the financial system through
fiscal operations of government. The heightened demand for FX
observable
in
recent
months
reflects
the
progressive
accumulation of this liquidity, in import bills and bank asset
portfolios, eventually washing up, demanding to be dealt with
onshore. What the Central Bank as our “financial weatherman”
forecasted to be “heavy showers” (and accordingly took
precautions against) is turning out to be a drenching monsoon.
Could we have done better?
Given the inherently political nature of these liquidity injections,
with attendant uncertainties around their size, distribution and
timing, and given the inherently conservative disposition of the
CBN as an institution, this type of failure is understandable, and
may be even pardoned – occasionally. The Central Bank of
Nigeria now clearly appreciates what further needs to be
undertaken, its gloves are off, and it is proceeding with even more
purposeful determination. Hence, I endorse the measures agreed
upon with fellow MPC members today, and voted accordingly. I
hope that we will have begun to successfully engineer the desired
turns in market conditions. However, should even further actions
be called for when next we meet in a month or so, then these too
shall be voted on with due care and diligence.

7.0 SALAMI, ADEDOYIN

Recent weeks have seen the exchange rate of the Naira outside
the outer limit of the band of ±3% around the midpoint of
N150/US$. Worse still market sentiment, driven by the reducing
level of Nigeria’s foreign reserves and sharply increased demand
for foreign currency at the Central Bank of Nigeria (CBN) WDAS
window, has begun to question the ability of the CBN to keep the
Nigerian currency stable and within the band. All this, after a
further tightening of monetary conditions at the end of our last
meeting almost a month ago.

The importance of exchange rate policy to inflation management
cannot be over emphasised. Significant components of our
national economy depend on imports – energy and food!
Allowing the currency to lose its external value will almost certainly
reverse the gains recorded in inflation management. Is there a
case for allowing erosion of the currency’s external value?
Without doubt, the falling level of reserves, coupled with the rising
prospect of easing commodity prices ‐ especially for our oil
exports, as the global economic growth slows; provide the
strongest reason for market doubts about the ability to sustain the
Naira’s international value. It is thus not surprising that positions are
being taken against the Naira.

There is also evidence that the global economic environment is,
not unexpectedly, beginning to take an adverse toll on capital
flows to frontier markets such as ours. In this context, continuing
negative inflation adjusted returns on Naira deposits undermines
the Naira’s attractiveness thus encouraging asset allocation
decisions against it.

The challenge of managing the implications of fiscal dominance
continues unabated. Beyond the effect of the usual monthly
Federation Account activity, there are a number of fiscal actions
on the immediate horizon which indicate that larger‐than‐normal
injections of liquidity. This is compounded by the strong liquidity
position of our Deposit Money Banks.

Simply stated, MPC must provide a credible reason to hold Naira
denominated assets. This can only be done by hastening the
process of restoring its attribute as a store of value. Furthermore,
the strong and growing sense of an imminent depreciation of the
currency has to be dealt with. Given the MPC’s mandate of
maintaining price stability and the surrounding economic context,
depreciation of the Naira is not a credible option.
The adverse effects of higher interest rates, which are limited to
some sectors of the economy, are in my judgement preferable to
the negative economy wide impact of devaluation. I have no

reservations in supporting sterilisation of the strong banking system
liquidity by raising the Cash Reserve Ratio. Furthermore, I believe
that my argument on previous occasions for movement towards a
positive ‘real’ interest rate remains valid in the present situation. I
expect that sterilisation of liquidity will finally begin the process of
restoring competition for liabilities, hitherto put in abeyance by the
Central Bank’s guarantee on Interbank Market transactions,
leading, eventually, to positive real rates for domestic depositors.

As we come to the end of the process of ‘banking sector rescue’,
it is my view that we must now revisit the definition of liquidity
which had been expanded as we sought to manage the
potential systemic dislocations arising from the spectre of bank
failure.

