Central Bank of Nigeria Communiqué No. 67 of the 212th Monetary
Policy Committee Meeting, January 4-5, 2010


The Monetary Policy Committee (MPC) met on 4th and 5th January, 2010 to
review domestic economic conditions in 2009 and the challenges faced by
the Nigerian economy against the backdrop of developments in the
international economic and financial environments in order to chart the
course for monetary and financial sector policies for 2010.

On the international economic scene, the Committee noted that developed
countries that were most adversely affected by the severe economic and
financial crises had started showing signs of recovery. The apparent rebound
in global economic activity was being driven mainly by rising
manufacturing activity, recovering housing markets and the restoration of
consumer confidence. Although central banks around the world have
undertaken large interest rate cuts and measures to inject liquidity into their
economies, the risks still remain that the current rebound may be sluggish
and that the global economy would remain credit-constrained in the near-tomedium-term, as financial institutions continue to maintain their cautious
approach to credit extension.

The Committee also noted that commodity prices, including crude oil prices,
have resumed an upward trend due largely to the fiscal and monetary
stimuli, and the prospect of economic recovery in advanced economies. The
rising commodity prices have, however, renewed concerns about the
resurgence of inflation in the near-term. The Committee further noted that
emerging and developing market economies, on their part, have continued to

show strong resilience to the financial crises and recorded positive growth
rates despite the harsh international economic and financial environment in
2009.

On the domestic scene, the MPC underscored the need for strengthening ongoing reform efforts in the banking sector aimed at engendering desirable
medium term economic growth path consistent with price and financial
stability. It further underlined the need to fast-track the proposed reforms in
some key sectors of the Nigerian economy, and in particular, the power
sector, to attract the much-needed private sector/foreign investment. This,
the Committee noted, was necessary because of the benefits in terms of the
growth-enhancing and employment-creating potentials that these reforms
and opening-up of the sectors would have on the rest of the economy.

Key Domestic Macroeconomic and Financial Developments

Output and Prices: Provisional data from the National Bureau of Statistics
(NBS) indicated that real Gross Domestic Product (GDP) grew by 8.23 per
cent in the fourth quarter of 2009, up from 4.50, 7.22 and 7.07 per cent in the
first, second, and third quarters, respectively. Overall GDP growth for 2009
was projected at 6.90 per cent which is significantly higher than the 5.98 per
cent recorded in 2008. The non-oil sector, as a group, remained the major
driver of growth although this was complemented by the sharp increase in
the growth of the oil sector GDP following the relative peace in the Niger
Delta in the second half of the year. The Committee observed that the higher
than anticipated real output growth recorded in Nigeria despite the harsh
international economic environment mirrored the trends in some subSaharan African countries and further buttresses the view that African

countries were better able to withstand the global economic and financial
crises relative to other regions of the world. The Committee felt that on the
basis of the robust economic growth recorded and the sustained
implementation of appropriate policies, further improvement in output could
be expected in 2010.

The headline inflation rate, as measured by the year-on-year increase in the
all item consumer price index, was 12.4 per cent in November 2009, up from
11.6 and 10.4 per cent recorded in October and September, respectively. The
outcome was, however, lower than the headline inflation of 15.1 per cent
recorded in December 2008. Food inflation which hovered between 12.5
and 12.90 per cent in the third quarter rose to 13.5 per cent in the fourth
quarter of the year. Inflation outlook for 2010 remains uncertain, but a
combination of both domestic and international economic developments,
namely the impact of the planned full deregulation of petroleum products
prices, the expansionary fiscal outlay, the quantitative easing measures
undertaken by the Bank, the resolution costs associated with the banking
sector reforms, possible capital inflows to strengthen commercial banks
balance sheets, and the rising international commodity prices, pose serious
threats to domestic price movements and, hence, inflation risk in the months
ahead. Against this background, the Committee emphasized the need to
continue to monitor price developments with a view to creating an enabling
environment for sustainable economic growth and employment.

