Central Bank of Nigeria Communiqué No. 77 of the Monetary Policy Committee
Meeting, July 25 – 26, 2011

The Monetary Policy Committee (MPC) met on 25th and 26th July, 2011 to review
domestic economic conditions during the first half of 2011 and the challenges
facing the Nigerian economy against the backdrop of developments in the
international economic and financial environment in order to chart the course
of monetary policy in the second half of the year.
On the global scene, the Committee noted with concern the enormity of the
challenges being faced by the US and euro zone countries as well as the major
emerging market economies such as the fiscal position of Brazil, possible real
estate bubbles in China and seemingly intractable inflation in India, which may
impact the Nigerian economy adversely through several channels. The
economic slowdown and the commodity price inflation in the international
economy as well as the rapid increase in prices of some asset classes in some
emerging market economies remain serious threats to the global economic
recovery. There are continuing widespread threats of inflationary pressures
fuelled by the sustained high energy, commodity and food prices in the global
economy. Headline inflation in many of the major emerging market economies
is now exceeding 6 per cent and is running close to or above central banks’
targets in a number of other larger economies.
The performance of the global financial markets was mixed. Many national
currencies in Africa depreciated against the US dollar while in many emerging
markets, currencies appreciated vis-à-vis the US dollar during the first half of
2011. Furthermore, most stock markets around the world showed weak recovery
during the period due to high inflation, weakening consumer confidence and
government finances, particularly in the US and euro zone. The unfolding debt
crises in the European periphery could damage confidence and output in the
near-term while the US debt and unemployment situation pose grave danger to
the international economy given the reserve currency role of the US dollar and
the size of the US economy. It is not unlikely that the US will lose its AAA rating
and actual default is possible unless a deal can be worked out between the
White house and the Congress.
On the domestic scene, the Committee noted that inflationary pressures which
were traceable to the high expenditure levels associated with the April 2011
general elections as well as the effects of rising international energy, commodity
and food prices had moderated by June 2011. This development was due in
part to the tight monetary policy stance of the Bank since September of 2010.
However, the Committee observed that the inflation outlook appears uncertain

owing to the expected implementation of the new national minimum wage
policy and the imminent deregulation of petroleum prices. Significant injection
of liquidity from FAAC in the third quarter coupled with the impact of AMCON
recapitalizing intervened banks to the tune of N1.6 trillion will both add to
inflationary pressures. The Committee welcomed the favorable growth
projections but cautioned that the current security challenges, infrastructural
bottlenecks and the uncertainty in the international economy as well as fiscal
developments could undermine investors’ confidence and output growth in the
near term.
The Committee expressed serious concerns about the continued sluggish growth
of credit to the private sector during the first half of the year which is attributed,
among other factors, to the heightened credit risk in the real economy as a
result of the persisting structural problems occasioned by the inadequate power
supply and critical infrastructure deficit. It also observed that the lending rates
of deposit money banks (DMBs) remained relatively high.

Key Domestic Macroeconomic and Financial Developments
Domestic Output:
Provisional data from the National Bureau of Statistics (NBS) indicate that real
Gross Domestic Product (GDP) grew by 6.64 per cent in the first quarter of 2011
down from the 7.36 per cent in the corresponding period of 2010. The non-oil
sector remained the major driver of growth recording 8.65 per cent growth rate
in the first quarter of 2011. Overall, GDP growth rate was projected at 7.80 per
cent for 2011, which the Committee believed, is still reasonably robust by major
emerging market standards, but which may be placed at risk in the event of
crystallization of various negative developments in the developed and
emerging markets.

Domestic Prices:
Inflationary pressures remained elevated during the first quarter of 2011 but
moderated towards the end of the second quarter. The year-on-year headline
inflation rate, declined from 12.8 per cent in March and 12.4 per cent in May
2011 to 10.2 per cent in June 2011. The downward movement in inflation in June
2011 was due to the moderation in both food and core inflation. Food inflation
fell for the first time since February 2008 to below 10 per cent. It declined from
13.6 per cent in March and 12.2 per cent in May to 9.2 per cent in June 2011.
Core inflation decreased from 12.8 per cent in March and 13.0 per cent in May

to 11.5 per cent in June 2011. Staff projections indicate that both headline and
food inflation would continue to moderate in the second half of the year.
However, core inflation is projected to increase during the same period driven
mainly by cost of energy, power and imports.

