CENTRAL BANK OF NIGERIA COMMUNIQUÉ NO 114 OF THE MONETARY
POLICY COMMITTEE MEETING OF 24th AND 25th JULY, 2017

Background
The Monetary Policy Committee met on the 24th and 25th of July 2017,
against the backdrop of a relatively improving global economy.
However, protectionism in trade and immigration; fragilities in the
financial markets, remain the key risks to global economic stability.

On the domestic front, the economy is on a path to moderate
recovery with a positive short- to medium-term outlook, premised
largely on fiscal stimulus and a stable naira exchange rate. Inflation
expectations also appear sufficiently anchored with the current stance
of monetary policy.

In attendance were 8 out of 12 members of the Committee. The
Committee examined the global and domestic economic and
financial environments in the first half of 2017 and the outlook for the
rest of the year.

External Developments
The momentum witnessed in the global economy in Q1 2017 continued
through the second quarter, driven by a generally accommodative
monetary policy stance in most advanced economies, moderation in
energy prices and improved global demand. The emerging markets

and developing economies, are experiencing positive spillovers from
somewhat improved commodity prices and developments in the
advanced economies. The growth prospects for this group of countries
in 2017 are expected to rise to about 4.6 per cent from 4.3 per cent in
2016.

Complemented by the momentum in other blocks and a potential
positive prospect for expansion in world trade, the IMF in its July edition
of the World Economic Outlook (WEO) projected global output growth
in 2017 at 3.5 per cent from 3.1 per cent in 2016.

The MPC, however, noted some headwinds confronting the optimistic
outlook to global growth arising mainly from receding market
expectations of expansionary U.S. fiscal policy, weaker than expected
growth in the U.K due to difficult BREXIT negotiations and geo-political
risks associated with the forthcoming German general elections. In
addition, the Committee noted the downward trend in global inflation
after earlier indications of an uptick as the U.S. continues to build up
inventories in shale oil, while emerging economies such as Brazil, Russia
and South Africa witness strong economic headwinds leading to sharp
downturn in output.

Domestic Output Developments
Data from the National Bureau of Statistics (NBS) showed that the
contraction in the economy moderated to 0.52 per cent in Q1 2017
from 1.30 per cent in Q4 2016. The data further revealed that fifteen
economic activities recorded positive growth in Q1 2017, showing
strong signs of recovery. The Purchasing Managers Index (PMI) for

manufacturing and non-manufacturing activities stood at 52.9 and 54.2
index points in May and June 2017, respectively from 52.7 and 52.5
index points in May 2017, indicating an expansion for the third
consecutive month. Similarly, the Composite Index of Economic
Activities (CIEA) rose from 55.85 to 59.50 index points between April and
June 2017. The Committee noted the continuous positive effects of
improved foreign exchange management on the performance of
manufacturing and other economic activities. Non-oil real GDP grew
by 0.72 per cent in Q1 2017, reflecting growth in the agricultural sector
by 0.77 per cent in the same period. Provisional data also showed that
the external sector remained resilient in Q2 2017, as the overall Balance
of Payments (BOP) position recorded a surplus of US$0.65 billion,
equivalent to 0.8 per cent of GDP. The Committee hopes that the
implementation of the 2017 budget and the Economic Recovery &
Growth Plan (ERGP) will further strengthen growth and stimulate
employment.

Developments in Money and Prices
The Committee noted that money supply (M2) contracted by 7.33 per
cent in June 2017, annualized to a contraction of 14.66 per cent, in
contrast to the provisional growth benchmark of 10.29 per cent
expansion for 2017. The development in M2 reflected a contraction of
7.45 per cent in net foreign assets (NFA) in June 2017. Similarly, M1
contracted by 7.98 and 10.70 per cent in May and June 2017,
respectively, consistent with the directive of the MPC that expansion in
narrow money should be controlled. On the other hand, net domestic
credit (NDC) grew modestly by 1.02 per cent in June 2017, (annualized
at 2.04 per cent), driven mainly by net credit to government, which

grew by 5.91 per cent. Credit to the private sector, however, declined
relative to end-December 2016 by 0.02 per cent. The MPC noted the
widening fiscal deficit of N2.51 trillion in the first half of 2017 and the
growing level of government indebtedness and expressed concern
about the likely crowding out effect on private sector investment. The
constrained growth in the monetary aggregates provides evidence of
weak financial intermediation in the banking system arising from the
constraints imposed by developments in the macroeconomy.

Headline inflation (year-on-year) declined for the fifth consecutive
month in June 2017, to 16.10 per cent from 16.25 per cent in May, and
18.72 per cent in January 2017. Core inflation moderated to 12.50 per
cent in June from 13.00 per cent in May 2017 while the food index rose
marginally to 19.91 per cent in June from 19.27 per cent in May 2017.
This development was traced to intermittent attacks by herdsmen on
farming communities, sporadic terrorist attacks in the North-East and
other seasonal farming effects. The Committee was particularly
concerned about the unabating pressure from food inflation but
hopeful that the situation will dampen in the third quarter as harvests
begin to manifest.

The Committee also attributed the moderation in inflation to be partly
due to the effects of the relative stability in the foreign exchange
market, stemming from improved management, which promoted
increased inflows. Against this backdrop, the Committee reiterated its
commitment to sustain and deepen flexibility in the foreign exchange
market to further enhance foreign exchange flow in the economy. The
Committee, however, noted the protracted effects of high energy and

transportation costs as well as other infrastructural constraints on
consumer price developments and expressed hope that government
will fast-track its reform agenda to address these legacy issues. The
Committee noted that while responding to the current tight monetary
policy stance, inflation still had a strong base effect which is expected
to wane by August 2017.

Money market interest rates moved in tandem with the high level of
liquidity in the banking system. The interbank call rate opened at 16.13
per cent on May 25, 2017 and closed at 4.43 per cent on June 29, 2017.
However, the average inter-bank call rate during the period stood at
12.49 per cent. The movement in the net liquidity position reflected the
effects of OMO, foreign exchange interventions, statutory allocation to
state and local governments, and maturity of CBN Bills.

The Committee noted the improvements in the equities segment of the
capital market as the All-Share Index (ASI) rose by 33.33 per cent from
25,516.34 on March 31, 2017, to 34,020.37 on July 21, 2017. Similarly,
Market Capitalization (MC) rose by 32.84 per cent from N8.83 trillion to
N11.73 trillion during the same period. Relative to end-December 2016,
capital market indices rose by 26.59 and 26.81 per cent, respectively,
reflecting growing investor confidence due to improvements in foreign
exchange management. The Committee however, noted the seeming
bubble in the capital market and cautioned on the utilization of the
inflows.

Total foreign exchange inflows through the Central Bank of Nigeria
(CBN) increased by 35.41 per cent in June 2017 compared with the

previous month. Total outflows, on the other hand, decreased by 12.73
per cent during the same period, as a result of reduced CBN
intervention in the interbank foreign exchange market, which also
reduced TSA (dollar) payments balances by 61.4 per cent in the period
under review. The positive net flows resulted in an improvement of gross
external reserves to $30.30 billion at end-June 2017, compared with
$29.81 billion at end-May 2017.

The Committee noted the emerging convergence between the
bureau-de-change (BDC) and Nigeria Autonomous Foreign Exchange
(NAFEX) segment rates and the stability of the average naira exchange
rate at the inter-bank segment of the foreign exchange market during
the review period.

2.0. Overall Outlook and Risks
Available forecasts of key macroeconomic indicators point to a fragile
economic recovery in the second quarter of the year. The Committee
cautioned that this recovery could relapse in a more protracted
recession if strong and bold monetary and fiscal policies are not
activated immediately to sustain it. Thus, the expected fiscal stimulus
and non-oil federal receipts, as well as improvements in economy-wide
non-oil exports, especially agriculture, manufacturing, services and light
industries, all expected to drive the growth impetus for the rest of the
year must be pursued relentlessly. The Committee expects that timely
implementation of the 2017 Budget, improved management of foreign
exchange, as well as security gains across the country, especially, in
the Niger Delta and North Eastern axis, should be firmly anchored, to
enhance confidence and sustainability of economic recovery.

