Central Bank of Nigeria Communiqué’ No. 105 of the Monetary Policy
Committee Meeting of Monday and Tuesday, January 25 and 26, 2016
The Monetary Policy Committee met on 25th and 26th January, 2016
against the backdrop of weakening global economic prospects as well
as increased risks in the domestic economic environment. In attendance
at the meeting were 10 out of the 12 members. The Committee reviewed
the ensuing international and domestic economic and financial
environments in 2015 as well as the outlook for the first half of 2016.
On the global front, uncertainties and geopolitical tensions have
increased in the Middle East, leading to a major standoff between two
major oil producers; Saudi Arabia and Iran, in the face of improving
relations between the United States (US) and Iran. In the global oil market,
both Iran and the US are emerging as new suppliers while OPEC appears
to have shifted from protecting price to defending market share. These
developments underscore the conclusion that the current global oil prices
would remain for a much longer period. Widespread stock market
weaknesses and worsening macroeconomic conditions in China have
further exacerbated the already stifling global economic challenges.
These uncertainties have blended well with domestic vulnerabilities to
affect the monetary policy environment in Nigeria.

International Economic Developments
The Committee noted the considerable divergence in global output
recovery in 2015, as growth picked-up in the most advanced countries
compared with slowdown in majority of emerging and developing
economies. Following the slowdown in the emerging market economies,
the IMF in its January 2016 World Economic Outlook (WEO), revised its
global growth estimate from 3.4 to 3.1 per cent and 3.4 per cent in 2015
and 2016, respectively.
In the United States, growth has remained relatively firm with 2015 third
quarter growth rate revised to 2.1 per cent from an earlier estimate of 1.5
per cent. The country’s overall growth in 2015 is expected to be the
strongest since the post-crisis recovery began in 2010. Likewise, 2016
growth rate has been projected at 2.6 per cent. The major drivers of this
growth remained improvements in consumption spending supported by a
robust labor market recovery; low inflation stemming from soft global
crude oil prices; massive and dynamic investments in the non-oil private
sector, improved foreign investment demand due to the recent
normalization of monetary policy by the Fed, as well as housing market
recovery.
Japan’s recovery in 2015 remained fragile despite the continuous policy
stimulus by the Bank of Japan. The Bank’s asset purchase program injects
¥6.7 trillion ($56.71 billion) monthly into the economy, with the possibility of
expansion. However, this has done little to restart growth which is
estimated at 0.8 per cent in 2015. Private consumption and investment
spending remained modest in 2015, worsened by rising skill shortages.

Japan’s outlook for 2016 remains dampened by the feeble response of
the economy to monetary and fiscal stimuli.
In the Euro area, weakening fiscal consolidation and improving labor
market conditions generated 1.5 per cent growth in 2015 with prospects
for achieving 1.7 per cent in 2016. The European Central Bank (ECB)
further eased its monetary policy stance in December 2015, despite the
Bank’s continuous monthly asset purchase of €60 billion ($64.8 billion), as
both inflation and wage growth remained subdued. In the same vein, the
Bank of England continued its accommodative monetary policy through
its ₤375 billion ($540 billion) asset purchase program, even as it announced
a decision to reinvest another ₤6.3 billion ($9.07 billion), being the
proceeds of redemption of the December 2015 gilt (government
securities) held in the Asset Purchase Program. The Bank also maintained
its core rate at 0.5 per cent in an attempt to herd inflation towards its
target rate.
Growth in the emerging markets and developing economies (EMDEs)
decelerated to 4.0 per cent in 2015, the lowest since 2009, as both
external and domestic challenges continued; owing to low commodity
prices, financial market volatility, slowing productivity, policy uncertainty
and eroding policy buffers as well as weak global trade. The slowdown in
the majority of EMDEs has also been attributed to spillovers from
weaknesses in major emerging economies, diminishing capital inflows,
rising borrowing costs and other geopolitical factors.
The stance of monetary policy in the advanced economies is expected
to remain largely accommodative in 2016, except for the United States

where monetary policy normalization has commenced. Against the
background of suppressed commodity prices and slow recovery, global
inflation is expected to remain moderate through 2016.
Domestic Economic and Financial Developments
Output
Domestic output growth in 2015 remained moderate. According to the
National Bureau of Statistics (NBS), real GDP grew by 2.84 per cent in the
third quarter of 2015, almost half a percentage point higher than the 2.35
per cent recorded in the second quarter. However, third quarter
expansion remained substantially below the 3.96 and 6.23 per cent in the
first quarter of 2015 and corresponding period of 2014, respectively. The
major impetus to growth continued to come from the non-oil sector which
grew by 3.05 per cent compared with the growth of 3.46 per cent posted
in the preceding quarter. The major drivers of expansion in the non-oil
sector were Services, Agriculture and Trade; contributing 1.42, 1.03 and
0.79 percentage points, respectively. The outlook for the fourth quarter of
2015, based on staff estimates, suggests further improvements over the
third quarter growth level.
The economy is expected to continue on its growth path in the first
quarter 2016, albeit less robust than in the corresponding period of 2015.
This expectation is predicated on the current low global oil price trend
which is projected to hold low over the medium-to long term, and with
attendant implications for government revenue and foreign exchange
earnings. Other downside risks to growth in 2016 include: capital flow

reversal, high lending rates, sluggish credit to private sector and bearish
trends in the equities market.
However, the Committee remains optimistic about a gradual recovery in
economic activity due to notable improvements in power and supply of
refined petroleum products, improved policy recalibration aimed at
improving the flow of financing resources to the real sector and
suppression of internal insurgencies, which will boost general agricultural
activity.
Prices
The Committee noted the slight uptick in year-on-year headline inflation
to 9.6 per cent in December, from 9.4 per cent in November and 9.2 per
cent in October, 2015. The increase in headline inflation in November 2015
reflected an increase in the food component, even though the core
component remained unchanged at 8.70 per cent. Core inflation
declined for the third consecutive month to 8.70 per cent in November
and December from 8.74 per cent in October 2015, while food inflation
inched up to 10.32 per cent from 10.13 and 10.2 per cent over the same
period. Consistent with its primary mandate, the Committee would
continue to monitor consumer price developments with a view to
formulating policies that will keep inflation in check.
Monetary, Credit and Financial Markets Developments
Broad money supply (M2) rose by 5.90 per cent in December 2015, over
the level at end-December 2014, although below the growth benchmark
of 15.24 per cent for 2015. Net domestic credit (NDC) grew by 12.13 per

cent in the same period, but remained below the provisional benchmark
of 29.30 per cent for 2015. Growth in aggregate credit reflected mainly
growth in credit to the Federal Government by 151.56 per cent in
December 2015 compared with 145.74 per cent in the corresponding
period of 2014. The renewed increase in credit to government may be
partly attributable to increased government borrowing to implement the
2015 supplementary budget.
During the period under review, money market interest rates generally
reflected the level of liquidity in the banking system. Average inter-bank
call and OBB rates, which stood at 1.00 and 1.50 per cent on 25
November 2015, closed at 4.75 and 4.50 per cent, respectively, on
January 21, 2016. Between the November 2015 and end-December 2015,
interbank call and OBB rates averaged 0.81 and 0.98 per cent,
respectively.
The Committee noted the bearish movement in the equities segment of
the capital market during the review period. The All-Share Index (ASI)
decreased by 13.15 per cent from 27,435.56 on November 30, 2015 to
23,826.50 on January 22, 2016. Similarly, Market Capitalization (MC) fell by
13.06 per cent from N9.42 trillion to N8.19 trillion during the same period.
However, relative to end-December 2014, the indices declined by 31.25
per cent and 28.66 per cent, respectively. This development reflected
capital flow reversals accentuated by soft commodity prices and
monetary policy normalization in the United States.

External Sector Developments
The Committee noted the ongoing activities in the informal segment of
the foreign exchange market, which led to the stoppage of dollar sales to
BDCs, even as the average naira exchange rate remained relatively
stable at the inter-bank segment during the review period. The exchange
rate at the interbank market opened at N197.00/US$ and closed at
N197.00, with a daily average of N196.99/US$ between November 23 and
January 11, 2015. The Committee underscored the necessity of improving
the supply of foreign exchange to the market, especially from
autonomous sources. It also reiterated its commitment to maintaining
stability in the naira exchange rate.
Committee’s Considerations
The Committee observed that the last episode of low oil prices in 2005
lasted for a maximum period of 8 months. However, the current episode
of lower oil prices is projected to remain over a very long period.
Consequently, it is imperative to brace up for a longer period of low
government revenues from oil sources, which would necessitate hard and
uncomfortable choices as the economy transits to more sustainable
sources of revenue, consistent with the economic realities and strategic
objectives of the country. In the circumstance, certain tradeoffs must be
envisaged and duly accommodated.
In view of the foregoing, the imperative for consistently sound and
coordinated macroeconomic policy has become inevitable. In the
medium term within which monetary policy is cast, the need to allow
policy to produce the desired outcomes becomes a key consideration in

the policy mix. Consequently, the Bank is fine-tuning the framework for
foreign exchange management with a view to ensuring a more effective
and liquid foreign exchange market, taking into account Nigeria’s
strategic development priorities; with the policies being designed within
an environment of regularly ensuring consistency with monetary and fiscal
policies.
The Committee noted that at its November 2015 meeting, it eased
monetary policy with a view to increasing the liquidity of the banking
system. This was aimed at moderating domestic interest rates so as to
encourage indigenous businesses to borrow. While the objective of
stabilizing the financial system in the aftermath of the Treasury Single
Account (TSA) withdrawals and J. P. Morgan delisting of Nigeria have
been largely achieved, the goal of increasing lending to key sectors of
the economy is yet to be achieved as the Bank continues to adopt moral
suasion to encourage the DMBs to support targeted lending to the real
sector including agriculture, solid minerals and SMEs sub-sectors of the
Nigerian economy.
Despite current challenges, the Committee remains guided by evidence
underpinned by credible data in its holistic evaluation of the emerging
scenario and in its assessment of policy choices. Consequently, the
Committee believes that given sound and properly coordinated
monetary, fiscal, and external sector policies, there is wide room for
optimism about the medium to long term macroeconomic prospects for
the Nigerian economy, especially, given the clarity in the policy direction
of the administration, the various interventions in the real sector; gradual

