Central Bank of Nigeria Communiqué No. 74 of the Monetary Policy Committee
Meeting, January 24-25, 2011


The Monetary Policy Committee (MPC) met on the 24th and 25th January, 2011
to review domestic and international economic and financial developments in
2010 and the challenges facing the Nigerian economy in the year ahead.

On the global scene, the Committee noted the divergence in the economic
performance of advanced and emerging economies in 2010. Economic
uncertainties contributed to the weak recovery in advanced economies. As a
result, growth was sluggish and concerns about inflation were dominant on
account of the rising oil and commodity prices in the international markets and
fears of fiscal stress in the years ahead. On the other hand, robust economic
growth was recorded in emerging markets based essentially on strong domestic
demand which offset weak export demand. Financial market conditions in
advanced economies were, however, more stable than in the preceding two
years while some emerging economies were confronted with challenges posed
by large volatile capital inflows .

With regard to the domestic economy, the Committee noted with satisfaction
the impressive economic growth, the continuing recovery of the capital market
and the progress made towards restoring stability in the banking sector. It,
however, observed that inflation had continued to be relatively high and
reiterated the need for it to be reined in and for Government to further
strengthen and deepen economic and structural reforms.

Key Domestic Macroeconomic and Financial Developments
Domestic Output
The Committee noted the sustained output growth recorded in 2010. Provisional
data from the National Bureau of Statistics (NBS) indicated that real Gross
Domestic Product (GDP) grew by 8.29 per cent in the fourth quarter of 2010, up
from 7.86 per cent recorded in the third quarter. The overall GDP growth for 2010
was estimated to be 7.85 per cent, compared to the revised growth rate of 6.96
per cent recorded in 2009. The non-oil sector remained the major driver of
overall growth, with agriculture, wholesale and retail trade, and services
contributing 2.39, 2.04 and 2.08 per cent, respectively. The outlook for 2011 is
projected to be generally favourable in view of the continued improvement in

the international oil market and emphasis on the development of the non-oil
sector.

Domestic Prices
The year-on-year headline inflation, as measured by the percentage change in
the all-items consumer price index (CPI, November 2009=100), trended
downwards during most periods of 2010. It declined to 11.8 per cent in
December 2010 from 13.6 per cent in September. Similarly, core inflation
declined to 10.9 per cent in December 2010 from 12.8 per cent in September.
Food inflation also, dropped to 12.7 per cent in December 2010, from 14.6 per
cent recorded in September.
The Committee noted that although inflation has been trending downwards, the
single digit benchmark was not achieved in 2010, despite the relatively good
harvest, improved supply of petroleum products and lower growth in monetary
aggregates. This, according to the Committee underscores the need to address
both supply and demand side factors that determine inflation dynamics in
Nigeria. One of the ways to keep aggregate demand in check is to restrain
debt-financed government spending in the medium-term. This calls for a review
of subsidies and other recurrent expenditure categories that constitute a drain
on the national budget as well as improving the revenue base. However, the
Committee commended the government for recognizing the existence of these
issues in the 2011 budget proposal especially the reduction in the proposed level
of total spending. Although there has been a strong emphasis on capital
expenditure and infrastructure development, the Committee noted that
recurrent expenditure remained high at over 70 per cent of the total budget.
For this reason, the MPC believes that the risk to price stability posed by fiscal
operations will need to be constantly monitored if inflation is to be brought
down to single digit levels in the short to medium term. However, the Committee
noted that the general thrust of fiscal policy pronouncements is in the desired
direction.

Monetary, Credit and Financial Market Developments
Provisional data showed that the growth in broad measure of money supply
(M2) was generally below the indicative benchmark throughout 2010 when
compared with the level at end-December 2009. Specifically, at end-December

2010, M2 growth was 6.70 per cent compared with the indicative benchmark of
29 per cent for 2010.