The Committee identified the downside risks to this outlook to include
weak financial intermediation, poorly targeted fiscal stimulus and
absence of structural programme implementation.

3.0. The Considerations of the Committee
Notwithstanding the improved outlook for growth, the Committee
assessed the implications of the uncertainties arising from the continued
normalization of monetary policy by the US Fed and the implications of
a strong dollar, the weak recovery of commodity prices, and the
uncertainty of US fiscal policy. The Committee similarly evaluated other
challenges confronting the domestic economy and the opportunities
for achieving economic growth and price stability in 2017.

The Committee expressed satisfaction with the gradual but consistent
decline in inflationary pressures in the domestic economy, noting its
substantial base effect, continuous improvements in the naira
exchange rate across all segments of the foreign exchange market,
and
considerable
signs
of
improved
investments
inflows.
The
Committee welcomed the move by the fiscal authorities to engage the
services of asset-tracing experts to investigate the tax payment status
of 150 firms and individuals in an effort to close some of the loopholes in
tax collection, towards improving government revenue. However, the
Committee expressed concern about the slow implementation of the
2017 Budget and called on the relevant authorities to ensure timely
implementation, especially, of the capital portion in order to realize the
objectives of the Economic Recovery and Growth Plan. The MPC
believes that at this point, developments in the macroeconomy

suggest two policy options for the Committee: to hold or to ease the
stance of monetary policy.

Against the backdrop of the outlook for the domestic and global
economy; the enthusiasm around the base-effect which reduced
inflationary pressures and the continuous relative stability in the naira
exchange rate, there is need to maintain cautious optimism, given the
potential ramification of a major deviation from the existing policy
path. The Committee is not unmindful of the high cost of capital and its
implications on the still ailing economy, which arguably necessitates an
accommodating monetary policy stance. The MPC also noted the
liquidity surfeit in the banking system and the continuous weakness in
financial intermediation, but agreed on the need to support growth
without jeopardizing price stability or upsetting other recovering
macroeconomic indicators, particularly the relative stability in the
foreign exchange market.

The MPC thinks that easing at this point would signal the Committee‟s
sensitivity to growth and employment concerns by encouraging the
flow of credit to the real economy. It would also promote policy
consistency and credibility of its decisions. Also, the Committee
observed that easing at this time would reduce the cost of debt
service, which is actually crowding out government expenditure. The
risks to easing however, would show in terms of upstaging the modest
stability achieved in the foreign exchange market, the possible exit of
foreign portfolio investors as well as a resurgence of inflation following
the intensified implementation of the 2017 budget in the course of the

year. The Committee also reasoned that easing would further pull the
real interest rate down into negative territory.

The argument for holding is largely premised on the need to safeguard
the stability achieved in the foreign exchange market, and to allow
time for past policies to work through the economy. Specifically, the
MPC considered the high banking system liquidity level; the need to
continue to attract foreign investment inflow to support the foreign
exchange market and economic activity; the expansive outlook for
fiscal policy in the rest of the year; the prospective election related
spending which could cause a jump in system liquidity, etc.

The MPC expressed concern over the increasing fiscal deficit estimated
at N2.51 trillion in the first half of 2017 and the crowding out effect of
high government borrowing. While urging fiscal restraint to check the
growing
deficit,
the
Committee
welcomed
the
proposal
by
government to issue sovereign-backed promissory notes of about N3.4
trillion for the settlement of accumulated local debt and contractors
arrears. The Committee, however, advised the Management of the
Bank to monitor the release process of the promissory notes to avoid an
excessive injection of liquidity into the system thereby offsetting the
gains so far achieved in inflation and exchange rate stability.
On the outlook for financial system stability, the Committee noted that,
in spite of the resilience of the banking sector, the prolonged weak
macroeconomic environment has continued to impact negatively on
the sector‟s stability. The MPC reiterated its call on the Bank to sustain its
intensive surveillance of deposit money banks‟ activities for the purpose
of promptly identifying and addressing vulnerabilities. The Committee

also called on the DMBs to support economic recovery and growth by
extending reasonably priced credit to the private sector.

4.0. The Committee’s Decisions
In consideration of the headwinds confronting the domestic economy
and the uncertainties in the global environment, the Committee
decided by a vote of 6 to 2 to retain the Monetary Policy Rate (MPR) at
14.0 per cent alongside all other policy parameters. Consequently, 6
members voted to retain the MPR and all other parameters at their
current levels while two members voted to ease the stance of
monetary policy. In summary, the MPC decided to:

(i)
Retain the MPR at 14 per cent;
(ii)
Retain the CRR at 22.5 per cent;
(iii)
Retain the Liquidity Ratio at 30.00 per cent; and
(iv) Retain the Asymmetric corridor at +200 and -500 basis points
around the MPR.

Thank you for listening.

Godwin I. Emefiele
Governor, Central Bank of Nigeria
25th July, 2017

PERSONAL STATEMENT BY THE MONETARY POLICY COMMITTEE
MEMBERS
1. ADELABU, ADEBAYO
The improvement in the performance of key macroeconomic
variables, which commenced in the early part of the year, appears to
have been fairly sustained. Recent statistics suggest that the economy
may completely exit recession by the end of the third quarter, while a
positive growth could be recorded at the end of the fiscal year. Of
significant interest is that the growth is all inclusive, as the
manufacturing sector, which has been in comatose for the past three
years, is beginning to show some signs of revival. The Purchasing
Manager Index (PMI) for the manufacturing sector increased by 1.2
percentage point to 54.1 points in July, which was not only the highest
level since 2014, but equally represents expansion in the sector‟s
activities for the fourth consecutive month. Similarly, the nonmanufacturing sector‟s PMI increased modestly by 0.2 percentage
point to 54.4 points during the period, representing an expansion for
three consecutive months. Inflation is still relatively high, particularly in
reference to the Bank‟s target, nonetheless, headline inflation eased to
16.1 percent in June, representing a consistent deceleration for five
months.
Furthermore, the stability in the foreign exchange market is becoming
firm and accompanied by significant reduction in premium between
the two markets. In particular, the recent return of current account
balances to a surplus would have profound positive influence on the
overall macroeconomic condition. Apart from the positive spillover in
terms of enhancement of accretion to external reserves, which would

strengthen the stability of the exchange rate, it also has the capacity to
alter the structure of GDP in favour of employment enhancing sectors.
This is predicated on the thesis that continuous surplus on current
account is normally associated with rapid growth of tradable sectors
than the non-tradable, and given that high quality employment is
generated mostly in the tradable sectors, the new trend will rub off on
employment and ultimately reduce poverty. On a similar dimension,
the growing confidence in the macroeconomic environment is also
generating a positive spillover in the equity market, with the capital
market witnessing sustained rally since April 2017 on the backdrop of
enhanced confidence cum optimistic outlook by investors. The
foregoing positive outcomes reflect the various measures of monetary
policy, particularly the improved liquidity as well as enhanced access
to the foreign exchange markets coupled with the commitment of
government to the Economic Recovery and Growth Plan (ERGP).
The medium term outlook is fairly optimistic but replete with challenges
that have considerable capacity to reverse the gains recorded so far.
One of the major risks is the limited fiscal space, which may threaten
discretionary expenditure that could provide strong impetus to the
implementation of the ERGP. Preliminary data suggests that actual
revenue of the fiscal authority significantly underperformed in relation
to projection in the first half of the year on the backlash of recurring
price and volume challenges in the oil sector. A key adverse outcome
of this development is the elevated interest to revenue ratio in the fiscal
authority‟s balance sheet, estimated to be in the neighborhood of 40
percent. The interest to revenue ratio may further rise with the
continuing tightening of monetary policy stance by the Federal
Reserves (Fed) of the US. My view is hinged on the strong correlation