improvement in the power sector, and the reinvigorated fight against
corruption. The Committee also believes that the effect of the softer
monetary policy stance adopted at the last MPC, should start crystalizing
soon through expansion of credit to critical sectors of the economy. In
addition, the unveiling of the Federal budget, oriented towards socioeconomic and infrastructural development is expected to provide the
necessary impetus for growth.
The Committee acknowledged the continuous liquidity surfeit in the
system stemming partly from the recent growth-stimulating monetary
policy measures, as well as the tendency of the banks to invest excess
reserves in government securities, rather than extend credit to the needed
sectors of the economy. To this end, the Committee once again urged
the deposit money banks to improve lending to the real sector, as part of
their patriotic obligations to the country and enjoined the Management
of the Bank to continue to explore ways of incentivizing lending to
employment- and growth-generating sectors, particularly SMEs.
The MPC also emphasized the necessity of coordination between
monetary and fiscal policies as a prerequisite for resolving the nation’s
economic problems, particularly, steering the economy away from oil
dependency. In particular, the Committee stressed the need for the fiscal
authorities to compliment the Bank’s low interest rate policy orientation by
properly coordinating its borrowing activities (and rates) with the Bank in
order to push the common objective of stimulating banking system credit
delivery at low interest rates to the key sectors of the Nigerian economy. It
noted that given the current economic reality of dwindling oil revenue

and the rather unclear outlook for commodity prices, there would be
need for a recalibration of the fiscal strategy to increasingly explore
opportunities in non-oil tax revenue.
Finally, the Committee reiterated its unyielding commitment towards
achieving a stable exchange rate regime to ensure more flexibility for
sustainable inclusive economic growth in the medium to long term.
The Committee’s Decisions
The Committee, in consideration of the headwinds in the domestic
economy and the uncertainties in the global environment decided by a
unanimous vote to retain the Monetary Policy Rate (MPR), Cash Reserve
Requirement (CRR), Liquidity Ratio (LR) and the asymmetric corridor of
+2/-7 around the MPR.
In summary, the MPC voted to retain:
(i) The CRR at 20.0 per cent;
(ii) MPR at 11.0 per cent;
(iii) Liquidity Ratio at 30 per cent;
(iii) The asymmetric corridor at +200 basis points and -700 basis points.


Thank you for listening.
Godwin I. Emefiele
Governor, Central Bank of Nigeria
26th January 2016

PERSONAL STATEMENT BY THE MONETARY POLICY COMMITTEE MEMBERS
1.0
ADELABU, ADEBAYO
The decisions at the last meeting (November 2015) represented a
watershed in the journey of monetary policy since 2011. Having changed
the stance of monetary policy at that meeting, it could be too early to
determine the relative potency of these measures given the length of lag
in policy transmission in developing economies such as ours. Nonetheless,
bearing in mind that macroeconomic policies could rarely be water-tight
without some unintended consequences or tradeoffs, what I consider
germane at this point might be the need to fine-tune the new policy
stance with a view to minimizing unintended consequences.
Among others, liquidity surfeit has assumed a new height following the
reduction of the CRR at the last meeting, while exchange rate differentials
has widened considerably between the two markets. With respect to
exchange rate differentials, I could observe a lot of noise in the market
which is a normal phenomenon in the quest towards equilibrium price.
Thus, it may be necessary to sieve the noise from signals before any fine
tuning process could be effective.
Liquidity surfeit, on the other hand, has always been a recurring issue but
the new cause is placing some kinds of burden on monetary authority.
The ultimate objective for reducing the CRR is to improve flow of credit to
the private sector in general and the real sector in particular. In my
opinion, the renewed liquidity surfeit is not much of surprise because the
reduction of CRR represents a kind of shock that shifts the supply curve of
loanable funds upwards, which would require some time for economic

agents to create the effective demand that would neutralize the excess
supply. Thus, in the interim, there is a need to revisit the liquidity
management framework and fine-tune it in such a manner that it would
not create undue imbalances in the economy, particularly in the foreign
exchange market.
Apart from challenges arising from the change of monetary policy stance,
the dynamic nature of macroeconomic environment implies continuous
emergence of issues. One of such issues in the last one month is the
increase in the policy rate by the US Federal Reserves. Although the initial
increase of 0.25 per cent could be adjudged relatively small, one should
still expect further tightening in the near term based on evolving indices.
First, the US economy is rapidly expanding with GDP growth estimated at
2.8 per cent in 2016 compared with 2.6 per cent in 2015. In addition, the
US consumer prices accelerated by 0.5 per cent in November 2015
compared to 0.2 per cent in the preceding month, representing one of
the highest rate of increase in a fairly long time. Continuous tightening
measures by the Federal Reserves would not only put additional pressure
on the Naira, with implications for inflation, but would also make the
current low price regime of crude oil to persist for a longer period. Under
the conventional approach, policy response to this type of challenge
would be tightening measures with a view to competing for portfolio
investment. As I have always argued, portfolio capital with little or no
value added to the real sector should be given less priority at this time. I
am of the view that diversifying our economy by supporting the real
sector would make it less dependent on global monetary conditions and
by extension on volatile portfolio flows. Consequently, supporting the real

sector at this time through expansionary monetary policy stance cannot
be compromised.
Beside the challenges of the monetary sector, there are number of issues
from the fiscal side that could pose substantial risks to monetary policy in
the near to medium term. It is commendable that the fiscal authority is
equally taking an expansionary stance to address the imminent headwind
of recession frontally, but the rising public debt stock is a cause for
concern. Total domestic bond market capitalization around mid-January
2016 was N7.08 trillion out of which FGN debts accounted for 89.2 per
cent. The proposed 2016 budget expects N984 billion to be added to the
domestic debt stock, which would increase bond market capitalization by
about 14 per cent. This will invariably impinge on private sector through
crowding out of banking credit, thereby defeating the original objective
of expansionary stance of monetary policy. In addition, about an
estimated N900 billion is expected from external sources. Based on
developments in both the domestic and global environment, particularly
with the commencement of monetary policy normalization by the US
Federal Reserves, interest rate on these loans would also increase. Given
that interest rate on risk free government securities are usually the
benchmark rates on lending by banks, it should be expected that lending
rates to the private sector would also increase, regardless of the recent
reduction in the MPR. Thus, coordination between the monetary and
fiscal authorities needs to be strengthened as the Bank continues to refine
the interest rate model to ensure that the original goals of the current
stance of policy are achieved.

The other issue that could pose threat to monetary policy is the recent
attack on oil installations in the Niger Delta area. Some refineries have
been shut down with implication of an increase in importation of
petroleum products to meet domestic consumption, which could put
additional pressure in the foreign exchange market. Besides, the disruption
of gas flows to the independent power plants would undermine the
current efforts to revamp the power sector with severe consequences on
real sector and by extension the GDP. In view of the fact that the issue is
largely outside the purview of the monetary authority, it is expedient for
the appropriate agencies to beef up security around oil and power
installations within the country to avert the risk of recession.
From the foregoing, it is obvious that there are challenges but they are
surmountable and indeed measures taken at the last meeting are
necessary initial steps on the path of progress. Some of these challenges
are outside the purview of the monetary authority, but it is worth noting
that relevant agencies like the security agencies are playing their bit.
From the monetary side, the teething issues could always be addressed
by fine-tuning some measures without altering the strategic goal of policy,
which is the need to support the real sector and promote inclusive
growth. Consequently, I vote for the retention of all the measures taken at
the November 2015 meeting.

2.0
ALADE, SARAH O.
This first MPC of 2016 is coming at a period of widespread turbulence in
the global economy. Global financial markets are behaving erratically
while most emerging markets currencies have depreciated significantly as
a result of slow growth in China, global uncertainty and geopolitical
tension. These uncertainties coupled with domestic vulnerabilities is
affecting monetary policy environment in Nigeria. Under these conditions
monetary policy must remain steady to overcome challenges in the
domestic economy.

Headline inflation ended the year at upper single digit, underpinning the
strength of monetary policy throughout the year. Headline inflation ended
2015 at 9.6 per cent in December. Core inflation on the other hand
declined for the third consecutive month to 8.70 per cent in November
and December from 8.74 per cent in October 2015. Food inflation
increased to 10.32 per cent from 10.13 and 10.2 per cent over the same
period. Despite the risk posed by the declining oil prices and the
implication for the economy, staff projection suggests that outlook in
inflation in the coming months is expected to remain below 10 per cent
through third quarter of 2016.

The decline in global oil price will pose downside risk to Gross Domestic
Product (GDP) Growth. The declining oil price and the resultant reduction
in revenue and negative terms of trade shock will imply significant
downside risk to GDP growth in 2016. New estimates for GDP growth in
2016 is projected to be around 3.2 percent. Although this is higher than

2015 growth of 2.8 per cent, it is low for Nigeria that has maintained an
average growth rate of 6 percent for the last ten years. The 2016 budget
aims to stimulate the economy through increase capital expenditure and
reduction in recurrent expenditure. However, its effectiveness will be
hinged on its ability to mobilize revenue to adequately fund the budget.
In the event of shortfall in projected revenue, budget implementation and
growth will be affected. These developments suggestion that both global
events and domestic challenges possess huge challenge to growth in the
coming months, and monetary policy should remain balanced in tackling
both domestic and global vulnerabilities.

The distribution of risks to global economic growth still remains on the
downside, as global rebalancing takes place. Global growth is projected
at 3.4 per cent in 2016 according to the January 2016 version of the IMF,
World Economic Outlook (WEO). While the outlook in advanced
economies remain positive and uneven, growth in emerging market and
developing economies is projected to be lower than in 2015 as low
commodity prices and tighter financial conditions pose increasing risk to
growth in the region. In addition, slowdown and rebalancing of the
Chinese economy, gradual exit of US expansionary monetary policy, and
strains in some large emerging market economies will continue to weigh
on growth prospects in 2016. On the global scene, there are mixed results,
while the low oil price will give boost to global growth, the boost will be
offset by the effects of declining oil price on oil exporting countries and
weak investments in some advanced and emerging economies such as
China, Russia and the euro area. These developments suggest that

monetary policy should give considerations to both global and domestic
development, thus a hold on Monetary Policy Rate and Cash Reserve
Requirement in other not to strangle domestic growth is the best option for
now.
The banking system continues to show high level of Naira liquidity, while
foreign exchange market continues to experience tightness. Interest rate
in all segments of the money market trended downwards since the last
MPC reflecting the level of liquidity in the domestic banking system.
Average inter-bank call and OBB rates, which stood at 1.00 and 1.50 per
cent on 25 November 2015, closed at 4.75 and 4.50 per cent, respectively,
on January 21, 2016. Between November 2015 and end-December 2015,
interbank call and OBB rates averaged 0.81 and 0.98 per cent,
respectively. However, liquidity remains tight in the foreign exchange
market posing significant threat to growth in 2016. To mitigate the adverse
effects, effort should be made to increase foreign exchange supply to the
inter-bank market. However, it should be noted that the average naira
exchange rate remained relatively stable at the inter-bank segment.