Available data indicated that growth in aggregate credit to the domestic
economy (net) was similarly sluggish at 6.13 per cent in December 2010
compared with 59.6 per cent recorded in the corresponding period of 2009. This
development is connected to the damaged balance sheets of the DMBs in the
wake of the global financial and economic crises. However, aggregate credit
to the Federal, as well as State and local governments grew by 67.83 per cent
and 19.17 per cent, respectively, in 2010. Credit to the private sector contracted
by 4.92 per cent in contrast to the indicative benchmark growth of 31.54 per
cent for 2010. However, this outcome would need to be considered in the
context of the purchase of non-performing loans with face value of over N 2
trillion from the DMBs by the Asset Management Company of Nigeria (AMCON)
in 2010. These loans were purchased at a discount and paid for by AMCONissued zero-coupon bonds. Adjusting for this factor, growth in credit to the
private sector would appear to be positive, since the loans were transferred to
the balance sheet of AMCON. The growth in credit to the three tiers of
government against the backdrop of the decline in private sector credit is a
reflection of the fact that government borrowing had to some extent crowded
out private sector credit.

Developments in retail market interest rates indicated that the retail lending
rates remained relatively high in 2010. The average maximum lending rate
declined from 23.18 per cent in January 2010 to 21.86 per cent in December
2010. The average prime lending rate also declined consistently from 18.38 per
cent in January to 15.74 per cent in December 2010.

Inter-bank and OBB rates moderated to 8.06 and 6.86 per cent respectively in
December 2010. The weighted average savings rate declined consistently from
3.33 per cent in January 2010 to 1.51 per cent in December 2010. The
consolidated deposit rate initially declined from 6.13 per cent in January to 2.07
per cent in September, 2010 but rose marginally to 2.24 per cent in December

2010. Thus, the spread between the average maximum lending rate and the
consolidated deposit rate widened from 17.05 percentage points in January to
19.76 percentage points in December 2010. The Committee noted with
concern the extremely low returns paid to savers and depositors as this poses a
major dis-intermediation risk and is inconsistent with developmental goals of
financial inclusion.

The domestic capital market recorded significant recovery in 2010, after the
decline associated with the global financial and economic crises in 2008/2009.
The All-Share Index (ASI) rose from 20,827.17 points as at end-December 2009 to
24, 770.52 points as at end-December 2010, representing a growth of 18.93 per
cent. Market Capitalization (MC) rose from N4.98 trillion as at end-December
2009 to N7.91 trillion as at end-December 2010, representing a growth of 58.83
per cent. For the fourth quarter of 2010, the All-Share Index (ASI) increased by
7.5 per cent from 23,050.59 to 24,770.52 at end-December 2010 while Market
Capitalization (MC) increased by 40.1 per cent from N5.65 trillion to N7.91 trillion.
However, the number of deals, volume and value of shares traded declined as
at December. The increase in ASI and MC was partly due to share price
recoveries in the Banking, Food/Beverage, Insurance and Oil & Gas sectors.
Nonetheless, the recovery process needs to be sustained through further
strengthening of macroeconomic and structural reforms. The Committee noted
the major role being played by the Securities and Exchange Commission (SEC)
in reforming and improving governance processes in the NSE and encouraged
the SEC to continue as this is necessary for restoring confidence in the Nigerian
financial system.

External Sector Developments
The foreign exchange market remained relatively stable. Between end-2009
and end-2010, the Naira/Dollar exchange rate depreciated by N1.08 or 0.72 per
cent, to N150.66/US$ from N149.58 /US$ at end-2009, as against 15.65 per cent
depreciation recorded at the end of 2009. The average premium between the
CBN transaction rate and the BDC’s as at end-2010, was 1.83 per cent,
compared with 8.58 per cent in 2009.

The Committee reaffirmed its conviction that a stable exchange rate regime is
critical to maintaining price stability but noted that in the absence of
complementary policies the regime is only sustainable at the cost of significant
attrition in foreign reserves. The MPC, therefore, continues to emphasize that the
solution to reserve depletion lies in the implementation of appropriate reforms
with regard to industrial and trade policies aimed at reducing importdependence, which are beyond the scope of monetary policy. Substantial
foreign exchange is expended annually on JVC Cash calls and importation of
petroleum products due to the delay in implementing much needed reforms in
the oil sector. This is in addition to the huge amounts spent on petroleum
subsidies which are likely to increase with higher oil prices. The country is also
expending foreign exchange on import of food items such as rice whereas what
is needed is the implementation of policies that will lead to food security and
total self sufficiency. The Committee noted that external reserves stood at
US$32.32 billion as at end-December 2010. It, however, rose to US$33,26 billion as
at 20th January 2011.

In the Committee’s view, implementation of these reforms along with the
improved outlook for oil price and output should go a long way in reversing the
negative trend in our foreign reserves position.