between gross capital inflows and market risk index for most emerging
economies. A rise in gross capital flows is normally accompanied by a
decline in market risk index and vice versa. Given that the continuous
normalization of monetary policy stance by the US Fed would,
invariably, be accompanied by a shift in risk appetites and policy
stance of most systemic important financial centers against emerging
market economies, a reduction in capital flows to emerging economies
is inevitable. Consequently, financial market risk for the domestic
economy may head northward, exerting additional strain on the fiscal
budget through increase in interest charges.
Furthermore, the economy is expected to exit recession by the latter
part of the year but the projected GDP growth is just 0.8 percent, a
relatively marginal increase that could barely make appreciable
impact on socio-economic condition in the country. In order for the
impact of growth to reflect on poverty and welfare, it is expected that
the rate should not be less than 7 percent for at least five consistent
years. This may be a little bit challenging under the present regime of
inflation induced high interest rate. There are at least two reasons why
the interest rate may not trend downward in the near term. Firstly, the
tight monetary stance on account of elevated inflation and secondly,
the cost of the rising NPLs in the banking industry may be factored into
the pricing models by the banks. Thus, the capacity of the banking
sector to support the ongoing recovery may be constrained. Another
worrisome dimension is that the short fall in government revenue has
increased government demand for banks financing, leading to the
crowding out of the private sector in credit allocation.
In a related dimension, the Federal Government has just refunded
another tranche of overcharged deductions on Paris Club debt to

states of the Federation, bringing the cumulative amount refunded in
the course of the year to about N740 billion. This amount is equivalent
to about 10 percent of current fiscal year‟s budget. The fund would
indeed considerably alleviate the current financial burden confronting
most of the states and it is more likely that a significant proportion
would be used to defray outstanding salaries and pensions. In as much
as this would enhance the purchasing power of citizen and stimulate
aggregate demand, it is also necessary to bear in mind that increases
in aggregate demand without commensurate plan to stimulate the
supply side would ultimately lead to general increases in price level,
hence the likelihood of reversing the current downward trend in
inflation.
Apart from the challenges in the macroeconomic environment, a key
risk that cannot be discounted is the rising socio-political tension on the
backdrop of agitations and issuance of threats and counter threats
from various parts of the country. These developments, no doubt,
reduces the rating on ease of doing business index, with severe
consequences on investment, output and even inflation. It is against
this background that the sustenance of ongoing recovery requires a
collaborative and coordinated commitment from all stakeholders,
including the monetary authority, the fiscal authority and wholesale
engagement with the civil societies.
In view of the fact that the balance of risks to outlook is mixed,
arguments for easing at this meeting are as convincing as for further
tightening. The compelling reason for easing is the need to support the
ongoing recovery by complementing the ERGP of the Federal
Government, but I would like to quickly add that in as much as this is a
desirable option, it should be seen as a long term perspective. The

current period is not appropriate because inflation is not only high, the
ongoing deceleration is equally not strong enough and is vulnerable to
a costly setback. This, invariably, reduces the policy choices to either of
further tightening or maintaining the status quo ex-ante. The key
arguments for further tightening include the need to enhance the
inflow of capital to strengthen the stability in the foreign exchange
market. This is more so, in the light of gradual increase in interest rate by
the US Fed and rising financial market volatilities in the advanced
countries. I am however of the view that the magnitude of interest rate
increase should be taken cautiously because of the long term
consequence on the banking sector. The prevailing interest rate
differential between the advanced countries and the domestic
economy is crossing the acceptable threshold and this may engender
unfriendly debt-type capital flow, which could elicit unsustainable
appreciation in the exchange rate and ultimately increase the fragility
of the banking system.
Against the perspective of the foregoing, I think the appropriate choice
at this meeting is to maintain the current stance of monetary policy.
Consequently, I would like to propose that all the current measures of
monetary policy be retained. Specifically, MPR at 14 percent with a
symmetric corridor of +2/-5 percent and CRR at 22 percent.

2. BALAMI, DAHIRU HASSAN
The July MPC meeting came at a time when the macro level and the
growth rate expectation figures have risen by 0.80% while inflation has
slightly improved from 16.10% in June to 16.05% in July 2017. There was
also some stability in the official foreign exchange market at N305.80
Naira to a Dollar. Stress test at the financial sector shows that the
Capital Adequacy Ratio (CAR) has worsened from 12.81% in April to
11.51% in June, with slight improvement of the Non-Performing Loans
(NPLs) ratio from 15.18% to 15.07% in June against the prudential
requirement of 10% -15% for banks with national and international
authorisation, and a maximum of 5% for NPLs ratio. The banking sector
Liquidity ratio showed that all DMB‟s registered above the minimum of
30% liquidity ratio with the exception of 4 outlier banks. The stress test
therefore shows that the Deposit Money Banks (DMBs) are less resilient
to shocks. However, the Return on Equity (RoE) and Return on Assets
(RoA) registered some improvement from 17.69% to 22.44% in June and
2.32% in April to 2.42% in June 2017, respectively, partly due to
annualised effect.
The financial performance indicators showed that when the four outlier
banks were removed, the CAR, the NPLs ratio as well as the Liquidity
ratio are all above the prudential requirement of 10%-15%, maximum of
5% ratio for NPLs. The critical question is how do we grow the economy
with high rate of inflation as well as high rate of interest charged by the
DMBs? It should be noted that the economy is exiting the recession by
registering slight fall in inflation and rising growth rate compared to the
April figures. Low inflation is partly instrumental to the growth registered
in the economy in July. However, the fall in inflation is fragile because

energy prices, transportation cos t, food inflation, liquidity pressure due
to Paris club refund are likely to heighten the level of inflation in the
economy if not properly handled.
It should be noted that MPC Policies over the past six months have
assisted in improving the performance of the economy. However, how
do we sustain the effort? How do we create an incentive for the DMBs
to lend to the real sector of the economy particularly the private
sector? Currently, greater percentage of the credit is going to the
government rather than the private sector. It seems that DMBs have
low knowledge of the various sectors of the economy. The areas they
favour are
usually capital intensive industries that have low
employment generation area such as oil and gas, telecommunications
and electricity sectors. Other employment generation areas which
include agriculture, small scale industry and transport services are not
favoured.
The way forward requires the restructuring of the economy- This will
require diversification of the economy, to be an export driven
economy. Both Federal and Sub-national governments need to
improve their revenue base and collection efforts and make all levels
of government pro-active in promoting growth at all levels through less
reliance on the oil and gas sector.
The clamour for low Interest rate cannot happen now because of the
high level of inflation and rising operational cost in the economy.
Again, there is the need to encourage the inflow of FDI both real
investment and hot money into the economy. To move the economy
forward there is also need for MPC to examine the effect of credit
concentration as well as banks concentration and how the two will

impact on the growth of the economy. It should be noted that banks
have seen how NPLs ratio are rising due to the effect of external shocks
on various sectors of the economy, for example low levels of
commodity prices such as oil at the international market to grow the
economy.
Deficit financing of the budget and Economic Recovery Growth Plan
(ERGP) 2017 is necessary. Usually Government budget deficit can be
financed through borrowing or nominal money growth which is done
by debt monetisation or stock monetisation or both. Debt monetisation
is a situation whereby government raise the treasury bills or bond and
ask the CBN to take the bonds. The CBN then monetise the bonds
through growing normal money and pass it to the government to
finance the deficit. It should be noted that deficit financing through
money creation can be expanding at the initial level. Nominal money
growth will affect lower nominal interest and real interest rate in the
short term because nominal money supply takes time to impart on
Inflation. However, as deficit financing through growth in nominal
money supply continues and start reflecting in inflation, the inflation
becomes dominant. This will further promote inflation because the
money provided through nominal money creation will not be
adequate for financing the deficit due to fall in the value of nominal
money, hence the need for government to request for more nominal
money growth to further cover the deficit. Currently, the case for
loosening does not arise because the DMBs will not react in the same
way if the CBN lowers the Monetary Policy Rate (MPR) so as to benefit
the real sector of the economy. I maintain that if inflation trends
downwards further then loosening can take place. Tightening will hurt

the economy because the DMBs are likely to raise their rates which will
be detrimental to investment in the economy.
Since the past policies have shown some improvement in the economy
as buttressed by data presented to us, to hold will enable us to await
clarity on the evolution of key fiscal variables which include budget
implementation, and monetary variables such as increase or decrease
in exchange rate, interest rate and inflation.
On the basis of the above, I vote to hold:
(i) Retain the MPR at 14 percent
(ii) Retain the CRR at 22.50 percent
(iii) Retain the liquidity Ratio at 30.00 percent and
(iv)
Retain the Asymmetric corridor at +200and -500 basis points
around the MPR