Therefore, I support the retention of the current stance of monetary policy.
I vote for no change in Monetary Policy Rate at 11 percent, retain Private
Sector Cash Reserve Requirement (CRR) at 20 percent, and retain
Liquidity Ratio at 30 percent to address both growth and macroeconomic
concerns.

3.0
BALAMI, DAHIRU HASSAN
Global growth is projected by the IMF in 2016 to be 3.6 percent while the
World Bank has downgraded its previous 3.3 percent to 2.9 percent for the
same period with a possible rise to 3.7 percent in 2017. However this
should
be
supported
by
generally
less
restrictive
fiscal
and
accommodative monetary policy frame stance; particularly in advanced
economies where growth is expected to be 2.2 percent and 4.5 percent
in emerging and developing economies. At the Domestic level the
economy is forecast to grow at 3.4% in 2016. The identified growth drivers
include: agriculture, works and housing and services like education and
manufacturing in Nigeria.
The global economy is going through shocks such as declining crude oil
and other commodity prices, geopolitical tension and price wars, disparity
between the U.S and other developed nations and emerging economies
monetary policy. Others include the slowing down of growth in the
Chinese economy and declining stock prices; in addition, the low
inflation trap in the Europe Zone and the normalization of the U.S
economy leading to raising interest rate and its implication on FDI and
their reserve in the emerging and less developed economies. Although
the U.S and UK economy have registered positive growth levels, the

quantitative easing in the Euro zone and Japan have not been able to
stimulate growth in the emerging markets of China, Brazil, Russia and
South Africa. In the MENA zone conflicts and crisis have slowed down the
level of economic activity and prosperity in that region in countries such
as Yemen, Iraq, Syria, Libya, etc. this is further exacerbated by huge
emigration problems.
Oil glut has seriously affected the foreign exchange earning capacity of
many crude oil exporting countries. As it relates to the oil glut the new
positive relationship between Iran and the United States of America which
led to the removal of sanctions entails additional oil flow into the global
market with obvious implications in the world market. The declining oil
price and the cost of production of a barrel of crude have implications on
the profitability of the oil industry globally. As the price continues to slide
downward many countries that depend on crude oil are sliding into low
revenue trap which has affected their budgets as well as development
efforts. The oil importers on the other hand are having cheap oil imports
but facing problem of weak demand from external trade partners due to
foreign exchange problems.
Looking at the Nigeria economic situation the domestic challenges as well
as the major headwinds affecting the economy in the 2016 transition

budget are as follows: declining crude oil prices in the international
market,
shading
away
of
stocks,
rising
unemployment
and
underdevelopment. Others include; infrastructure deficit such as power,
energy, roads, rail etc, foreign exchange problem, debt problem, rising
non-performing loans (NPL), import driven nature of the economy, the
issue of the TSA and high level of interest for credit to the SMEs which are
critical to the growth and development of the economy. As always,
inflation is a major concern and a challenge to growing economy; the
headline inflation stood at 9.60% slightly breaching the CBN target band
of 6-9 percent, slow growth, and the pressure on the exchange rate.
In the face of the above, what can be done to stimulate the economy
and the strategies to be adopted? Although government wants to
stimulate the growth of the economy through the Keynesian approach, it
may not adequately meet its shopping list like fighting insurgency,
reconstruction and rehabilitation in the Northeast of Nigeria, and pipelines
vandalism in Niger Delta areas, etc. The strategy to stimulate the
economy include; diversification, lower interest rate particularly for SMEs,
and rehabilitation of decayed infrastructure etc. This can be achieved
partly through deployment of expansionary monetary policy to be
supported with an appropriate fiscal policy. This policies and strategies

put in place must be the right ones to address our problems. For example,
in the transition budget, how do we promote the government
effectiveness if there is huge deficit bearing in mind that huge
government borrowing will crowd out the private sector? What will be the
consequences on the economy if the right decision is not taken? If
government have credit account in TSA, does it pay for it to borrow? The
simple solution is appropriate articulation of economic problem solving
solution by all concerned agents of government. Primarily, monetary
policy cannot be applied in blanket for everything hence the need for
policy coordination between the monetary authorities, the government
and the Regulators of the economy. However, the framework to be
developed must take into consideration the independence of the Central
Bank which is critical.
Having attained synergy between monetary and fiscal policies we need
to organize ourselves to do something that will support the economy
through nationalistic beliefs by cutting down on the consumption of
foreign products, thus, reducing level of imports. In addition, aside from
moral suasion for the consumption of local product, the government
should promote effective reorganization of the Solid Mineral Sector to
assist in the exploitation of mineral resources that abound in almost all the

states of the economy including the FCT. This would lead to employment
generation and job creation to support the real sectors. On the side of
banking industry, the Nigerian banking industry remains healthy or
buoyant as demonstrated by Sound Financial indicators at the end of
December 2015. The Capital Adequacy Ratio (CAR) stood at 17.66%
which is above the minimum prudential requirement of 10% - 15%, NPLs of
4.88% which is slightly less than maximum 5%, liquidity ratio of 48.63 which is
greater than a minimum of 30%. However, the empirical evidence as per
providing loans to SMEs is not encouraging, there are pressure points
which include potential risk of raising Non-Performing Loans (NPL), pressure
on the exchange rate and other macroeconomic issues like declining oil
price.
Given the above, I vote to hold on the November 2015 MPC policies so as
to allow previous measures to work their way through as well as to
achieve the benefit associated with policy stability. In my opinion we
should maintain the following:
i.
CRR at 20%
ii.
MPR at 11%
iii.
Liquidation Ratio at 30%
iv.
Asymmetric Corridor at +2/-7

The rational for the above is to allow the (i)-(iv) such that the nation’s
transition budget to be financed permeates the market effectively,
stimulate output growth and employment generation, raise the capital
market activities, encourage lending at low rates so as to help stimulate
aggregate domestic demand in the economy. Although, this may have
some downslides to the economy like disincentive to portfolio investors
and pressure on the exchange rate and inflation, etc. The variable should
continue to be monitored.

4.0
BARAU, SULEIMAN
Background
After about four years of consistent tightening, the Committee, at its
meeting in November 2015, decided to ease the stance of monetary
policy, at least, in partial consonance with the tenets of countercyclical
monetary policy. The fiscal stance, though details of the 2016
Appropriation Bills are yet to be completely unveiled, equally suggests
leaning against the wind. This, I think is a step in the right direction.
Having just settled for this strategic direction from both ends of
macroeconomic policy, some teething issues should naturally arise but
such may not necessitate immediate policy response given the required
time lag for policy impulses to filter through the economy. These initial
challenges include renewed liquidity surfeit in the banking system and the
unprecedented differentials of rates in the foreign exchange markets. All
the same, it is incumbent on us to continue fine-tuning the new direction
of policy through administrative measures until satisfactory outcomes are
delivered on various macroeconomic fundamentals.
With this in mind, my vote in this meeting is to hold on all measures taken in
the last meeting.

Key Developments
Global Development: As widely expected, the US Federal Reserve
increased its policy rate at its December 2015 meeting, albeit marginally
(0. 25 per cent). The magnitude of the increase notwithstanding, the

development clearly signals the end of an 8-year interest rate regime. This
would fairly pose challenges on both the real and financial sectors of the
domestic economy. On the real side, given the inverse relationship
between currency and global commodity prices, another round of
downward movement in oil prices may commence or at the minimum the
current bearish condition would persist over a fairly long time. From the
financial side, the dollar has appreciated by almost 20 per cent against a
basket of currencies in the last one year. This level may likely be sustained
in the near to medium term with consequences for inflation and perhaps
banking system stability.
Domestic Developments: Developments in the domestic economy
appear mixed, though the balance of risk appears a little bit more
elevated. On the positive side, the 2016 Appropriation Bill is already before
the National Assembly with the expectation that its passage into law
would not extend beyond the first quarter. Contrary to what was
gradually becoming the norm, early passage of the Bill would enhance
planning and predictability required to bolster confidence among
economic agents. It is equally heartwarming to note an improvement in
the proportion of the budget allotted to capital expenditures. In addition,
the retail price of premium motor sprit (PMS) has been marginally adjusted
downwards, which could moderate inflation expectation. Lastly, unlike
the previous episodes of economic crisis, the banking sector still remains
sufficiently resilient with key prudential indicators well anchored; creating
some latitude for the deployment of monetary policy tools.

On the other hand, the spillover of global economic condition to
commodity prices continues to adversely impinge on fiscal revenue,
putting considerable strains on the financial markets, among other pains.
Furthermore, low accretion to external reserves continues to fuel pressure
in the official foreign exchange while unprecedented rate differential
exists in the markets.
Moreover, depreciation in the exchange rate as well as liquidity surfeit
arising from reduction in the CRR remain upside risks to inflation, while
softness in growth still persists.
Likely Pressure Points
In my view, the likely pressure point in the near to medium term revolves
around the fiscal stance particularly through the channel of rising public
debt. The other issue is perhaps the evolving security conditions in the
Niger Delta region.
i.
Rising Public Debt: Although debt/GDP ratio at about 10.0 per cent is
still within the prudential threshold, the debt/revenue ratio as well as
debt to export ratio have steadily and rapidly increased in the last one
year. Given the deteriorating condition in the global oil market, the
possibility of slippage on the proposed fiscal revenue of N3.8 trillion in
the 2016 Appropriation Bill cannot be completely ruled out. The
consequences on the economy include:
Risk of Fiscal Dominance: It is well known that rising fiscal deficits
and the attendant increases in public debt create the spectre of
fiscal dominance. This is because purchase of government
securities by central banks might be considered appropriate

monetary tools to support the fiscal stimulus. The downside is that
these types of operation are equivalent to monetary financing
with the implication of central bank subjecting itself to fiscal
dominance and by extension heightened inflation expectation.
Preference for Short Term Credit by the Banking Sector: It is
equally settled in both economic and finance literature that
increases in public debt crowd out private sector credit. This is
already manifesting in the domestic economy as shown by the
sluggish growth in private sector credit in the last couple of years.
Beyond this, another likely issue of worrisome dimension is the
tendency for the structure of new credit to the private sector
tilting towards short term due to the new emphasis on issuance of
long term debt securities. Although government debt instruments
and private sector credit are not perfect substitutes in the
portfolios of banks, they tend to compete with each other. Given
that banks seek to strike appropriate balance between short and
long term investment in their portfolios, once their long term
investment appetite is met through long term debt instruments,
little or no consideration would be given to long term private
sector credit. This portends significant risk for medium to long term
growth trajectory.