8.0 GARBA, ABDUL GANIYU
Decision: I vote for:
I. Holding the MPR at 9.25%
II. Maintaining the Asymmetric Corridor for SLF and SDF
III. Increasing the CRR from 4% to 6%

Observations
Since the last MPC Meeting in September,

a. the crisis in the global economy has deepened and
political leaders in Europe and the Americas seem unable
or unwilling to put together a potentially effective solution
package to address the debt, growth and unemployment
problems.
b. The rating agencies have downgraded sovereign debts
and banks with significant exposures to sovereign debts
especially in the EURO Zone and the UK raising fears of a
deepening of the banking/financial/economic crises in
Europe. The volatilities in the global currency, equities and
commodity markets have risen and, are unlikely to abate
soon.
c. Inflation has declined slightly in Nigeria. However, the
demand for foreign exchange has been rising well above
trend and had become more volatile in the last few
weeks leading to above trend pressures on the exchange
rate. In addition, the equities market remains bearish and
the job market has not shown any sign of improvement.
The external accounts has underperformed and coupled
with demand pressures, the external reserves have also
underperformed.

Commitment to Stable Exchange Rate Policy and Effective
Enforcement of Transparent and Non-Discriminatory Rules
1. I strongly support the commitment of the MPC to a stable
exchange rate policy: exchange rate volatilities in an uncertain
and risky world is a potentially disastrous policy option more so,
given (i) the likely adversarial effects on production and
distributions costs, investments, jobs, income and, well-being of
a majority of citizens and (ii) that Nigeria’s exports and imports
are exchange rate inelastic.
2. I also strongly support the decision of the MPC to strengthen the
enforcement of existing rules of the game to discourage
opportunistic and market destroying speculative behaviors that
is, behaviors that distort the market fundamentals and by so
doing, undermine the effective functioning of the financial
markets. I am convinced that the financial markets will work
more effectively if the costs of undermining the market to a
“rouge player
Deciding Issues
” greatly exceed the benefits. The simple rule is:
actual costs of rouge playing must significantly exceed actual
and potential benefits.
1. Evidence: The data shows that since the tightening regime
began in September 2010, the liquidity (Monetary Base, M1,
QM and M2) has risen significantly, the structures of banking

system liabilities has shifted significantly against savings deposits
and time deposits in favor of foreign currency deposits. Quasi
money has exceeded M1 suggesting that MPR may not be as
effective as expected in targeting the “harmful speculative
liquidity”. I am convinced that a regime of tighter and timely
enforcement of existing laws to de-incentivize “harmful
speculative activities” will be more effective. Further, a
complementary rise in CRR by 200 basis points would be
adequate to immediately reduce liquidity that may be used by
players to speculate on the foreign exchange market instead
of intermediating.
2. Commitment to Limiting Constraints to struggling higher job
elastic and higher value-adding Players/firms/activities: It
seems that while MPR has so far been less effective in
“removing harmful speculative liquidity”, its effects on lending
rates and small business value-added and jobs may not to be
insignificant. In these uncertain times and with the high level of
unemployment, small businesses can do with all the help that is
feasible to extent to them without adding to the uncertainties
and menu of risks they already face.

9.0 SANUSI, LAMIDO SANUSI
Governor of the Central Bank of Nigeria and Chairman of the
Monetary Policy Committee
The extra ordinary Monetary Policy Committee Meeting called today
is in recognition of the need for a more frequent review of dynamic
global and domestic economic conditions that may contain threats
to macroeconomic stability. Indeed, at the next MPC meeting in
November we may find it useful to start holding monthly meetings
until the situation stabilizes.

We have always known that after resolving the banking system crisis
the very next challenges would be the risk posed by elevated levels
of liquidity resulting from fiscal spending, AMCON bonds (if not
carefully managed) and credit expansion from recapitalized banks.
This situation has been further compounded by the global economic
situation, particularly the sovereign debt, banks solvency and market
confidence crises in the Euro zone, the US deficit problem and risks of
inflation and economic slowdown in key EM economies like China,
Brazil and India.