3. BARAU, SULEIMAN
Background
I voted to hold on the back of relative in gains in reducing inflation,
stability in exchange rate and indication that the economy will come
out of recession sooner than later. In taking this decision, I am aware
that the continued existing of liquidity surfeit, Government deficit and
that the fact that the decline in inflation is largely due to base effect
and that there exist real threat to the gains mentioned unless further
tightening is elicited. However, I passed by this option and the option
of easing based on the observed need for sustained stability in policy.
The relative improvement in the macroeconomic environment, which
commenced at the beginning of the second quarter, has been fairly
reasonably sustained. The notable depreciation in the foreign
exchange rates for the Naira have been largely contained and this has
elicited improved confidence in both the interbank and the BDC
segments, culminating in significant reduction in the hitherto huge
premium at the BDCs‟ market. The latest projection by the IMF reveals
that the Nigerian economy would outpace South African economy in
2018 while it is remarkable that the Economic Recovery and Growth
Plan (ERGP) of the Federal Government is receiving endorsement of
international development partners like the World Bank. Although
headline inflation at 16.1 percent in June is still above the Bank‟s target,
the good news is that deceleration has been consistently observed in
the last five months. As noted in my last statement, the task at this
period is to strengthen the seemingly nascent macroeconomic stability
including building resilience and I am of the view that this should not be
an elusive goal given that some of the major risk factors are waning.

The major risks continue to be the normalization of monetary policy by
the US Federal Reserve, uncertain course of crude oil prices and
pockets of tension within the domestic polity. Some other
developments, however, could provide sufficient countervailing force
to these apparent risk factors. Among others, the recent refund of
overcharged deduction on Paris debts to states of the Federation
would stimulate aggregate demand and thereby complement the
Federal Government ERGP, which has equally received impetus with
the commencement of the implementation of the 2017 Budget. A
faithful implementation of the economic blueprint, in addition to
sustained proactive monetary policy measures, should strengthen the
macroeconomic environment and invariably put the economy on a
firm recovery path.
As indicated earlier, the need to support the tepid recovery in output
gives prospect for consideration of other policy options but the
balance of risk to outlook is still mixed. Consequently, prematurely
altering the stance of monetary policy stance may cause severe
setback to the gains recorded so far in the macroeconomic
environment. I will therefore opt to retain all monetary policy measures
in place.
Pressure Points
Global Environment:
Developments so far in 2017 have signaled improvement in the global
economy, but the outlook is still fraught with significant downside risks
and uncertainties. One of the key issues is the rising financial markets
volatilities, with severe implication on external financing conditions,

particularly for emerging and developing market economies. External
financial conditions could have loosened relative to 2016, but the terms
for accessing global financial markets still remain tighter for emerging
and developing market economies on the backlash of inherent
features of vulnerability in these economies. Progressive normalization
of monetary policy stance by the US Federal Reserve is expected to
further strengthen the US dollar against most emerging market
currencies, and for Nigeria in particular, it could translate to a setback
in the evolving stability in the foreign exchange markets.
Furthermore, the medium term outlook of crude oil prices remains
uncertain on the backdrop of market fundamentals. Although oil prices
have witnessed a fair rally in recent weeks, sustainability of the trend
remains a serious source of concern as oil majors in the US scaled up
investment in shale exploration, while OPEC has been facing
challenges in ensuring total compliance on its output cut deal. From
the demand side, apart from the fact that global economic recovery is
yet to keep pace with the pre-global financial crisis, the concern over
climate change with particular reference to Paris climate accord is
shifting technology away from carbon-based energy sources. For
example, France has just announced a plan to ban petrol-driven
vehicles as part of the commitment of becoming carbon neutral.
Similarly, Norway and Netherlands are planning to ensure only electricrun vehicles are used in their countries by 2025. Apart from these
countries, Germany and India are looking at 2030 towards compliance
with carbon neutral environment, while the manufacturer of Volvo
automobile is working towards making its cars at least partly electric by
2019. In a nutshell, the dynamics in crude oil markets is revealing an
indicative equilibrium price at the south of US$50 per barrel.

Domestic Environment
The overall medium term path could be challenged by the following
risk factors.
Threat to implementation of 2017 Budget: The 2017 Federal Government
Budget was predicated on crude oil price benchmark of US$44.5 per
barrel and production volume of 2.2mpd. Crude oil prices, after the
initial rebound in the early part of the year, have been more of a
downward trend reaching a 7-month low of US$43.3/barrel, about 3
percent lower than the benchmark price. Besides, in an attempt to
contain the softening crude oil prices, OPEC is contemplating further
production freeze in a scheme that may specifically affect Nigeria and
Libya. This, in essence, implies that projected oil revenue for the budget
may be adversely affected in both price and output contexts. This
development would either lead to reduction in total spending or
widening of budget deficit. Either of these options is a risk factor to
monetary policy. A cut in expenditure would logically be from growth
enhancing capital spending thereby acting as incubator of structural
inflation, while increase in fiscal deficit would increase interest rate as
well as crowding out private sector credit and ultimately stoke price
level.
Injection of Funds to State Governments: As part of the wider efforts to
stimulate the economy, the Federal Government has just released
about N244 billion to the states of the Federation, being the second
tranche of the refund of overcharged deduction on the Paris Club
debt. The latest tranche brings the total amount released so far to
about N760 billion, while the possibility of more tranches in the course of
the year appears very high. In view of the terms attached to the

release of the fund coupled with labor union agitations, a significant
portion of the fund would be deployed to payments of salaries and
pensions. The whole idea underlying the deployment of the fund is not
completely bad as it could stimulate growth in output in the long run.
The reality, however, is that the impact of this type of injection on
aggregate demand tends to precede the influence on aggregate
supply and invariably stoke inflation in the short run. Besides, there is
evidence of growing liquidity surfeit in the banking industry in the face
of sluggish growth in credit particularly to the private sector. It is not
unlikely that the current injection may complicate the liquidity surge
with potential adverse impact to the foreign exchange markets.
Recommendations
Enhancement of net inflows to External Reserves: The improved
confidence in the foreign exchange markets has been significantly
bolstered by the increased liquidity in the market, but at the same time
accompanied by relative degree of outflow on external reserves.
Conventionally, stemming the tide on external reserves would involve
increase in domestic interest rate, but I would not be disposed to that
option for now, out of concern for growth and the fact that the flows to
the external reserves, on net basis, has been positive. Without prejudice
to these logics, it is equally important to bear in mind the strategic
move of rational economic agents. Monetary authority loses the driver
seat to the market, when the stock of external reserves is approaching
a threshold in which economic agents perceive that it would be
difficult for the monetary authority to defend the exchange rate. The
cost of maintaining stability at such threshold becomes elevated
through significant increase in interest rate. As such, while I would prefer