Increase in Lending Rates: Prevailing lending rates range from 1625 per cent, which is adjudged to be high. Both the MPR and CRR
were reduced at the last meeting with a view to moderating the
rates, among others, but the attainment of this objective remain
elusive. This is because the combined effects of depreciating

exchange rate and the rise in the level of debt stock may
manifest in elevated risk premium on government debt
instruments. Given that these instruments are normally the
benchmark rates, lending rates to the private sector may not
adjust downward substantially.
ii.
Buildup of Tension in the Niger Delta Areas: It is worthwhile that the
government has made remarkable progress in containing the
insurgency of the North Eastern part of the country, but it is regrettable
that militant activities are beginning to rear their ugly trend in the Niger
Delta area, reminiscent of the 2006-2008 period. The NNPC has
disclosed that two domestic refineries with estimated production
capacity of six million litres of PMS per day would be shut down as a
result of the recent attack on oil facilities in the region. In addition, it is
estimated that the nation would lose about N400 million per day on
power generation resulting from disruption of gas flow to NIPP plant.
Besides, unlike the 2006-9 era when attractive oil prices could
compensate for the elevated risk due to production in an unfriendly
environment, the prevailing price regime does not offer such comfort.
Any activity that would drive up cost of oil production under the
prevailing price regime would be highly inimical to the industry and
could result in closure of oil fields with far reaching implications on GDP,
exchange rate management and fiscal revenue, among others.
Way Forward
Adherence to Existing Rules on Ways and Means: The age-long orthodoxy
that expansionary fiscal stance plays a catalytic role in staving off
imminent recession is still relevant in our present circumstances, but it is

equally important to avert doubts around fiscal solvency in order to
engender confidence in the economy. In most of the advanced
economies as well as some low income countries, the focus of policy
discourse is now on fiscal consolidation. Given that expansionary fiscal
policy cannot be avoided in our current circumstances, both the fiscal
and monetary authorities should ensure that issues around fiscal
sustainability
and
broader
economic
and
financial
markets
consequences are completely avoided.
Innovative Credit Products for the Real Sector: The decision to reduce the
CRR in the last meeting was the first step towards supporting credit growth
in the private sector. As highlighted under the section on pressure points,
the flow of credit through the conventional banking channel may still be
constrained by several other factors most especially the fiscal stance. The
solution has in having a vibrant capital market that is characterized by a
deep fixed income issuance and finding capabilities.
Effective Management of Excess Liquidity: The overall motivation for
reducing the CRR is to deploy banking sector liquidity into the real sector.
It needs to be noted however that such goal could not be achieved
instantaneously without some initial challenges like the re-emergence of
liquid surfeit. As pointed out earlier, the need to reverse the policy does
not arise given the nobility of the objective but the Bank may need to fine
tune the liquidity management framework in a win-win manner for the
entire system.

Decisions
As highlighted above, some initial challenges could emanate from the
implementation of the new direction of monetary policy but they do not
necessarily require policy response, at least now. Most of the issues could
be handled administratively, particularly through effective collaboration
with the fiscal authority. More fundamentally, it would be in order to allow
for the necessary time required for these policy measures to transmit
through the economy.
In the light of the foregoing, I propose to hold on all subsisting policy
measures. Specifically, I vote to retain MPR at 11.00% with corridor of +2/-
7%/ while CRR should also remain at the subsisting 20%.

5.0
GARBA, ABDUL-GANIYU
Context and Decision
My position at this first MPC meeting of 2016 is the same as it was in the last
MPC of 2015. The foundations for my positions were summarized in the
personal statement of September 2015. My analysis based on available
facts, lessons of history and the outlook is that the core policy issues are
not simply that of moving financial metrics (quantities and prices) one
way or another or from one “static equilibrium” to another where a new
round of contestation begins. Rather the core policy issues are far more
fundamental and, a piecemeal magic bullet approach leads inevitably
to fundamental policy errors that tend to lead to lasting damages.

Indeed, there is emerging consensus on three key points: the challenges
facing Nigeria are multifaceted, a piecemeal approach to policy is
ineffective and consistency between monetary, prudential and fiscal
policies is necessary to the effectiveness of the policies and, to the
realization of the Constitutional mandate of the MPC.

When I voted to hold at the last MPC, I re-emphasized two points I have
made consistently and repeatedly. First, the strategic choice is between
altering financial metrics in response to greed, fear or worry or ‘’harnessing
and directing all available intellectual and political resources to engage
the
fiscal
authorities
to
develop
a
strategic
macroeconomic
management framework for Nigeria.’’ Second, a vote to hold is not a
vote to maintain a status quo. Rather it is a vote for ’harnessing and
directing all available intellectual and political resources to engage the

fiscal authorities to develop a strategic macroeconomic management
framework for Nigeria. I remain convinced that macroeconomic policy in
Nigeria at this historical epoch must be centered on a comprehensive
and consistent medium to long term strategy that is anchored in sound
‘‘institutions, incentives, strategy, coordination and a forward looking
(perspective).’

This remains my position as I vote to hold. My vote still is, for “harnessing
and directing all available intellectual and political resources to engage
the
fiscal
authorities
to
develop
a
strategic
macroeconomic
management framework for Nigeria” for the medium to long term.

I am not unaware of the view canvassed by key players that moving the
price metrics of the forex market ought to be the primary issue of
monetary policy in Nigeria. In my considered perspective the view
exemplifies the type of piecemeal approach to policy that tends to
create hysteresis – adverse permanent effects. Historically, the view of
moving price metrics without fundamental and comprehensive analysis of
causes and effects has helped to move prices in ways that profit short
position takers, forces policy makers into perpetual defensive positions
and that drive the key metrics into the path of self-fulfilling prophecies.

In a matter of cause and effect, a bias towards effects does not help to
understand underlying strategic and policy problems without which it is
impossible to fulfill the primary and secondary mandates of the MPC.
Based on what we know about the nature of cause and effect of

financial market processes and the dynamics of their metrics (quantities
and prices) and the evolutions of the structures (allocation and gains) and
the psychological instabilities as well as the opportunities they offer
rational (that is, greed-fear-worry driven) actors, simply moving the level of
a metric from a lower to a higher one simply will simply shift the defense
line to a higher level. There is thirty years of concrete data and policy
experience on this including the experience of the last two years.

Existing work on currencies in emerging markets and globally makes it
clear that movements in the metrics of the forex market are due to many
cross-currents that mere movements of the price metric cannot resolve.
We also know from settlements after the global financial crises that key
attacking players in the global financial markets rig markets and their
metrics to bias “market payoff” in their favour. Therefore, considerable
care must be exercised in assuming that one price is “efficient” and
another “inefficient” because the former is higher than the latter. It is
simple economics that in segmented markets; neither the lowest nor the
highest price is efficient. The efficient price if it exists; will lie between the
two prices provided that the prices are not manipulated prices.

Not much can be gained in the short to medium terms if the underlying
structural deficiencies in allocations and in gains; the deficiencies in
institutions and incentives and, the vulnerabilities as well as the
administrative actions or inactions that cause spreads and resource
misallocations are not comprehensively, consistently and dynamically
understood and addressed. Policy without strategy is doomed to fail.

Worse, it tends to be followed by long term damages. This is exemplified
by how the decision in 1978 to borrow from the international money
market opened the door into a debt crisis that was only partly resolved in
2005-2006 before it transitioned into a malignant tumor shortly after.


In my view, improving administrative actions, institutions and incentives as
well as reducing the scope and strength of vulnerabilities are key
prerequisites of an effective monetary policy framework. These issues
ought to take precedence over movements of metrics which are never
sufficient to guarantee the goals of monetary policy. The problem of
malfunctioning markets cannot be solved by mere changes in metrics.
Policy effectiveness requires policies to be appropriate but also, that
markets function efficiently and effectively. The problem is that players
who react to and influence the greed-fear-worry index exploit
vulnerabilities to make markets and policies work perversely. No one
concerned about the primary and secondary goals of the monetary
policy could afford to be complacent about and blind to the true causeeffect nexuses. Otherwise, policy could not serve the interests of the
majority.

It is clear that policy effectiveness is relative because every policy
generates winners and losers. This is why there would always be a contest
of positions by rational players whose arguments reveal their interests. The
contest is good. But policy must follow the facts and its mandate.
Otherwise, it loses its essence and relevance. The key issue always for
policy must be what best serves the medium to long term interests of the

majority which includes the 50 million unemployed and underemployed.
For the majority, improving the efficiency and effectiveness in the
allocation of credit, forex and securities and strengthening the
transmission mechanisms of monetary policy are urgent. Also key is the
urgency of reducing the structural vulnerabilities of small open economy
like Nigeria in a greed-fear-worry driven global financial and economic
system washed with the liquidity unleashed by the episodes of
quantitative easing of the last decade.
Global Outlook and the Urgency of Coordination
The January 2016 MPC held amidst global structural problems (slowdown
in China, policy conflicts among large economies, slowing global
demand, declining commodity prices and the consequences of medium
and small economies) and psychological instabilities (exemplified by the
observed shift from high greed to high fear and worry on the fear-greed
index and on the worry board at the 2016 Davos meeting).

