CENTRAL BANK OF NIGERIA COMMUNIQUÉ NO. 64 OF THE
MONETARY POLICY COMMITTEE MEETING, JULY 7, 2009

The Monetary Policy Committee (MPC) met today to review and discuss the
latest domestic and international developments and their implications for the
Nigerian economy. The Committee noted the continued adverse effects of
weak global demand and falling crude oil production on Nigeria’s external
and fiscal performance during the second quarter of the year. The MPC
noted the reported prospects of economic recovery in some emerging market
economies. However, this development is not likely to offset the continued
weak economic performance in advanced economies. In view of the
openness of the Nigerian economy, the Committee observed that the growth
prospects may weaken in the remainder of 2009, more so that inflationary
tendencies appear to be persisting.

Key Economic and Financial Developments

Domestic Output
Provisional data from the National Bureau of Statistics (NBS) indicated that
the Gross Domestic Product (GDP) at 1990 constant basic prices grew by
4.85 per cent in the first quarter of 2009. It is estimated to grow by 5.13 per
cent in the second quarter of 2009 compared with 5.20 per cent in the
corresponding period of 2008. The non-oil sector is estimated to grow by
8.03 per cent in the second quarter of 2009 mainly as a result of the
performance of agriculture (2.84 per cent); wholesale and retail trade (2.20
per cent); and services (2.28 per cent).

The NBS forecast showed a lower growth of 5.75 per cent in overall real
GDP for 2009, compared with 6.41 per cent in 2008, notwithstanding the
projected weak performance of the global economy.

Price Developments
Inflation
The Committee noted the marginal decline in headline year-on-year inflation
rate to 13.2 per cent in May from 13.3 per cent in April 2009. The
persistence of high food inflation at 15.7 per cent in May compared with
15.3 per cent in April remains a matter of serious concern given its
overwhelming weight in the consumer price index (CPI) basket. It is,
however, expected that the headline inflation would slow down in the
coming months on account of slack demand and the likely improvement in
the supplies of agricultural produce.

Monetary Developments
Provisional data indicated that broad money (M2) decelerated sharply by 4.9
per cent in the first five months of 2009 in contrast with the growth of 29.9
per cent during the corresponding period of 2008. On a year-on-year basis,
M2 grew by 15.6 per cent, mainly on account of the decline in net foreign
assets and slowdown in credit to private sector. The decline in net foreign
assets reflected the fall in oil export receipts and deceleration in other
inflows, calling for policy initiatives to improve the availability of foreign
exchange in the system. The slowdown in credit to private sector is not
unconnected with the slack domestic demand as well as financial squeeze,
requiring a combination of credit and structural measures to ensure that there

are no enduring adverse effects of credit slowdown on growth and
employment.

Interest Rates
Key interest rates at the inter-bank market rose in May and June 2009. The
weighted average inter-bank call rate on unsecured transactions stood at 12.5
per cent in April, 13.2 per cent in May and 18.6 per cent in June. In the first
few days of July, the inter-bank call rate ranged from 21 to 22 per cent. The
weighted average open buy back rates in April, May and June were 7.1, 7.2
and 7.7 per cent, respectively. The average spread between the call rates and
the rates on secured transactions has been very high at 1090 basis points in
June, 600 basis points in May and 540 basis points in April.
The average prime lending rate rose from 19.34 per cent in April to 19.53
per cent in May 2009 while the average maximum lending rate declined
from 23.17 per cent in April to 22.86 per cent in May. The weighted average
rate on all categories of deposits rose from 5.98 per cent in April to 6.13 per
cent in May 2009. Thus, the spread between the two rates is higher than the
current inflation rate, which provides a unique opportunity to banks to
improve efficiency and reduce lending rates.

Exchange Rates
The MPC noted with satisfaction that recent measures to stabilize the Naira
exchange rate have posted some positive outcomes. The Naira exchange rate
has stabilized at the rDAS in recent weeks while in the other segments, the
rates have appreciated, thereby narrowing the arbitrage opportunities.

However, the premium over the rDAS rate has remained significant. The
present situation offers an opportunity to further narrow the gap between the
two rates by measures aimed at further liberalizing the inter-bank foreign
exchange market.

External Reserves
Foreign exchange reserves as at July 03, 2009 amounted to US$43.19 billion
(provisional) compared with US$53 billion at end December 2008. The
decline in reserves mirrored mainly the relative downward drift in
international crude oil prices from the levels reached in mid-2008 and the
slowdown of other foreign exchange inflows. However, the decline in
reserves is likely to moderate in the next two quarters owing to the expected
rise in international crude oil demand arising from recent reports of
improvement in the recovery prospects in the US and other developed
countries and in the relatively favorable outlook for growth in some
important emerging economies.