to hold the current stance of policy, it may also be strategically
optimum to begin exploring other means of increasing net inflows to
external reserves given the current vantage position of the monetary
authority.
Strengthening of Domestic Resource Mobilization: Apart from the fact
that oil prices are declining the issue of output cap has been on the
front burner at OPEC with Nigeria and Libya likely to now be at the
receiving end. In light of the apparent anti-benign external
environment, the smooth implementation of the economic recovery
and growth plan would be contingent on the quantum of resources
that could be mobilized within the domestic economy. This, invariably,
requires intensification of various structural policies that could enhance
non-oil revenue. Fortunate enough, recent studies have confirmed that
most of the Sub Saharan African countries including Nigeria have
potential to increase tax revenue by about 3-6 percent of GDP. In this
regard, the ongoing tax reform measures by the Federal Inland
Revenue Service (FIRS) are a commendable step in the right direction
provided that it will elicit a rather significant and radical increase on tax
revenues.
Food Security Measures: The recent policy announced by the Federal
Ministry of Agriculture to commence the export of yam to the US and
UK is a major breakthrough in the quest to promote non-oil exports. The
implementation of the new trade scheme should however be
approached circumspectly in view of relatively high weight of food in
the Nigeria consumer‟s basket. Food inflation has been a major driver
of the prevailing episode of high inflation, driven in part by supply
deficit. As such, the implementation of the new trade schemes should

take on board measures that would preserve domestic food security
with a view to avoiding domestic supply deficit which could fuel
inflation.
Conservative Benchmark Price for Crude oil in 2018 Federal
Government Budget: The benchmark price for crude oil in the 2017
Federal Government budget is US$44.5 per barrel while the first half of
the year has seen the actual price sliding below the budget
benchmark. OPEC has tried to rise up to the challenges by negotiating
a deal on output cut from member states. Compliance by OPEC
members with production cut deal has not only been low, but the
precarious situation has been further exacerbated by rising supply by
non-OPEC members led by US, Brazil and Canada. In addition, the
production cut deal is expected to expire in March 2018 while OPEC
has not clearly shown the exit strategy. Except for such temporal
disruption to output, it is high time to adjust to the reality that the era of
astronomical crude oil prices has ended and this should be duly
recognized in the revenue projection for 2018 to avoid unplanned
budget deficit.
Robust Framework to Calm Rising Socio Political Tension: The
importance of peace and security in fostering investment, an
acknowledged accelerator of economic prosperity, cannot be
overemphasized. To build on the fledgling gains in macroeconomic
environment, issues that bother on security cannot be compromised.
Against this background, it is expedient that a holistic framework be put
in place to address all kinds of security threats across the various geopolitical zones to avert the possibility of major crisis.

Decision:
The ongoing recovery requires some measures of interest rate support
but in view of the fact that the balance of risk to outlook on
macroeconomic stability is still mixed, I will vote for the retention of all
monetary policy measures.

4. GARBA, ABDUL-GANIYU
Decision
I vote to reduce the MPR by 200 basis points (2%). This implies (i) a
reduction in the MPR from 14% to 12% and (ii) a reduction in Standing
Lending Facility (SLF) from 16% to 14% and the Standing Deposit Facility
(SDF) from 9% to 7%.
My vote is a vote for (i) consistency and effectiveness of monetary
policy and (ii) growth in private investment, creation of new jobs,
output
growth,
financial
system
stability
and
medium
term
macroeconomic stability.
Justification
The first joint fiscal and monetary retreat which held in March before
the March MPC laid down a sound set of principles for effective
strategic and policy coordination (humility, sincerity and integrity) and
emphasized the organic links between fiscal, monetary and prudential
policies and the grave dangers of independent and uncoordinated
strategic and policy analysis and choices. It is important that we keep
in mind the frameworks, mandates and goals of macroeconomic
management and the specific domains of each monetary, prudential
and fiscal policies and the initial conditions of recession. Otherwise,
policy decision making will be within strategic vacuums. Such policy
choices may not drive the economy towards paths of low inflation
conducive to growth, financial system stability (FSS) and fiscal
discipline. I believe strongly that it is critically important to build on the
foundations of the “March retreat” if we are not to be matching in
retreat.

It is very easy to lose focus, squander opportunities to learn key lessons
and repeat fundamental and disastrous strategic and policy errors if
challenges and pressures are allowed to overwhelm strategic analysis
and policy choice. However, if we let the lessons of history, of clear and
consistent reasoning, of evidence and of the legal mandate of
monetary policy guide our thinking, conclusions, and choices, it would
be easier to find quicker and less costly pathways to low inflation
growth, low unemployment, fiscal prudence and financial system
stability.
This MPC meeting brought to focus three key macroeconomic
challenges in increasing order of difficulties: technical exit from
recession (achievable even by a positive growth that is not significantly
different from zero growth such as 0.000000001%); economic recovery
(that is, taking the economy to where it was in 2014) and economic
growth (growing the economy from the 2014 base). It is obvious that
the least challenging is the technical exit from recession. However,
there is no guarantee that the economy will not slid back into recession
or that the economy will recover and grow and surpass the level of
2014.
The macroeconomic challenge revealed by the data is overwhelming:
five quarters of negative aggregate growth from 2016:Q1 to 2017:Q1
compounded by the economic slowdown since 2014Q1, nine quarters
of negative growth in industrial GDP; six quarters of negative growth in
construction GDP, four quarters of negative growth in trade GDP and
three quarters of negative growth in services GDP, reversed in 2017:Q1
by a very low positive growth of 0.37%. Unemployment trending up to
14.2% in 2016:Q4 from 13.9% in the previous quarter and expected to
trend upwards in 2017 given that unemployment starts to decline

several quarters after the recovery in economic growth had
commenced and sustained. Though headline inflation is trending
downwards, it is driven mainly by base effects: the month on month for
imported food inflation and core inflation are higher in June than they
were in May 2017.
The fiscal performance indicates a rise of cumulative fiscal deficit to
N2.51Trillion in the first six months of 2017 from N1.211 Trillion in the first six
months of 2016. This represented a 107.3% rise in deficit. In the same
period, the ratio of revenue rose from 93% to 204%. In addition, the
public debt rose by 32.4% in 2016 and by 11.5% in the first half of 2017 as
the public debt stock rose from N10.98 trillion in 2015 to N16.21 Trillion in
June 2017.
The money market remains characterized by excessive concentration
in assets, credit and deposits among financial institutions and excessive
concentration in the loan book per obligors and per sectors. For
instance, big ticket borrowers –those who borrow above N1 Billion
account for about 81% of the loan portfolio while those borrowing less
than or equal to N1 million account for just about 1.3%. Majority of small
and medium scale enterprises who have highest employment and
output elasticities typically borrow under N1 million. Similarly, agriculture
attracted just 3.2% (mostly guaranteed by the Central Bank). In contrast
oil and gas continues to attract almost a quarter of new credits
allocated in June 2017 despite relatively high ratios of non-performing
loans. Not only does agriculture and small and medium scale players
attract low allocations of credit, they do so at high costs. The maximum
lending rate was 30.75% while the prime lending rate and deposit rates
were 17.59% and 8.9% implying spreads of between 13.16% and 21.85%.
It is hard to see how such high spreads and high lending rates will

stimulate growth in investment, employment, productivity and output
or conduce a path towards financial system stability.
The coexistence of high interest rate and growth in money supply are
unnatural. Indeed, it generates a contradiction or inconsistency
problem. Strong growth in money supply in all countries that adopted
quantitative easing pushed down interest rates almost to zero. And it
was such almost zero interest rates that partly helped economic
recovery and excessive growth in asset prices. The injection of liquidity
through AMCON, frequent and wide ranging interventions, frequent
injections through monthly monetization of FAAC oil revenue income
and budget supports continually undermine the deflationary policy
that has dominated monetary policy since September 2010. Persistent
deflationary policy is incompatible with economic recovery and
economic growth because deflation deflates!
As we pointed out in previous personal statements, it is the strong
growth in money supply in 2015 and 2016 that significantly distorted the
forex market, the money market, the stock market and domestic prices.
It was almost a classic monetarist phenomenon where an expansion in
money supply was transmitted more than proportionally to domestic
prices through the amplifying effects of the exchange rate. To continue
to grow money supply either through monetization of oil dollar revenue,
standard lending facility, liquidity mop ups (each mop-up offsets the
size mopped-up by the proportion of the interest rate), episodic release
of intervention funds, expanding government securities, roll-overs of
maturing securities and so on while keeping interest rates high is a selfdefeating policy process. The revolving door of liquidity – pumping in
liquidity and them mopping them up – keeps interest rates high,
undermines
investments,
corporate
revenues
and
profits
and