Because of the pre-eminence of “investors” and the growing dominance
of “financial markets” in the global economy, much focus is given to the
psychological shift from high greed to high fear and worry. However, no
serious policy making body could make effective medium term
compatible policies on the basis of greed, fear and worry. At the very
least, the leading central bankers anchor policy choices on medium term
outlooks generated from forecasts of the medium term paths of a set of
key financial variables (interest rate and prices) and economic variables
(GDP, unemployment, demand). This explains why key policy organs of

Central Banks that met in January 2016 did not react to the volatilities in
financial and commodity markets in January.

For Nigeria which is a small open economy, the global structural problems
have caused the current account balance to turn negative while the
combination
of
global
structural
problems
and
the
plague
of
psychological instabilities have combined to drain financial flows from
Nigeria. Did we see these coming? If yes, did we prepare for them?
Could we have prepared for them? My answer to the first and third
questions is the same: yes we saw it coming and yes we could have been
better prepared. Understanding why we did not prepare despite the
Fiscal Responsibility Act of 2007 and associated economic laws is in my
view, the crux of the strategic and policy discourse.

We must understand our vulnerabilities in a world ruled by greed, fear and
worry otherwise, we will keep repeating the same mistakes at growing
economic, social and political costs. There is enough historical data and
advice incidentally, from former leading officers of the International
Monetary Fund against the idea of small open economies opening the
barn doors only to close them when the horses have bolted or opening
the barn door when they lack the prerequisites for managing what goes
in, what comes out and what they take away and what they leave
behind.
A Consistent Medium Term Monetary-Prudential-Fiscal Strategy
Connecting
monetary,
prudential
and
fiscal
policies
within
a
comprehensive and consistent framework is critical. It is important to

agree on this and then, follow up immediately to make it happen. A
sufficiently comprehensive framework would make it easier to understand
why raising fiscal deficit when the current account deficit is growing will
worsen a precarious twin deficit problem. The implications of a planned
increase in public debt by over N2.2 trillion will become obvious: increase
in debt from N10.5 Trillion to N12.7 Trillion, crowding-out of private
borrowers including the small and medium scale firms that have higher
growth and employment elasticities, a rise in interest rates, adverse effects
on investment hence, employment and growth and the likelihood that
debt service in the 2017 budget would significantly exceed the 22% of the
proposed 2016 budget. It will thus become clear that fiscal choices can
constrain monetary choices also, that neither the goals of fiscal or
monetary policy could be achieved without efficient and effective
coordination.

It is worth noting that after Nigeria exited the Paris Club in 2006, the total
federal debt was N2.1 Trillion which is well below the borrowing plan for
2016. The borrowing plan will continue a trend that picked up in 2009
during which total federal debt almost quadrupled from N2.8 Trillion to
N10.5 Trillion.

Raising the debt by another N2.2 Trillion clearly needs much more detailed
analysis of the implications for policy effectiveness. An ongoing study has
shown that had domestic debt risen along the 1981-2006 trend,
government expenditure, total debt service and budget deficit would
most likely have been significantly lower while private sector investments,

credit to private sector and real GDP growth would have been
significantly higher than they were. The results imply that excessive public
borrowing was harming private investment, employment and real growth
while creating and worsening a fiscal problem.

A more comprehensive framework would also make it easier to see that
with lower domestic borrowing and a more effective management of
petro-dollars, liquidity would not need to be mopped up frequently after
each round of fiscal injections which often tend to raise interest rates, “kill
money” and reduce opportunities for viable real private sector activities
that have relatively high growth and employment elasticities. In addition,
high interest rates tend to worsen the performance of loans and therefore,
a threat to financial system stability.

Clearly, harmonizing monetary, prudential and fiscal strategies and
policies are indispensable to the credibility of macroeconomic strategy
and policy in Nigeria. The harmony has legal foundations in the CBN Act
of 2007 which specifies the primary mandate of the CBN to be price
stability and its secondary mandate to be, supporting the economic
policies of the government. Without coordination, neither the primary nor
secondary mandate can be efficiently and effectively actualized.

Available information indicates that the Treasury Single Account has a
balance of over N2.2 Trillion. If supplemented by recoveries either from
voluntary returns or legal successes on the “war on corruption” and more
effectiveness in the budget design and implementation following strictly

provisions of the Fiscal Responsibility Act, 2007, there is a great likelihood
that the problem of fiscal deficit should be significantly reduced in 2016. If
cash management were to significantly improve even to the levels of
household budget management, it should be possible for the spending
programmes for 2016 to support a more efficient and more effective
monetary and prudential strategy and policy. The short to medium term
gains will include: lower interest rates, lower crowding-out of private sector
credit, enhanced intermediation and significantly lower crowding out of
resources for social and economic infrastructures.

In the 2016 spending plan, the planned debt service of N1.36 Trillion is 76%
of planned capital spendings, 62% of planned deficit, 22% of total
expenditure and exceeds the sum of the recurrent allocation to the top
five MDAs (Education, Defense, Police Formations, Health and Interior) by
about N46 billion! The idea that we are below a threshold and should
continue to borrow led Nigeria to a debt overhang problem that took
more than half a century (1982-2006) to resolve at very high economic,
social and political costs. To rely on the same idea to worsen the triple
problems (fiscal deficit, current account deficit and a growing debt
problem) is to fail to learn from history and to worsen the likelihood of
efficient and effective policies.

I am still convinced that “the 2016-2020 planning and budgeting cycle
offers opportunities that the monetary and the fiscal authorities should use
to have continuing purposeful and thorough strategic sessions, working
out and agreeing on a continually adjustable strategic macroeconomic

management framework at least, for 2016-2020.” It is important that
fundamental errors are avoided and key vulnerabilities are positively
addressed otherwise, the policy environment will remain challenged by
structural problems, psychological instabilities (greed-fear-worry) and by
avoidable strategic and policy errors whose effects are systematic and
long termed.

6.0
NNANNA, O. JOSEPH
Key global macroeconomic indicators suggest that economic headwinds
and fragilities are still lingering. In addition, the persistent decline in oil
prices and the aftershocks of US monetary policy normalization have
created ripple effects on financial markets and fiscal regimes in emerging
and frontier economies. Given the disparate sources of external
macroeconomic shocks, which are still unravelling, and its intractable
impact on Nigeria’s macroeconomic conditions, the need to exercise
cautious monetary policy strategy cannot be overemphasized.
OUTPUT AND PRICES
The tepid improvement in growth in Q3 seemed inadequate to inspire
confidence in quick recovery given sustained decline in oil prices, rising
inflation and worsening unemployment.
Data from National Bureau of Statics indicated that growth slightly
improved from 2.35 percent in Q2 to an estimated 2.84 percent in Q3 of
2015 but down from 6.23 percent in corresponding quarter in 2014. The
lukewarm uptick in growth was driven by non-oil sectors: namely, services,
trade, agriculture and construction. The marginal improvement in GDP
growth in Q3 of 2015 suggests that, while the potential slide into recession
may have been reversed, the impact of external and domestic shocks still
dampen expectations of quick recovery in the medium term. However,
despite the slight improvement in growth, unemployment increased from
8.2 percent in Q2 to 9.9 percent in Q3, 2015. In addition, headline Inflation
has been creeping upward from 8.0 percent in December 2014 to 9.6 in

December 2015, largely driven by rising food inflation from 9.1 percent in
December 2014 to 10.59 percent in corresponding period in 2015.
EXCHANGE RATE DEVELOPMENTS
Increasing demand pressure on the Forex market amid declining reserves
due to softening oil prices and capital outflow, demands flexibility in
Exchange rate management.
The persistent decline in oil prices coupled with increasing capital reversals
significantly impacted external reserves which decreased from $29, 346.62
billion
in
March

to
$27,756.23
billion
as
at
end-January,
2016.Nothwithstanding the relative success achieved in halting the
hemorrhage in reserves through demand management strategies and
stoppage of forex to BDCs, the pressure in the forex market remains a
concern in the short term. While the interbank rate slightly depreciated
from N196.95/N/US$ to N197.00/US$ between June, 2015 and January,
2016, the BDC rates depreciated significantly from N237.00/US$ to
N267.00/US$ with a spread of N71.00 during the period under review.
Therefore, while demand management strategies still remain valid in the
circumstance, the current incessant pressure on the forex market requires
additional proactive market measures to rein in speculative attacks on
the naira.
Developments in the Banking System
The financial system remained very resilient despite the marginal increase
in non- performing loans (NPLs) of the banking system from 4.5 percent to
4.8 percent, as a result of banks’ exposure to the oil and gas sector.
Similarly, Capital Adequacy Ratio (CAR) of banks stood at 17.66 percent,

as at end- December, 2015- which is well above the prudential
requirement of 10 percent. Overall, the ability of the banking system to
withstand current economic headwinds and play its intermediation roles is
reassuring.
Conclusion
Given the uncertainties in global economic developments and the
lingering impact of external shocks on domestic macroeconomic
conditions, I see merit not to change the stance of monetary policy from
previous decisions. Therefore, I vote to:
i.
Retain MPR at 11.0 percent
ii.
Retain CRR at 20.0 percent
iii.
Retain Liquidity Ratio at 30 percent and sustain
iv.
the asymmetric corridor of +200 basis points and -700 basis points.
7.0
UCHE, CHIBUIKE U
In my view, this MPC meeting was one of the least complex meetings we
have had for some time now. Unlike in recent meetings, the new
Government’s fiscal policy direction has now been made clear. We for
instance now know that the present administration is determined to
implement the TSA. This in my view is a welcome development. For a
number of years in the past, the MPC was forced to charge discretionary
CRR on government deposits all in the attempt to force the Government
to adopt TSA. The political will the current Government has demonstrated

in enforcing TSA, which is in line with prudent fiscal policy management,
will definitely help monetary policy formulation in the country.
At another level, it is also instructive that the Federal Government has now
released its 2016 budget proposal. With a proposed budget deficit of N2.2
trillion, it is clear that the Government is determined to spend its way out
of the current economic difficulties. In this direction, the Government has
particularly noted that it is determined to increase the capital expenditure
segment of the budget with the view of enhancing infrastructural
development which will provide the much needed support for the
diversification of the Nigerian economy. Specifically, the Government has
increased its capital expenditure segment of the budget from N557 billion
(2015) to N1.8 trillion (2016). With oil prices hovering around 30 dollars per
barrel, and expected to remain at such levels for a considerable period of
time, it is clear that our economy is in trouble and that the projected
budget deficit may further increase. The only sustainable solution will be
for us to develop other sources of foreign exchange earnings by
diversifying our mono-product oil dependent economy.
The clarity of Government fiscal policy direction has however not in any
way made monetary policy formulation easier. While I see merit in the
Government decision to run a deficit budget at the present time,
especially given the dearth of basic infrastructure that can aid economic
development, it is clear to me that this may come at some cost. Some of
these costs are already obvious and are bound to increase in the future.
Statistics available to MPC, for instance, clearly show that inflation is
already inching upwards and approaching double digit territory.