The Stance of Policy
The Committee noted that the recent economic and financial developments
point to the need for policies to be focused on growth, exchange rate and
financial market dynamics. Monetary and credit policies have to be
therefore properly integrated with exchange rate policies. The stance of
monetary policy in the coming months would be assure that liquidity, both
domestic and foreign currency, is adequate to meet genuine demand and that
real lending rates are moderated. To match these forces for bringing about
stability in foreign exchange and domestic money markets, the CBN would

undertake suitable foreign exchange and domestic open market operations in
a coordinated manner in the coming months. For this purpose, the CBN
would announce an advance calendar of its operations for each week so that
market expectations are formed in a manner that is conducive to the
realization of the objectives of policy. The CBN also proposes to have in
place firm consultation procedures with bank executives prior to and after
the policy meetings as a condition for bringing about a more open and
transparent monetary policy.

Decisions:
In the light of the above, the Monetary Policy Committee decided as
follows:

A.
Interest Rate Policy
1)
The Committee affirms the clearly established empirical
evidence of a strong nexus between low real interest rates and
economic growth. However, the strategy for achieving low
interest rates will need to be based on market forces and involve
a deliberate and painstaking effort aimed at addressing
structural problems that had lead to high interest rates. All caps
and floors imposed thus far by the Bankers’ Committee have
turned out to be unenforceable and counter-productive. Only a
minority of banks are fully compliant. The Committee has,
therefore, removed those caps.

2)
The wide divergence between inter-bank rates and the
Monetary Policy Rate (MPR) exerts pressures on lending rates.

As part of the strategy for achieving convergence, the Monetary
Policy Framework which has the interest rate corridor as an
important component is hereby restored. Consequently, the
MPR would be reduced from 8.00 per cent to 6.00 per cent per
annum. The corridor of interest rates would be +/- 200 basis
points, with the rate on the standing lending facility at 8.00 per
cent and the rate on the standing deposit facility at 4.00 per
cent.
3)
It is recognized that high inter-bank rates are substantially
driven by the refusal of banks to lend to each other because of
perceived counter-party risk. Whereas steps are being taken by
the CBN to address this problem through proper bank audits,
appropriate resolution frameworks and enhanced disclosure and
transparency in financial statements, these will take some time
before finalization and full restoration of confidence in the
system. In view of the dire consequences to the real sector and
the banks themselves of a sustained regime of excessively high
interest rates, it is important to de-risk the inter-bank market
and address the concerns of lenders and investors while the
regulatory reforms are in progress.

Consequently, the CBN shall provide a guarantee on all interbank placements from July 2009 to March 31, 2010. This
guarantee is also extended to placements with banks by pension
funds. Details of operational modalities will be discussed at the
Bankers’ Committee meeting. However, a condition for this
guarantee is that pricing must reflect the credit enhancement it

provides. Overnight placements shall not be priced higher than
MPR + 2%. A maximum spread of 300, 400 and 500 basis
points above the MPR shall be maintained for tenors up to 30,
60 and 90 days, respectively. This will lay the foundation for
evolving a risk-free yield curve at the short end. The CBN
expects to conclude its work on diagnosis, resolution and
disclosure policy in the banking system, latest by March 31,
2010.
4)
In view of the CBN guarantee of the interbank market
transactions, there will be no new loans on the Expanded
Discount Window (EDW) and no extension of maturing
obligations. Furthermore, all banks are required to liquidate
their obligations under the EDW facility at maturity.

B.
Foreign Exchange Market
1)
The inter-bank foreign exchange will be liberalized with
immediate effect and wDAS replaces rDAS.
2)
All other restrictions imposed recently are removed and the net
open position limit for banks is increased to 5% of banks’
capital base.
3)
All Class ‘B’ Bureaux-de-Change may now participate directly
in the CBN window. Only those with valid licences are
eligible. However, they will make a caution deposit of
$20,000.00 each.

4)
Class ‘A’ BDCs capital requirement is hereby reduced from

N500 million to N250 million.

5)
Allocation of foreign exchange will differ in magnitude
between Class ‘A’ and ‘B’ BDCs, given the different levels of
capitalization.


Sanusi Lamido Sanusi
Governor,
Central Bank of Nigeria
Abuja
July 7, 2009