employment while increasing public debts and the crowding out of
non-debt public expenditure and private investments. The argument
that we need to raise interest rates to attract portfolio flows is
unconvincing. We have already had two disastrous episodes of
portfolio flows triggered distortions of foreign reserves, current account
balance, capital market, exchange rates and inflation during and after
short lived asset price bubbles. The experiences of 2006-2009 and 20132016 are still fresh to start another cycle of flows that in additions to its
distortionary effects cause depletion of reserves as well as increase in
the sacrifice ratios of deflationary policies that climaxed in recession,
high unemployment, high inflation, high interest rates and high public
debt.
I was convinced after the March Retreat that finding the paths to low
inflation growth conducive to job creation, financial system stability
and fiscal prudence was the most urgent priority. I am still convinced
that it is important to build on the March Retreat and that a consistent
monetary policy is key to macroeconomic stability in the medium to
long term.
I was concerned about a high interest rate trap since the deflationary
policy phase began in September 2010. I believe that it is important to
avoid a similar trap because I do not think the gains of portfolio flows
are anywhere near the costs. I am also convinced that it is far more
effective to stimulate remittances because they have more significant
positive policy elasticities, greater stabilizing effects on the external
balances and more positive impacts on the macro-economy and
clearly far more virtuous.

No economy can recover and stimulate growth with excessively high
interest rate and episodic destabilizing influences of portfolio flows. We
have had the opportunity to restore monetary policy independence
since 2014 when portfolio investors took flight. Getting into another high
interest rate trap is not the answer to economic recovery or low
inflation growth. I am convinced that we ought to move away from the
Hong Kong Model that sacrifices monetary policy independence. We
cannot afford to sacrifice the independence of monetary policy and
hope to have a stable path to low inflation growth, financial system
stability and fiscal discipline.
Kenya I believe presents a better model for ensuring that interest rate
spread and interest rates do not destroy the productive base of an
economy as well as the stability of the financial system and the
economy. The SLF-SDF window has become a major noise and
constraint to the effectiveness of monetary policy as the monetization
of dollar oil export earnings. The excellent tracking of the exchange
rates (Interbank and BDC) and inflation by M1 is indicative of the
dangers of an unconstrained expansion in money supply and the high
risks of currency collapse. The high instabilities in both OBB (open buy
back) and Call Rates due to liquidity management in my considered
view call for greater consistency in constrained liquidity management if
the shifts from rent creation and appropriation (wealth transfer) is to
give way to wealth creation, jobs and productivity and economic
growth. Lowering interest rate is just a first step towards policy
consistency and policy effectiveness. It should be a consensus point on
which the monetary and fiscal authorities could on build on to produce
a consistent forward looking strategic framework for coordinated,
effective and constrained monetary, prudential and fiscal policies.

5. NNANNA, OKWU JOSEPH
Economic growth has shown resilience since the last MPC helped by
recovery of oil production, industrial sector’s increased access to
foreign exchange and the 3.4 per cent Q2 growth in agriculture. At
103.8, the index of industrial production rose by 0.7 per cent, higher
than the preceding quarter, while manufacturing capacity utilisation
remained unchanged at 53.7 per cent. Average capacity utilisation
index rose by 1.1 points in Q2 2017. However, downside risks to the
growth outlook remain strong as structural rigidities persist and
uncertainty which becloud the international oil price may weaken
resource buffers for real sector financing.

Inflation continues to decelerate due to the positive core inflation
shocks, favourable base effect and the moderation in the pass-through
effect of exchange rate appreciation on domestic prices. Headline
inflation narrowed by 0.15 percentage point to 16.1 per cent in June
relative to its level in May. While core inflation fell to 12.46 per cent from
13.02 per cent in May, food inflation remains elevated at 19.91 per cent
higher than the 19.27 per cent in May due to supply-side disruptions
associated with insecurity, higher energy costs, protracted transport
infrastructure bottlenecks and seasonality factors.

I note that though financial conditions eased-out in the interbank
market as evidenced in the decline in the average interbank market
rates, the drag on financial intermediation and credit conditions have
remained persistent. Interbank market liquidity was bolstered by OMO
sales and seasonal statutory disbursements, releases for capital budget
execution and maturing CBN bills. Consequently, average inter-bank

call and OBB rates in June fell to 13.46 per cent and 29.57 per cent,
respectively from 21.29 and 39.29 per cent in May 2017. Credit to the
private sector contracted as a result of the persisting crowding-out
effect of government borrowing requirements driving up interest rates.
Maximum and prime lending rate rose by 0.19 and 0.01 percentage
point, respectively to 30.94 and 17.59 per cent in June, from May 2017.
All stock market indices were robust with the ASI and market
capitalisation rising by 26.6 and 27.2 per cent, respectively, reflecting
buoying investor sentiments.

Global growth which was predicated on stronger economic activity in
advanced and emerging economies remains relatively fragile. Growth
was hampered by a number of headwinds, namely, major oil exporting
economies continue to grapple with weak financial conditions; United
States expected fiscal expansion and deregulation is phasing in with a
drag on economic activities; and crystalisation of the unintended
consequences of BREXIT.

On the fiscal front, concerns about future fiscal slippages remains
pertinent. The issue of long-run fiscal sustainability is emerging as
revenues are weakening, interest rates on government debt are
elevated, while borrowing is rising and interest payments have
accumulated. It is my expectation that the authorities would bring to
speed implementation of the Executive Orders recently signed to ease
conditions of doing business; support local contents in public
procurement by the Federal Government; and the Voluntary Asset and
Income Declaration Scheme (VAIDS). These Orders should assist in
improving the business climate, boost tax revenue, build buffers and

further
support
investors‟
confidence.
Fiscal
reforms
including
expenditure switching, can further free space to enhance public
investments.

External sector indicators remained resilient supported by improved oil
production and the effectiveness of the investors’-exporters’ foreign
exchange window in the provision of foreign exchange liquidity. The
exchange rates in the NAFEX and the BDC segment appreciated by
18.0 per cent and 0.1 per cent to close at N363.76/US$ and
N365.77/US% near its relative purchasing power trend. External reserves
at end-June 2017 stood at US$ 31.26, 15.82 per cent higher than its level
at end-December 2016 and could finance approximately 10 months of
import cover.

Overall, the macroeconomic outlook is positive, while exchange rate
stability is assured. The risk of a reversal of the current deceleration in
the inflation path is very unlikely in the short-to-medium term. Against
the backdrop of fiscal dominance despite lower than expected
growth, and on the balance of risks based on available data, I vote to
retain the current stance of monetary policy tightening.

6. SALAMI, ADEDOYIN
At the conclusion of this meeting, I voted with a minority of members to
reduce the Monetary Policy Rate (MPR) by 2.0 per cent. As the
Communique from the meeting shows, the majority of members voted
to maintain the status-quo ante.
By way of background to this meeting, news, data and analysis
continue to paint a mixed picture. Despite continuing contraction in
overall economic growth – recorded at -0.5 per cent in Q1-2017 -, the
non-oil sectors of the economy attained positive growth of 0.7 per cent
in the same period. Though still shrinking, the rate of contraction in the
oil sector slowed to 11.6 per cent from 17.7 per cent the previous
quarter. Inflationary pressure appears to be easing. From 16.25 per cent
the previous month, Headline inflation fell to 16.1 per cent in June 2017
– its lowest value for a year and the 5th consecutive monthly reduction.
Similarly, Non-food or Core inflation dropped to 12.5 per cent from
13.02percent the previous month. In contrast, food prices continued to
rise. At 19.91 per cent in June 2017, they were the highest they have
been since 2009.
The picture of slowing inflation, around which there has been much
positive comment, is sharply disputed when we look at the Month-onMonth data on price changes. Since its low point in November 2016
when it rose by 0.8 per cent, the monthly change (as opposed to the
year-on-year change) in Headline has risen quite sharply. In June 2017,
it rose by 1.6 per cent. This confirms that minus „base effects‟, inflation
remains a serious problem which both fiscal and monetary policy
makers will do well not to ignore. The present euphoria around slowing
inflation is unlikely to last beyond exhausting the „base effects‟.