The implementation of the 2016 budget will only cause the inflation
problem to get worse. The fact that the proposed budget benchmark oil
price of $38 per barrel is unlikely to be achieved will no doubt further put
pressure on inflation. The dwindling international price for crude oil is also
behind the widening gap between the official market exchange rate and
the parallel market exchange rate for the Naira. This widening gap
between the parallel and official exchange rate for the Naira can only
add fodder to the inflationary pressures we are currently witnessing.
Based on the above dynamics, the biggest challenge for monetary policy
in my view is how real sector development can be encouraged in the
face of rising inflation. This is especially so given the fact that the banks,
which are one of the main vehicles for aiding real sector development,
are unlikely to lend at rates attractive to businesses when inflation is high. It
for instance makes little economic sense for any bank to fix their lending
rates below the inflation rate. This is because such practice can only result
in the degradation of the bank’s real capital.
Furthermore, with the Government set to increase its borrowing in order to
bridge its budget deficit, there is little incentive for banks to lend to the
real sector of the economy. Under the above dynamics, the sustainable
path for monetary policy to tread so as to achieve its main policy
objective of promoting price stability and supporting the economic policy
of the Federal Government of Nigeria remains difficult to identify. This is
even more so given the fact that our banking sector, partly as a
consequence of its credit exposure to the oil sector, is increasingly facing

trying times. Evidence available to MPC, for instance, suggests that the
bad debt portfolio of the banking industry is gradually inching upwards.
Despite the above difficulties, I still believe that there is still some room for
monetary policy manuevre in order to aid sustainable economic
development in Nigeria. As I stated in a recent policy statement, I am
philosophically in agreement with the idea that the CBN should devise
creative ways of extending credit to the real sector of the economy as
part of its developmental function. I however believe that there is need
for more studies in this area before we take the leap. This is particularly
important especially given the fact that Nigeria has a long history of using
monetary policy to incentivize banks to lend to the preferred sectors of its
economy. Learning from the mistakes and/ or successes of the past will in
my view lead to better policy making.
In summary therefore, I am inclined to adopt a cautious attitude at the
present time. I therefore vote as follows: (1) to retain MPR at 11 percent
with asymmetric interest rate corridor of + 200/- 700 basis points around
the MPR; (2) to retain CRR at 20 percent; and (3) to retain Liquidity Ratio at
30 percent.

8.0 YAHAYA, SHEHU
The Global Economy
Generally, the growth prospects in the global economy have not
changed much since the last meeting of the MPC in November 2015.
Growth estimates for 2016 have remained low, slightly higher than 2015.
Modest growth has been fairly well established in the US, despite some
concerns about the possible effects of interest rate increases on growth in
2016; the UK is still growing, although at a lower pace; India is maintaining
its fast growth rate, while Brazil and Russia are contracting. Japan is barely
growing, while the Eurozone is still battling against a recession. What is
clear is that global demand is unlikely to have a major stimulatory effect
on output in African economies this year. While intra-African trade is
growing, it is still not playing a major factor in growth in most African
countries
Global prices are also expected to remain low, only slightly higher than
2015, due to lower oil, commodity and food prices. Hence, the US dollar
exchange rate, which has strengthened against most currencies, may be
much more important in affecting domestic price levels in Africa,
including Nigeria, than imported inflation. The challenges facing oil
producing and exporting countries are unabated. The stock market in
many countries around the globe, especially in emerging markets, have
been bearish, perhaps a reflection of the low confidence generated by
weak growth and low commodity prices, as well as anticipated
adjustments.

The domestic economy
The major challenge for the Nigerian economy is to boost growth, create
jobs and ensure a more even spatial and inter-personal distribution of
income and opportunities. Yet growth in 2015 is estimated at between 4
and 5%, despite the slightly better performance of the economy in Q3 as
compared to Q2, with various projections for 2016 at around the same
levels.
The budget proposal of the Federal government has been designed to
reflate the economy, to drive growth and jobs through investments in
infrastructure and local production and to reduce poverty. The
implications of the substantial budget deficit and the financing of the
deficit on price levels and the exchange rate would have to be thought
through and addressed in the coming months.
The downward pressures in oil prices are unrelenting, which poses a
significant challenge to growth, external reserves and even on budgeting.
Oil prices are hovering around the cost of production. Yet, the non-oil
sector, which is expected to take up the driving force behind growth,
experienced a decline in growth rate in Q3. Growth rate in the
manufacturing sector also fell, despite a significant increase in Bank
lending to the sector.
Headline inflation has nosed up to 9.6% in December 2015, largely driven
by food and transportation. It is expected to maintain a forward
momentum in the near term. It is likely that economic agents will price
many of their goods to reflect the value of the Naira in the parallel

market, which may contribute to inflationary pressures. Prices are
expected to level off during the middle of 2016.
The government still dominates access to credit, a phenomenon which is
expected to increase this year due to the sizeable planned budget
deficit. Credit to the private sector remains much lower than the
benchmark. Sectors such as agriculture, construction, power and energy,
mining and quarrying that are important for growth and jobs do not
appear to have benefitted from increased access to bank credits during
the year. This may have implications for the nascent growth strategy.
The Naira/dollar exchange rate still dominates the conversation on the
external sector. Administrative measures are maintaining the exchange
rate at a stable rate, while a combination of reverse capital flows,
declining levels of external reserves, falling oil prices, reduced supply,
speculative demand and uncertainty are driving the value of the Naira
down at the parallel markets.
The banking system has to be constantly vigilant and innovative to
adequately meet the challenges to asset quality, exposure to foreign
assets and liabilities and uncertainty emanating from the fall in oil prices
and the pressure on the exchange rate. The transfer of public sector
deposits to the Central Bank also pose some challenges. Nevertheless,
given its overall capital adequacy, liquidity and profitability, the Banking
system has the capacity and the resilience to respond to the changing
global and domestic economic and financial environment.

Conclusions and Position
Growth, jobs and welfare in the course of the year will be influenced
much more by fiscal, trade policies than by monetary policy. Given the
thrust of the draft budget and explicit/implicit exchange rate policies, it
appears essential for the government to develop a more comprehensive
medium term framework, so that elements of policies to promote local
production and value addition, economic diversification and social
protection can fit into a self-reinforcing and coherent strategy. This can
also provide a more analytical and sound basis for an exchange rate
policy- rather than short term responses- as well as provide clearer signals
for supporting monetary policies.
Given the critical importance of the fiscal side in these circumstances it
would be helpful to see the actual budget approved by the National
Assembly. Also, a raft of measures have been adopted during the last
meeting of the MPC, whose effect are still working through the system.
In consideration of the above therefore, I vote to maintain the current
policy stance as follows:

CRR at 20%
MPR at 11%
Assymetric corridor of +2/-7%
Liquidity Ratio at 30%

9.0 ADEDOYIN SALAMI
At the end of the MPC’s deliberations, members were invited to vote on
either of these options:
(i) Maintain the status quo – in other words leave all parameters
unchanged; or
(ii) Change the band around the Monetary Policy Rate (MPR) from +2/-7
to +2/-11 whilst retaining all other parameters unchanged.
I voted in support of keeping the Monetary Policy Rate (MPR), the Cash
Reserve Ratio (CRR), Liquidity Ratio (LR) unchanged and retaining the
asymmetric corridor around the MPR at +2/-7. In addition, I had proposed,
for the Committee’s consideration, that the -
The mid-point of the exchange rate band be moved from N197/US$
to N220/US$; and
The exchange rate band be widened to +5/-5 percent around my
proposed mid-point of N220/$.

My additions to the proposal gained no support.


In my mind, the questions facing the MPC at this meeting included –
How to deal with rising cost in the face of slowing activity growth?

What implications do the budget proposals for 2016 have for the
framework
–
goals
and
instruments
-
of
monetary
policy
management?
Does the worsening international economic environment require a
change in approach to, or direction of, monetary policy?

With headline inflation ending the year at 9.6 percent – making for a 2015
average of 9.01percent in comparison to 8.0 percent in 2014, the
challenge of rising cost continued to face both the design and
implementation of monetary policy. Similar to the overall measure of
prices, the rate of increase in the index of food prices increased from 10.3
percent recorded in the previous month to 10.6 percent in December
2015 – resulting in the year average rising to 9.9 percent from 9.5 percent
the previous year.
At 8.7percent, core inflation, remained unchanged between November
and December 2015 – unlike the food and the overall indices of prices.
However, the trend towards higher cost noted in the preceding
paragraph also extended to core inflation when the year average is
considered – this rose from 6.9 percent in 2014 to 8.2 percent in 2015.
Ordinarily, rising inflation would have required a tightening of monetary
policy. Nonetheless, available evidence suggests that structural supply
side
weakness
rather
than
any
significant
pick-up
in
demand
(notwithstanding the payment of salary arrears, by some subnational
governments) explains rising prices.