Monetary, Credit and Financial Market Developments:
Broad money (M2) grew by 5.66 per cent in June 2011 over the end-December
2010 level, which when annualized, translated to a growth rate of 11.32 per
cent. Aggregate domestic credit (net) grew by 2.30 per cent in June 2011 over
the 2010 December level which annualized to a growth rate of 4.60 per cent.
The sluggish growth in aggregate credit was mainly due to the weak expansion
in private sector credit which grew marginally by 1.45 per cent or 2.9 per cent
on an annualized basis.
Interest rates in all segments of the interbank money market moved up in
response to the upward review of the MPR for most part of the period since the
last meeting of the MPC. The weighted inter-bank call rate, which stood at 9.73
per cent prior to the last MPC meeting rose steadily, peaking at 13.64 per cent
on June 13, 2011 while the OBB rate also trended upward reflecting the increase
in the MPR. Developments in the interest rate structure indicated that retail
lending rates remained relatively high. The average maximum lending rate
declined to 22.02 per cent in June 2011 from 22.19 per cent in May 2011 while
the average prime lending rate declined to 15.76 per cent from 15.81 per cent
during the same period. Thus, the spread between the average maximum
lending rate and the consolidated deposit rate narrowed marginally to 19.22
per cent in June 2011 from 19.40 per cent in May 2011.
Stock market performance remained bearish during the review period as the AllShare Index (ASI) decreased by 3.4 per cent between March 31, 2011 and July
21, 2011. Market Capitalization (MC) also declined by 3.4 per cent during the
same period. The Committee noted that the Nigerian stock market
performance is consistent with the stock market performances around the rest
of the world, and reflects a growing risk aversion on the part of portfolio investors
as well as domestic concerns on the ongoing banking sector resolution. This will
be addressed later in this communiqué.
External Sector Developments
At the wDAS, the exchange rate closed at N151.61 (including the 1%
commission) on 22nd July, 2011, representing an appreciation of 2.14 per cent
over the N154.91/US$ on 23rd May, 2011. The Inter-bank selling rate opened at
N156.67/US$ on 23rd May, 2011 and closed at N152.33 on 22nd July, 2011,

representing an appreciation of 2.77 per cent. At the BDC segment of the
market, the exchange rate closed at N166.00/US$ on 22nd July, 2011,
representing a depreciation of 4.40 per cent over the opening rate of
N159.00/US$ on 23rd May, 2011. In the light of this, the Committee noted that the
premium between the rates at the wDAS and the interbank rate narrowed
towards the end of the review period, while that between the wDAS and the
BDCs widened which is not unconnected with the measures taken to limit sales
to BDCs. However, while strengthening of currency is an important factor in
mitigating inflationary pressures, the spread may lead to arbitrage by players
and fuel unhealthy speculation.
The Committee noted the modest accretion to external reserves in recent
months, but remained concerned about the sustained low level of accretion in
the face of higher oil output, higher oil exports volume and higher oil prices.
Gross external reserves stood at US$33.73 billion as at 21st July, 2011, representing
an increase of US$1.84 billion or 5.77 per cent over the level attained on 30th
June, 2011. Given that the current oil price level may not be sustained in the
event of a slowdown in global economic recovery, the Committee reiterated
the need for pursuing policies to foster macro-economic stability, economic
diversification as well as encouraging foreign capital inflows.
The Committee commended the CBN for the limit placed on the foreign
exchange sales to the BDCs. However, in view of the widening premium
between the wDAS and BDC rates, the Committee encouraged the CBN to
review the existing limit. The decision and communication in this regard will be
made by the Bank.
With regard to banking system stability, the Committee was informed that 3 of
the intervened banks had signed Transaction Implementation Agreements (TIAs)
and 3 more are expected to sign TIAs within the next two to three weeks. The
remaining two are already the subject of interest from prospective core
investors, and the CBN is closely monitoring developments. It is expected that all
the intervened banks would be fully re-capitalized by 30th September, 2011.
Committee’s Considerations
The Committee recognized the decline in inflation rate and the slow down in
GDP growth rate as well as credit to private sector which would ordinarily
advice maintaining rates at current levels. However, the consensus of the
Committee is that the outlook is uncertain due to dark clouds on the
International horizon and the rising spectra of a structural fiscal deficit. In view of
the need to proactively address the impact of huge injections of liquidity in the
third quarter to correct the negative real interest rate situation in the market and

attract foreign capital inflows to build up reserves to protect the economy
against possible external shocks, the Committee decided as follows:


Decisions:
1. To tighten monetary policy by a majority decision of 10 to 2.
2. To raise the MPR by 75 basis points from 8.0 per cent to 8.75 per cent by a
majority vote of 8 members in its favour, 1 member favoured 50 basispoint increase while 3 members voted for holding the MPR at 8.0 per cent.
3. To maintain the corridor at +/- 200 basis points around the MPR.

Sanusi Lamido Sanusi, CON
Governor
Central Bank of Nigeria

July 26, 2011