Quite a bit of the background commentary had focussed on the gain
of stability in the Forex Market. Particular emphasis being laid on the
resumption of Foreign Portfolio Investor (FPI) inflows. A cursory review of
the data for Capital Importation, whilst showing improvement, remains
fragile. To confuse stocks and flows in the analysis of forex flows is to do
ourselves a dis-service. The fundamental question, which in my view
remains unanswered, is will the tentative drift in the direction of
consolidating our multiple forex markets survive a downturn in oil
prices? Given the uncertainty as to the answer to this question, it may
be prudent to suggest that caution needs to attend the seeming haste
to declare victory.
The Financial System Stability Report by Bank Staff highlights one of the
biggest challenges with which the Central Bank must grapple. At
slightly over 15.0 per cent, the portfolio of Non-Performing Loans (NPLs)
as a proportion of the total loan book of banks remains above the
regulatory maximum and continues to rise. Whilst Bank Staff continue to
note that once the figure is discounted for the impact of “4 Outlier
Banks”, the NPL ratio drops to 8.17 per cent. In another set of
circumstances, I may be tempted to suspend my judgement and
support their position. However, I note that these “4 Outlier Banks”
cumulate in size to at least 1 Systemically Important Bank (SIB). I take
the view that since the failure of any of the SIBs is a source of concern,
excluding these “4 Outlier Banks” does not adequately take
cognisance of the contagion effect which they could trigger.
Perhaps the most challenging of the present characteristics of the
economy in Nigeria is the adoption of a quantitative easing stance by
the management of the Central Bank. Monetary data shows a sharp
rise in the extent of CBN financing of the government deficit. Highlights

of CBN financing of the Federal Government since Dec. 2016 are as
follows–
CBN‟s claims on Federal Government (FG) at N814bn is
twentyfold higher while the claims of Commercial Banks rose
marginally by 0.4% to N4.6 trillion;
30.0 per cent increase to N454bn in CBN‟s purchase of
government T-Bills;
5percent increase in FG Overdrafts to N2.8 trillion; and
Increase in the „mirror account‟ from N3 billion at the end 2016 to
N1.5 trillion in April 2017.
It is clear that the CBN has provided „piggy bank‟ services to the
Federal Government.
To prevent the effect of continuous and massive injections of cash to
fund the Federal Government showing up in sharply higher inflation
and currency weakness, the Central Bank now applies „special
auctions‟. The format of these „auctions‟ recall the dark days of
„stabilization securities‟. The effect of these auctions is to raise the
„effective‟ Cash Reserve Ratio (CRR) beyond the 22.5 per cent
sanctioned by the MPC. The adverse effect on extension of credit to
the private sector is not difficult to understand.
We thus find ourselves at a point where government borrowing from
the CBN is „neutralised‟ by raising the CRR of banks thereby limiting
private sector access to credit. In other words, the private sector is
deliberately „crowded-out‟. Its ironic that the government, in need of
tax revenues – having in the 1st half of the year accumulated its fullyear deficit – is constraining the private sector from which the sorely

needed revenues are to be derived.
Whilst I still wonder what the underlying economics is – I sincerely hopes
it works!
Given that monetary policy management is presently about funding
the Federal Government – in other words, the stance of policy is easing,
policy consistency and credibility demand that the Monetary Policy
Rate (MPR) be significantly reduced to reflect the underlying
preferences of policy managers. I thus voted for a 2.0 per cent
reduction in the MPR.

7. YAHAYA, SHEHU
I vote to maintain the current monetary stance, due to the reasons
provided below
Developments in the Global Economy
Growth data for the global economy and for key trading partners of
Nigeria is not yet available for the Q2 2017. What has been mentioned
earlier for the first quarter of the year therefore still stands. General price
levels reduced or remained stable in July in the US, Euro area, UK, China
and Japan. This was also the trend in some African countries such as
South Africa, Kenya and Ghana, while much of North Africa is
experiencing some inflationary pressure.
Some of the most important developments appear to be emerging in
the oil sector. Oil prices recovery in the first few months of this year is
giving way to new pessimism due to oversupply and increasing shale oil
production, and this is despite the extension of the OPEC production
cut agreements. With rapidly falling overhead costs of shale oil
production (their break-even point having come down to $2225/barrel, which may even fall further), the prospects for continuing
market saturation are getting stronger. In the longer term, an even
bigger threat is the expanding use of renewables in the transport and
energy sectors. Volvo has announced its intention to stop producing
petrol/diesel cars by 2020; India is phasing them out by 2032 and the US
is expected to see a collapse in use of petrol for transportation to 14%
of current use by 2027. Germany, France, China and others have
announced ambitious plans for the expansion of EV cars. The costs of
solar power have also significantly shrunk and are continuing to fall
further. Longer term prices of oil are therefore bound to experience a

sharp fall and this will obviously have far-reaching consequences on
the economies of oil producing countries.
The Domestic Economy
Although yet to be confirmed, GDP is expected to show a positive
growth rate of around 0.8% in Q2 2017 for the first time since early 2016.
Energy and manufacturing are forecast to contribute to the turnaround. Despite the occasional gains in the price of crude oil and the
improvement in production, the oil sector is unlikely to contribute at this
time to the growth figures. Construction is also likely to show a small
rebound. Nevertheless, the turn-around is still quite tentative and is
capable of being interrupted in the event of headwinds.
Headline inflation has maintained its downward trend to 16.10 in June
2017, from 17.24% in April and 16.25% in May. The decline in headline
inflation was spurred by the steady, even if slow decline in core inflation
since December 2016, and is at 12.5% (YOY) in June 2017; whereas
food inflation maintains a slow increase, more or less since April, to
19.91% by June.
The month-on-month inflation figures also indicate a gentle decline in
prices, even for the food component, which has reduced from 2.54% in
May 2017 to 1.99% in June, driven by both processed food and farm
produce. Month on Month core inflation figures have also moderated,
led by processed foods and housing, water, electricity, Gas and other
foods. A substantial decline in headline inflation figures is unlikely unless
there is a significant fall in food inflation. At any rate, the outlook is for
prices to tick upward a little in July and September before slowing
down again for the rest of the year. It is therefore important to ensure

that policies are aimed at contributing to the downward trend of
prices.
At the foreign exchange market, the value of the Naira has remained
fairly stable, mainly due to the rising oil production levels and the
policies implemented by the CBN which have contributed to the rising
levels of reserves. The stability of the Naira value is clearly an important
contributory factor to the slightly moderating general price levels. The
development of non-oil sectors and the attraction of foreign
investment will be important factors in maintaining the level of reserves
in the medium term.
The banking and financial sector are still experiencing some
challenges. Capital adequacy ratio in the banking sector maintains its
downward trend. However, while, NPLs are still too high, they are
currently slightly lower than they were in April, and it is hoped that this
trend will solidify along with the general economic turn-around.
Liquidity is well above the regulatory threshold, while there has been
some recovery in the figures for return on assets and particularly return
on equity, with the latter experiencing a big surge. Profits have also
risen by around 4.5%, despite the much higher level of provisioning in
the sector, which is unsurprising, considering that lending rates have
risen slightly and are increasingly diverting from deposit rates, which
have actually fallen slightly, on average. However, it must be noted
that credit to the private sector during the first half of the year has
fallen by around 0.56%, while credit to the government is well below the
indicated benchmark. Given the declining levels of government
revenue and the need for private sector investments to boost growth
and jobs, there is clearly a need to increase the flow of credit to the
private sector.