The Committee’s Considerations
The considerations of the MPC following from the above review suggest that
while the general outlook on growth is highly favourable, it is important to be
vigilant on prices and financial market developments. The likelihood of
improved oil output and rising oil prices in the international market, would
contribute to growth and help rebuild external reserves which is vital to sustain
consumer and investor confidence in the economy.

The Committee noted that the risk of inflation is on the upward side as a result of
the liquidity injections from the likely increase in government spending in the run
up to the April 2011 elections, and AMCON purchases, as well as rising global
energy and food prices and the expected pass-through to the domestic
economy. It noted that the existing subsidy regime on petroleum products is not
sustainable in view of government’s current finances. In view of these factors,

the Committee noted, that inflation remains a major concern that cannot be
ignored in the short- to medium-term.

The MPC also noted with serious concern the existing low rates of about 1.0
percent paid on savings deposits and its implications for financial intermediation
and the mobilization of long-term funds which is critical for enhancing
investment in real sector economic activities, and hence, economic growth.
The Committee felt that in preparation for the removal of the CBN guarantee of
inter-bank market, banks need to provide reasonable incentives for the
mobilization of savings for growth and financial inclusion. The Committee,
however, stated its commitment to continue to monitor developments with a
view to coming up with appropriate measures to address the issue.

With regard to external reserves, the Committee observed that the fundamental
structural problem of the country as an import-dependent economy was largely
responsible for the continuing depletion of the external reserves. The continuing
decline in reserves was accounted for by the payment for JVC cash calls,
amounting to US$6,867 million and US$5,657 million in 2009, funding of the
foreign exchange market to the tune of US$24,835.65 million as against
US$25,070 million in 2009 in the case of WDAS. Sales to BDCs amounting to
US$5,337 million in 2010 compared with US$4,734 million in 2009, in addition to
the payment of subsidies on petroleum product as well as other government
external payment obligations. The Committee stressed that a significant portion
of the foreign exchange outflow will be stemmed with the Petroleum Industry Bill
because JVC Cash Calls alone accounted for a large proportion of the total net
outflow in 2010. The Committee observed that if exchange rate had not been
managed in a stable manner, inflation would not have moderated. The policy
thrust on exchange rate stability is informed by the overwhelming impact of
exchange rate pass-through on inflation, given the import-dependent nature of
the economy.

The MPC identified the greatest challenge facing the economy as the lack of
flow of credit to the critical sectors, and the consequent need to unlock the flow
of credit for critical investments in agriculture, SMEs and manufacturing sectors.
To achieve this, government would need to create the right policy and
regulatory environment, including the sustained fight against corruption,

strengthening of transparency and institutions, as well as implementing critical
reforms. On its part, the CBN will continue to engage banks and take the lead in
programmes and interventions to channel credit to the real economy. To this
end, the Committee noted the initiatives being pursued by the Bankers’
Committee and urged speedy implementation.

The Committee further stated that the economy is affected not only by
monetary and fiscal policy measures but also by political risk and concerns
about national security which affect investors’ confidence in the economy. In
this regard, the Committee stressed the need to pay greater attention to the
issue of security and how to manage uncertainty in the political environment.

MPC Decisions
In the light of the above considerations, the Committee committed to
maintaining price stability by pursuing the current policy thrust of monetary
tightening in view of the perceived inflation risks in the near term. The
Committee took the decision to further tighten monetary policy. This was a
decision taken by a majority of 11:1. The following measures were approved:

1. Raise the MPR by 25 basis points from 6.25 per cent to 6.50 per cent with
immediate effect (a majority vote of 11:1);
2. Maintain the symmetric corridor of +/- 200 basis points by 7-5; 4 members
voted for asymmetric corridor by 50 basis points increase in Standing
Deposit Facility rate;
3. Raise the Cash Reserve Requirement (CRR) Ratio by 100 basis points from
1.00 per cent to 2.00 per cent with effect from February 1, 2011 with a
majority vote of 11:1; and
4. With effect from March 1, 2011, raise the Liquidity Ratio (LR) by 500 basis
points from 25.00 per cent to 30.00 per cent with a majority vote of 11:1.


Sanusi Lamido Sanusi
Governor,
Central Bank of Nigeria
Abuja
January 25, 2011