The global situation has led to reversal of capital flows from EM and
frontier economies. In the case of Nigeria, there are genuine
concerns about oil price outlook with attendant impact in external
reserves. Even though market fundamentals would suggest a slight
moderation, rather than a big collapse, in oil prices, markets are
unpredictable especially when the bears take over and confidence
dips to a level where we have mass flight to less risky assets and
deleveraging.

The published information about the draft 2012 budget suggests a
base price assumption of $75/b and output of 2.4mbpd. Our view is
that these assumptions are based on a rather optimistic (though not
entirely unrealistic) set of assumptions. In any event, this would place
spending at N4.8trillion compared to the N4.4tirllion budgeted in
2011. With over 70% still in recurrent expenditure and given the
historical tendency of revenues to fall short of projections, the real
fiscal deficit is likely to be higher then the 2.7% projected. It is also

worthy of note that the last quarter of the year is when a significant
part of capital releases will occur. In sum, my view is that the 2012
budget as proposed continues with the procyclical trend set in 2011,
even though I must state that fiscal authorises have informed us of
the possibility of reviewing the bench mark price downward to $70/b
before the final presentation to the legislature. Until that reduction
materialises the markets will anticipate elevated fiscal spending and
this feeds into inflation and exchange rate expectations.

The combination of factors above has led to renewed pressures on
the exchange rate, with the potential, through translation effect of
compounding the inflationary implications of the fiscal stance. In
view of the uncertainties in global outlook, we need to seriously
consider the implications of maintaining the current interest rate and
exchange rate stance, with a view to making such adjustments are
necessary to avoid a rapid depletion of reserves and rapid
depreciation of the naira at the same time. Such an occurrence will

lead to a major dent in confidence and plunge the economy into a
self – reinforcing inflationary cycle.
Our exchange rate stance, defined by our commitment to stability, is
informed by two arguments which are compelling. The first is that
exchange rate stability is central to our price stability mandate,
given pass-through effects of imported items (diesel, petrol, food,
processed food, manufactures, raw materials etc) on CPI. Whereas
the weight of these items may be indeed smaller than that of farm
produce, they represent at least one class of items that we can
influence through careful management of the exchange rate. The
second is that a depreciation in currency does not automatically
translate into improved balance of payments. The demand for
many imported items is highly inelastic. In the case of subsidized
petroleum products for example, depreciation simply increases the
naira value of the subsidy (other things being equal). This is turn
increases the margin for arbitrage and rent seeking and may
actually provide an incentive for increasing import demand. The
perverse incentive system of petroleum subsidies may very well lead

to an upward sloping demand curve, with petroleum imports
increasing as naira price increases rather than the inverse. In
addition, depreciation fuels speculative demand and capital flight,
leading both to further depreciation and reduction in reserves. For
this reason, while I am inclined towards flexibility in managing the
exchange rate, I am of the firm view that any depreciation must be
a last resort and should be carefully managed and carried out from
a position of strength. We need to send clear signals of our
commitment to support the naira in these times.

The foregoing analysis leaves us now with a number of options at our
disposal. We can increase CRR, thus tightening liquidity significantly
and depriving speculators of the liquidity to give effect to their
demand. This I support strongly.

We can further increase the MPR significantly both as a signal and as
an incentive for portfolio reallocation into naira assets as real interest
rates move well into positive territory. This also increases the holding

cost of long positions. In view of progress on banking resolution I also
support this measure.

In addition we need to reduce net open position limits to reduce
speculative holdings, and implement recommendation from the
recent examination of foreign exchange transactions by bank
examiners to address issues around non-compliance and abuse of
existing regulations. Appropriate sanctions must be applied.

I do not support capital controls and I am pleased that all members
agree on this point.
My vote is for
1. Increase in CRR from 4% to 8%, and suspension of reserve
averaging as the method of computation;
2. Increase in MPR from 9.25% to 12% while maintaining symmetric
corridor: and
3. Reduction in net open position limit from 5% to 1%.