The capital market is experiencing a resurgence, reflecting the cautious
but positive sentiments that the economy has bottomed out. Foreign
Portfolio and Direct investment are rising
In considering the policy options, it should be borne in mind that
inflation, although trending downwards, is doing so very slowly and is
still too high to be conducive to growth, since it has exceeded the
thresholds beyond which, it is widely accepted, to be inimical to
growth. In addition, it is still undermining the real income and
consumption of fixed income earners, the poor and the unemployed.
Secondly, recovery from growth is still very tentative and can be easily
undermined. Thirdly, the stability in the foreign exchange market is
critical to both economic recovery and the moderation of inflation.
In consideration of the above therefore, a loosening of monetary policy
will undermine the efforts to sustain the moderation of inflationary
pressure and therefore undermine the very growth that this approach is
seeking to achieve, at a time when the effect of such a loosening on
the reduction of interest rates is uncertain. It is also unlikely to
encourage foreign investment and may undermine the efforts to
maintain the robustness of external reserves.
On the other hand, tightening monetary policy may help the inflation
effort, but will put Banks under additional pressure with respect to NPLs,
and may also lead to a rise in interest rates (interest rates are more
sticky downwards in developing countries). This may further choke off
lending, especially to agriculture and manufacturing sectors, which are
important for growth and jobs.
I therefore vote to maintain the current monetary stance. In addition,
efforts should continue to be made to sustain the stability in the foreign

exchange market and incentivize DMBs to lend to the productive
sectors of the economy. The CBN must also intensify efforts to avoid
inflationary financing and accommodation.

8. EMEFIELE, I. GODWIN, GOVERNOR OF THE CENTRAL BANK OF
NIGERIA AND CHAIRMAN, MONETARY POLICY COMMITTEE
At today‟s MPC meeting, my inclination is to hold the current monetary
policy stance. This is to ensure an orderly transmission of past policy
impulses, sustain the gains so far achieved in the domestic economy,
and ensure that the improvement in near- to medium-term outlook is
not overturned. Available data indicate that the pickup in
macroeconomic aggregates which began during the fourth quarter of
2016 were not only sustained in the first half of 2017 but has
broadened, albeit delicately.
The upturn in GDP trajectory is expected to culminate in positive
growth by 2017q2. There were comparable improvements in price
levels with a fifth consecutive month of disinflation to 16.1 percent in
June 2017 from 18.7 percent in January 2017. These reflected the
continued stability in the FX market as exchange rate generally
converged downward. Besides, external sector statistics also indicated
steady improvements discernible from the positive current account
balance so far in the year.
Nonetheless, the medium- to long-term risks are on the downside
especially with respect to developments in the crude oil market.
Prominent in this regard are the persisting fall in the breakeven costs of
producing shale oil towards US$22 per barrel and the green energy
deportment of major car producing countries who have announced
dates to halt the production of hydrocarbon-powered vehicles. These
have dire ramifications for countries, like Nigeria, whose economy are
overly dependent of crude oil.

In the near- to short-term, downside risk are contingent on the
trajectory of global economic developments. Though near-term
global macroeconomic outlook, according to the July 2017 vintage of
the IMF‟s WEO, remained unchanged, the projections for the US and
UK were revised downwards while prospects improved for the euroarea and Japan. Global outlook is, however, threatened by the
persistent uncertainties in key advanced economies, especially the
chaotic Brexit negotiations and somewhat unpredictable policies by
the US government. For many emerging countries, this is compounded
by the programmed interest rate hike in the US and ensuing capital
flow reversals.
For Nigeria, general sentiments on the economy and the financial
markets have improved somewhat vis-à-vis the mood 12 months ago.
This largely reflected the relative stability in the FX market, continued
disinflation, waning recession, recovering capital markets, and
improving prospects. From a contraction of 0.5 percent in 2017q1, the
economy is envisaged to record a slight positive growth in 2017q2
driven fundamentally by the continued recovery in the non-oil sector.
Though household demand may remain weak throughout the year,
the rising government investments in capital projects are expected to
propel the rebound in domestic aggregate demand. It is important
that the pace of capital projects is sustained in the medium-term so as
to reduce infrastructural deficits, with potential favourable effects on
output and prices.
The continued decline in headline inflation rate for a fifth successive
month, from 18.7 in January 2017 to 16.1 percent in June 2017, is a
welcome development. Over the same period, core inflation fell from

17.9 percent to 12.5 percent, while food prices accelerated from 17.8
percent to 19.9 percent. Though the benign base-effect is dissipating
asymptotically, the continued stability of the exchange rate in the
various windows is expected to sustain the pace of disinflation in the
near-term. However, the unrelenting ascent of food inflation traceable
to widespread flood, herdsmen attack and other factors on farming
activities threatens the prospects of price stability in the near-term.
Nonetheless, barring any unforeseen shock, the pace of headline
disinflation may prevail beyond the year-end. It is, therefore, important
that policy shocks are rightly delayed in order not to upset the current
trend of disinflation and overturn the imminent recovery of the
economy.
Liquidity conditions in the money and credit markets remained tight
during the review period. Broad money supply M2 contracted by 14.6
percent annualised as against a target expansion of 10.3 percent.
While this parallels the 0.04 percent annualised contraction in private
sector credits it contrasts the 11.8 percent annualised expansion of net
claims on government. The growth in government credits due to
expanded fiscal operations evokes the crowding-out of productive
private sector in the short-run. If the government succeeds in reducing
the infrastructure deficit through it fiscal operation, I expect a
favourable crowding-in of the private sector in the medium- to longterm.
In my consideration, I note that while the fragile prospect of economy
recovery is encouraging the need to ensure that it coalesces into a
stable equilibrium is non-negotiable. Amidst continued efforts to
diversify the Nigerian economy, structural imbalances subsist as supply

constraints persist. As I had noted earlier, the underlying deterrents
include: foreign exchange scarcity (due to low crude oil receipts and
inadequately
diversified
economy);
constrained
fiscal
space;
infrastructural bottlenecks; high energy prices; and depressed
domestic demand (partly attributable to sizeable salary arrears owed
to some civil servants). The economy remains delicately balanced on
the vagaries of the oil sector. And that is why I would like to reiterate
the call to speedily and completely diversify the economy away from
oil as this is a critical step in ensuring sustainable economic growth in
the future.
Given that the impulses from previous policy adjustments are still
permeating the system, it is imperative to be cautious with our
decisions. In my opinion, adjustments to key monetary policy
instruments may at this time be rather hasty. To safeguard the relative
stability in the FX market, we must ensure that the interest rate parity is
optimal to attract sufficient inflows to the economy. I emphasise that
my personal predisposition is to achieve a regimented fall in interest
rate to a low single-digit level; as contained in my inaugural speech of
June 2014. However, the current realities do not support that
sentiment. Inflation remains at intolerable double-digit level, a level
which in-house threshold analyses indicate is inimical to economic
growth. Accordingly, the real monetary policy rate is negative and as
such obviates real investment analyses.
In my view, the current tight stance of monetary policy should be
maintained to ensure that the expected recovery is achieved and
sustained in the short- to medium-term. Given that real policy rate is still
negative due to high inflation, and interest rate parity is indispensable

for stability in the FX market, easing monetary policy would at this time
be sub-optimal. Such decision would re-introduce undue pressure to
the FX market, instigate inflation which is already at inimical doubledigit levels, undermine the expected rise in domestic investment as the
real exchange rate would remain perversely negative, and upend the
expected rebound of the economy. To ensure that the corrective
effects of previous policies filter-through and also ensure that distortive
policy shocks are not introduced into the system, I prefer to maintain
the current monetary stance and all its underlying indicators.
Therefore, I vote to:
1. Retain the MPR at 14.0 percent;
2. Retain the CRR at 22.5 percent;
3. Retain the asymmetric corridor at +200/–500 basis points; and
4. Retain liquidity ratio at 30.0 percent

GODWIN I. EMEFIELE, CON

Governor

July 2017