Available income and expenditure side data, albeit limited to 1st half of
2015, shows that employee compensation, when compared to the same
period the previous year, shrank by1.14 percent - approximately 10.00
percent when adjusted for inflation. In the same period, inflation rose
faster than aggregate disposable income implying a ‘real’ contraction in
disposable income of almost 5percent. Since then, anecdotal evidence
supports significant staff layoff – especially in manufacturing.
Furthermore, in notes accompanying the figures for December 2015, the
National Bureau of Statistics (NBS) drew attention to rising cost of imported
food and the impact of disruptions to fuel supply as the primary factors in
explaining rising prices at the end of 2015.
The NBS’ reference to the adverse effect on domestic inflation of rising
cost of imported food is, in my view worthy of note. Given the continuing
decline in the global food price index (including cereal and sugar which
are our key food imports), higher domestic costs of these imports may
suggest that the ‘fixed’ exchange rate at the CBN window may no longer
be the basis for setting the domestic price of imports!
Indeed, review of the data available for exchange rates shows that the
premium of between the CBN and non-CBN window closed 2015 at
33percent for parallel market and 31percent for bureau-de-change –
rising from 9percent and 11percent respectively at the end of 2014. By
January 2016, however, this potential arbitrage window had furthered
worsened to 54percent and 47percent respectively.
In other words, costs are now reflective of the difficulty of access to FOREX
at the CBN window and thus have been determined by exchange rates

at the non-CBN windows. This raises the additional question of whether the
price of policy uncertainty and inconsistency is already translating to rising
prices?
Beyond this unease over rising prices, my vote was also informed by
worries over eroding confidence in the economy and financial system
stability.
The increase in the yield on Nigeria’s 10yr Eurobond issue should be of
concern. At 12.25percent, Nigeria was, after Brazil, the 2nd riskiest issuer in
a group of 20 Emerging and Frontier Markets. What is worrisome though is
that between Dec 2015 and Jan 2016, the yield on Nigeria’s Eurobond
rose 1.58percent. The deterioration that this represents was by far the
worst of the comparators adopted by Bank Staff. This, in my view, signals
deteriorating market confidence in our economy.
With respect to financial system stability, my concern, similar to that of
other colleagues on the MPC, is to ensure that there is no repeat of the
systemic distress arising from poor risk asset quality that gave rise to the
creation of the Asset Management Corporation of Nigeria (AMCON). In
considering this possibility, I pay especial attention to the:
(i) Ability of Deposit Money Banks (DMBs) to intermediate; and
(ii) Effectiveness of intermediation. In my view, the financial system,
especially our banks continue to face a multiplicity of growing external
threats, not unlike those facing the national macro-economy.
With banking system liquidity ending 2015 at 48.63percent – the highest
level since Dec. 2013, it is easy to conclude that there is no threat to the

banks’ intermediation ability. However, given slow growth in the economy
and the state of confidence, it is not surprising to note that Bank deposits
declined by 2.89percent (which, when adjusted for inflation, translates to
almost 13percent reduction).

Furthermore, it is also not surprising to observe deposit holders responding
to a riskier environment by switching from demand deposits to tenured
deposits – thereby raising the cost of intermediation. While data also
shows a reduction in domiciliary account holdings, this figure may be an
understatement of foreign currency holding – especially given that
domiciliary account holdings were, until recently, discouraged.
Bank Staff report show that at NGN5,783bn, the volume of new credit
dropped almost 30percent in 2015 compared to a year earlier. The quality
of asset acquired in the process of intermediation and the systemic risk
posed appear to be worsening.
The Banking System Report presented by Bank Staff shows the following
highlights –
78.8percent rise in Non-Performing Loans (NPLs) to N649.63bn in the
year since December 2014;
NPL ratio ending 2015 at 4.88percent – relative to a threshold of
5percent; and
Loan-loss provision of N514bn already made against NPLs

In the normal course of events, the loss-loss provisions already made
should assuage any concern. However, granular inspection of the data
shows that between 2014 and 2015:
The number of banks with NPL ratio in excess of the 5 percent
threshold rose from 3 to 8. Furthermore, NPL in 3 of these banks
exceeded 10percent; and
NPLs rose in 18 of the 22 buckets into which the CBN classifies
Deposit Money Bank (DMB) lending;

Worsening NPLs reflect a combination of external and internal factors.
These include: Low and volatile Oil prices; uncertainty about severe fiscal
imbalance at the sub-national level of government; weak output growth;
and eroding investor confidence.
Reflecting on the nature of these threats, notwithstanding reassurance
provided by Bank Staff based on the outcome of various stress and
contagion tests, I cannot help but remain concerned about the possibility
of under-reporting of NPLs. The weakened ability of the CBN, represented
by the structure of its balance Sheet, to deal with a recurrence of crisis in
the banking sector requires heightened vigilance by Bank Staff.
In closing this review of outcomes that influenced my vote, it is important
to note near-term inconsistencies of which sight must not be lost:
Current FX policy is inconsistent with Fiscal Policy. After negative
revenue shocks, such as our economy has experienced, using fixed
exchange rates to rectify external account imbalances demands

that fiscal spending contracts or, at least, that policy brakes are
applied in fiscal consolidation, not expansion;
Furthermore, the presence of twin deficits - fiscal and current
account deficit – is inconsistent with the on-going maintenance of
fixed exchange rate;
Interest Rate Policy has become inconsistent with the Inflation Policy
objective. The Central Bank’s concentration on FX Rate stability
seems to have led to abandonment of its price stability/inflation
objective. This may be understandably construed to be a temporary
trade-off in our pursuit of stronger growth and employment. But
interest rate policy has also been subordinated to Financial Sector
Stability, and Credit Policies of the Bank. Witness the Bank’s
interventions on poor credit decisions in banking, and the
subsidization of interest rates in its implementation of real sector
initiatives. In the meantime, signs of a turnaround in trajectories for
growth, employment and inflation remains to be seen.
Market policies in general are becoming inconsistent with
Investment Promotion policies. Public resource allocation decisions
appear to be distorting and not leveling the playing field; i.e. not
promoting broad-based equitable opportunities. They are instead
entrenching the abilities of mono and oligopolies, in public and
private spaces, to undermine core prerequisites for growth and
economic diversification. Such decisions are imposing administered
constraints that are in effect choking the free flow of increasingly
scarce private capital and material to existing, varied capacities in
the economy.

In addition to policy inconsistencies, some of the approval processes
within the Central Bank may inadvertently be worsening access to forex.
Under CBN Guidelines, import applications not requiring FOREX from the
CBN window – referred to as ‘Not valid for FOREX’ - should be processed
within 48hrs. Given that our FOREX challenge is a shortage of supply, it is
difficult to understand why the CBN is not ensuring strict compliance with
its guidelines. These applications represent a supply of FOREX that would
ease, however insignificantly, the present constraints.
While the foregoing review of outcomes gives room for significant
concern, monetary policy being forward looking, the outlook is even more
worrisome.
It is clear that the changed dynamics of the oil market – strengthening US$
and OPEC’s switch to aggressive competition for market share in the face
of the reality that shale oil is unlikely to go away anytime soon - coupled
with the growing friendship between the USA and Iran and the simmering
animosity between Saudi Arabia and Iran suggest oil prices will remain
volatile and low for longer than usual. In consequence FOREX inflow,
which have already dropped from US$3.2bn/month to US$1.0bn/month,
will also remain far below ‘normal’ year levels.
The fiscal proposals in the Federal Government’s (FG) 2016 budget will
pose a significant challenge to monetary policy in the year ahead. While
the expansionary nature of the budget is appropriate in the face of
slowing activity growth, it conflicts, as I noted above, with the fixed
exchange rate regime presently in force.

The example of Saudi Arabia, another Oil Producing Country, with a fixed
Exchange Rate regime may be instructive. Saudi Arabia’s defense of
exchange rates for its currency, the riyal, features spending cuts and not
increases. The unprecedented range of recent Saudi government
spending cuts may be considered as testimony to the severity of the
revenue shock experienced by oil-producing States around the world.
Furthermore, the FG’s 2016 budget, as presented, will see the deficit
increase of almost 82percent. Ignoring the resulting sharp increase in debt
service payments – which in Budget 2016 may rise to 35percent of
revenue, the crowding out impact on the domestic economy’s private
sector borrowing need cannot be similarly ignored.
Assuming that budget funding is executed as planned, I expect domestic
interest rates to rise in the year ahead adversely affecting availability and
cost of credit. If, as is possible, much of this deficit is, contrary to plan
funded internally, the pressure on available credit and its cost will
heighten significantly.
Significant as the issues surrounding the FG’s budget are, attention must
also be paid to the fiscal conditions of the sub-national tiers of
government. It is clearly evident that, as I had argued in September, the
bailout afforded the States in July 2015 provided greater succor to their
bank creditors. With the State Governments getting no significant new
resources, their precarious fiscal condition continues to bubble just below
the surface. The impact of this issue on the outlook cannot be
understated. Its adverse effect on demand and non-performing loan
stock of banks should be issues for sober reflection. In the absence of new

resources, I expect State Governments to face the hard reality and make
the choices that significantly reduce costs and enhance productivity.
Beyond oil and the challenge which funding the budget deficit pose, the
absence of exchange rate management policy has diminished Nigeria’s
attractiveness as a destination for international capital flows. This policy
challenge is worsened by the seeming inability of the CBN to effectively
use the interest rate corridor as an effective policy tool.
With respect to exchange rate management policy, I have on several
occasions drawn attention to the need for an exchange rate
management policy. In my judgment, the framework of effective
exchange rate provides the most appropriate vehicle for determining
exchange rates. The present system of rationing without the establishment
of clear criteria doubtless creates uncertainties, inconsistent outcomes
and is open to abuse!
Returning to the MPC mandate of inflation management, forecast by
Bank Staff show inflation, under present conditions, continuing to rise in
2016 – average inflation rate of 9.2percent.
In my view, as earlier stated, prices are already rising in response to the
supply shortages arising from difficulty of accessing FOREX officially and
the resort to non-CBN markets where exchange rates are significantly
higher. There is a sense in which it appears the CBN may have lost control
of the ‘market’ exchange rate and perhaps inflation management.

My proposal to move the mid-point of the exchange rate band by
10percent to N220/US$ is based on the value of the 6month NonDeliverable Forwards (NDF). In my view, unlike the NDFs, the prevailing
price for US Dollars outside the CBN window - at almost N300/US$, grossly
undervalues the Naira. It unsurprisingly reflects the impact of scarcity of
US$ and the unnecessary uncertainty in policy around the determination
of exchange rate and the access to foreign currency.
Using my preferred measure of effective exchange rate, the Naira, as at
the time of this meeting is 10percent percent overvalued. The covered
interest parity framework also points to a 10percent overvaluation of the
Naira.
For the avoidance of doubt, while I am clear that flexibility in exchange
rate management is desirable, it is not a silver bullet! Its effectiveness in
enhancing and sustaining productivity in our national economy depends
on a collective willingness to undertake fundamental reforms, which at
the very least include –
i.
Reduction of government monopoly participation in economic
activity and consequently expand the scope of private sector
participation in the economy;
ii.
Improve labour productivity;
iii.
Re-organise the regime of subsidies to target production rather than
consumption; and
iv.
Ensure internal coherence and consistency between objectives and
policy actions.

I have spent much of the period since September 2015 arguing that our
willingness and ability, as a nation, to adjust to new realities will determine
how well our national economy weathers the turbulence occasioned by
low crude oil prices. I am increasingly concerned that we are unwilling to
recognise the new realities and meaningfully deal with them. In
consequence, we are, unnecessarily, paying – in the form of eroding
confidence, slowing growth and increasing joblessness of our population –
a needlessly heavy price!

10.0 EMEFIELE, I. GODWIN, GOVERNOR OF THE CENTRAL
BANK OF NIGERIA AND CHAIRMAN, MONETARY
POLICY COMMITTEE
The year 2015 was a tumultuous one for many financial markets and
economies. Accordingly, expected global growth for the year was
revised downward from 3.9 percent 3.1 percent in the IMF’s World
Economic Outlook (WEO) of January 2016. Amidst subdued demand and
rising uncertainties, growth momentum over the medium-term outlook
has remained fragile. However, global economic activities are envisaged
to recover marginally in 2016 with a projected growth rate of 3.4 percent.
The expected outcomes of global growth continued to reflect the
fragility of key emerging market economies, especially the deteriorating
output gap in China, softening commodities and oil prices, the uneven
rebound in advanced economies and the rising geopolitical tensions in
some strategic international trade routes.

For advanced economies, a modest and uneven recovery continued for
much of 2015 with estimated growth revised downward marginally by 0.1
percentage point to 1.9 percent. Amidst broadly accommodative
monetary conditions in these countries, growth prospect is expected to
pick-up slightly with a projection of 2.1 percent for both 2016 and 2017 for
the group. Individually, The United States, United Kingdom and the Euro
Area economies are expected to continue their recoveries into the
medium-term albeit at uneven pace. The recovery in key advanced
economies largely reflects the increasing demand, the falling production

costs due to cheaper energy, rising investments (both domestic and
foreign) due to benign monetary conditions, and fiscal ease (in Europe)
due to the refugee crisis. Despite the third quarter relapse, the Japanese
economy is expected to record a positive but modest growth of 0.6-0.8
percent in 2015 with a medium-term growth projection of 1.0 percent
and 0.3 percent in 2016 and 2017, respectively. The asset purchase
programmes of the ECB, the Bank of England, and the Bank of Japan
and expected to continue into the future with variegated ramifications
for the financial markets in emerging and developing economies.

Following the continued fall in commodity prices, structural imbalances,
worsening vulnerabilities, volatile financial markets, weakening demand,
and diminishing policy buffers, a generalised growth deceleration was
observed among emerging markets and developing economies in 2015.
Average economic growth for countries in this group fell from 4.6 percent
in 2014 to 4.0 percent in 2015 with a tepid outlook for 2016. With the
exception of India, all countries in the BRICS classification lost growth
momentum in 2015, which could continue into 2016. In China, a sharper
than envisaged lull in international trades due to sluggish aggregate
demand, weaker investment and flagging manufacturing culminated in
a sub-par growth of 6.9 percent in 2015 from 7.3 percent in 2014. Similarly,
the growth rate of the South African economy is estimated to decline by
0.2 percentage point to 1.3 percent in 2015. Brazil and Russia are
experiencing intense contractions with negative growths of 3.8 percent
and 3.7 percent, respectively, estimated for 2015 in contrast to positive
growths recorded in the preceding year. In sub-Saharan Africa,

economic growth rate is estimated to slow to 3.5 percent in 2015 from 5.0
percent recorded in 2014.

Accordingly, while the cheapening commodity prices are easing
production costs and supporting consumer demands in many advanced
economies it continues to worsen structural imbalances and exchange
market pressure in many emerging market and developing economies as
the gravitational pull on the exchange rates intensifies. Nonetheless, I
note that in the wake of the prevalent fragilities in the global economy,
monetary policy has generally shifted short- to medium-term emphasis to
growth stabilisation as the against the de jure objective of price stability.
This is reflected in the widespread accommodative stance of monetary
policy except in the USA where a resilient recovery heralded a gradual
tightening with the rescinding of the zero-bound interest rate.
Strained by the headwinds of the exacerbating global developments
particularly the plunging crude oil prices, the strengthening US dollar and
the slowing Chinese economy, the Nigerian economy continued to
experience unsavoury challenges. As long as these exogenous
developments persist, the grey outlook is not expected to lift fully in the
near-term. With a third quarter growth rate of 2.8 percent and an
average growth rate of 3.1 percent in the first three quarters of 2015,
economic growth for the entire 2015 may not exceed 3.5 percent.
Though growth could pick-up slightly in 2016 if global conditions improve,
various forecasts including staff estimates predict a range of 3.7 to 4.1
percent. I note that the expected growth rates for 2015 and 2016 are
substantially below the average of over 5.5 percent recorded in the

preceding five years. These growths are expected to be largely driven by
the non-oil sector, especially Services and Agriculture. Aside the multiplier
effects of falling oil prices and capital flow reversals (reflecting the
normalisation of the US monetary policy), poor lending to the real sector
remains a major threat to short-term growth prospects.

On domestic prices, the year-on-year headline inflation rose marginally to
9.6 percent in December 2015 from 9.4 percent in November. Though
single digit, the rate stayed above the Bank’s tolerance range of 6—9
percent. The Consumer Price Index report of the National Bureau of
Statistics indicated that headline inflation has remained above the range
for eight consecutive months since the upper threshold was first
breached in May 2015. The uptick in headline inflation during the month
reflected the 0.3 percentage point increase in food inflation to 10.6
percent even as core inflation remained unchanged at 8.7 percent. This
outcome is broadly attributable to the archetypal seasonal impulses of
the Yuletide festivities. This was reinforced by the acute scarcity of
premium motor spirit experienced during month, the drawn-out
consequences of disruptions to food supply due to insurgency in
important agricultural zones of the country, and the lingering passthrough from a strengthening US dollar.

Available data on domestic monetary, credit and financial conditions
indicated that broad money supply (M2) expanded, year-on-year, by 5.9
percent in December 2015 relative to a programmed target of 15.2
percent. Similarly, net domestic credit (NDC) increased by 12.1 percent;

a shortfall of 17.2 percentage points from the 29.30 percent growth
targeted for 2015. The growth in domestic credits reflected the 151.6
percent expansion in net claims on the Federal Government. I note that
irrespective of the sluggish monetary expansion and poor credit to the
private sector, the money market was relatively awash with liquidity, as
key interest rates in the market remained significantly low and outside the
asymmetric policy corridor. Starting at 1.0 and 1.5 percent on 25
November, the interbank call and OBB rates recorded averages of 0.8
and 1.0 percent by end-December 2015. The incongruity of a surplus
liquidity at the money market vis-à-vis a meagre credit to the private
sector reflects in part the apathy at lending to the real sector of the
economy.

At the capital market, the bearish conditions persisted at the equity
segment. This reflected the prolonged capital withdrawals from the
economy in the aftermath of the normalised US monetary policy and
austere sentiments associated with falling oil prices. Closing at 23,826.5
points on 22 January 2016, the All-Share Index of the Nigerian Stock
Exchanged declined by 13.2 percent from the 27,435.6 points it recorded
at end-November. Over the same period, Market Capitalisation dropped
from ₦9.4 trillion to ₦8.2 trillion.

During the review period, the exchange rate of the Naira to the US dollar
stabilised at the interbank market around ₦197.00/US$ with a daily
average of ₦196.99/US$ between 23 November 2015 and 11 January
2016. This reflected the CBN’s commitment to safeguard the domestic

currency using a mix of administrative policies and market instruments.
However, I note the need to improve foreign exchange supply from
autonomous sources. This will relieve the pressure on our gross official
reserves, which fell from an average of US$29.9 billion at end-November
2015 to an average of US$28.3 billion on 22 January 2016.

On the whole, I note that the headwinds impacting the Nigerian
economy, especially those related to falling oil prices and weakening
global demand are revealing the structural inadequacies of the
economy. As I have maintained in the past, the current fall in price of
crude oil represents a shift in equilibrium and as such is not transient.
Besides, even at the new lower equilibrium, oil prices are not expected to
recover anytime soon. I am convinced that the challenges confronting
the Nigerian economy are largely structural, though with some cyclical
undercurrents. Given that monetary policy is essentially deployed to finetune short-term cyclical variations, this implies that monetary policy is not
equipped to singlehandedly tackle the structural base of these problems
effectively. This underscores the inevitability of a coordinated and
consistent macroeconomic policy framework.

While the Nigerian economy is significantly diversified, the dependence
on oil for foreign exchange and fiscal revenue needs to be speedily
corrected. I note once again that the lopsided dependences on external
markets underlie the gradual but unrelenting erosion of Nigeria’s
productive base. It is important that the Nigerian economy not only
reverts to more sustainable sources of fiscal and foreign exchange

revenue but also increase support for local production. We must make
hard choices with respect to foreign exchange management and
structural re-alignment of the economy.

I am of the view that at this critical time monetary policy must
methodically consider the trade-off between inflation and output growth
and its implications of this trade-off for the macroeconomy. In view of the
rising inflation and slowing economic growth, policy must give priority to
the growth recovery without letting inflation out of sight. If we fail to prop
growth up at this critical moment, the hysteresis effect may lower our
growth potential, which will imply a permanent fall in the growth
trajectory.
It
remains
expedient
to
ensure
that
there
are
no
encumbrances to the drive to support the real sector and the productive
base of the economy.

While it is imperative to maintain a regime of accommodative monetary
policy, it is even more important to ensure that the surfeit liquidity from
the easy stance of policy is channelled to boost lending to the private
sector. This would ensure more optimal outcomes of growth, inflation and
employment. I note therefore that the concurrence of surfeit liquidity in
the money markets and low credits to the private sector is unwelcome. I
enjoin the banking system to do more in ensuring that more lending is
channelled to the real sectors particularly in agriculture, manufacturing,
and SMEs.

I am of the view that the effects on inflation, growth and employment of

decisions at the last MPC are still been transmitted in the economy. It is
important to allow the economy absorb the previous impulses fully before
further adjustments. It is in this regard that I vote to retain:
1. The conditional CRR at 20.0 percent;
2. The MPR at 11.0 percent;
3. The asymmetric corridor at +200 basis points and –700 basis points,
around the mid-point of the MPR; and
4. The Liquidity Ratio at 30 percent.