Monetary, Credit and Financial Market Developments: Over the preceding
December level, broad money (M2) grew by 12.80 per cent (on annualized
basis) in November 2009, which was significantly below the indicative

benchmark of 20.8 per cent growth for 2009. Similarly, the annualized
growth rate of aggregate domestic credit (net) as at November 2009 was
56.10 per cent, compared with the provisional benchmark growth rate of
86.97 per cent for 2009. Despite the various policy measures implemented
by the CBN to ensure adequate liquidity in the banking system, reserve
money (RM) was largely below the indicative benchmarks for most of 2009.
The annualized growth rate of private sector credit was 26.10 per cent,
significantly below the indicative benchmark of 45.00 per cent but not in
itself insignificant in view of all the developments in the banking sector. The
trends in money supply movement reflected the fall in net foreign assets and
the slowdown in credit to the private sector. This implied slack aggregate
demand, indicating the need for the continuation of an accommodative
monetary policy stance.

Notwithstanding the sub-optimal monetary growth during the year,
confidence in the money market has improved considerably following the
inter-bank money market guarantee and other measures to strengthen the
banking sector. This was reflected in the downward movement of the daily
interbank call rates. Specifically, the average call rate for November was
5.25 per cent down from 6.60 per cent in October and 9.76 per cent in
September 2009. The secured open buy-back (OBB) rate for November was
4.53 per cent, down from 5.80 and 6.60 per cent in October and September,
2009, respectively. As at December 30 2009, the interbank call and OBB
rates were 2.91 and 2.51 per cent, respectively. The spread reflecting
counterparty credit risk, has narrowed significantly from an average of 316
basis points in September to 80 basis points, 72 basis points and 40 basis
points in October, November, and December, respectively.

The Committee observed that despite the falling interbank rates, the retail
lending rates of deposit money banks (DMBs) were still high. The average
maximum lending rate had risen to 23.1 per cent in November from 22.97
and 22.64 per cent in September and June, 2009, respectively. Also, the
average prime lending rate rose to 18.93 per cent in November from 18.33
and 18.16 per cent in September and June, 2009, respectively. The
Committee reaffirmed that the reduction of structural and institutional
impediments as well as DMBs risk perception of borrowers could moderate
the high lending rates. It also felt that current efforts by the Bank to promote
the use of shared infrastructure by DMBs as well as the development of the
fixed income market in conjunction with relevant agencies would further
reduce cost of operation and moderate lending rates. The Committee noted
the progress made so far in this area and urged an intensification of efforts
and closer collaboration with political authorities to fast-track its
actualization.

The weak performance of the Nigerian capital market continued throughout
2009. The All-Share Index (ASI), which was 31,450.78 in December 2008,
fluctuated to 19, 851.89 (36.88 per cent) at end-March 2009, 26,861.55
(14.59 per cent) at end-June 2009, 22,065.00 (29.84 per cent) at endSeptember, 2009, and further to 20,827.17 on 31 December, 2009. Market
Capitalization (MC), which stood at N6.96 trillion in December 2008
declined steadily to N4.989 trillion on 31 December, 2009. The NSE has
attributed the bearish performance at the stock market to the harsh operating
environment and the gloomy economic outlook in 2009, which affected the
quarterly results of some quoted companies. However, the major stock

markets around the world have shown improved investor sentiments
following prospects of recovery in the medium term. It was also noted that
although banking shares in general have been badly affected by losses
incurred, a number of companies in the non-bank sector have had strong
performance in the stock exchange.

External Sector Developments: The foreign exchange market remained
relatively stable for the most part of 2009, after the initial turbulence
recorded in the first quarter of the year, following measures taken by the
CBN. In November, the WDAS average exchange rate stood at N150.85 per
US dollar compared with N149.3578 per US dollar in October 2009,
representing a depreciation of 1.0 per cent. As at end-December 2009, the
WDAS average exchange rate was N149.58 per US dollar compared with
N126.48 per dollar at end-December 2008. The inter-bank market rate
averaged N151.03/$US as at end December 2009. Thus, as at end-2009, the
spread between the WDAS and inter-bank market rates was insignificant.
The convergence reflects renewed confidence and clarity in expectation,
founded on the stability that has been sustained in exchange rates. Policy
will continue to focus on avoiding volatility in exchange rates and thus
retaining confidence.

External reserves stood at US$42.47 billion on 29th December 2009, down
from the level of US$53.00 billion recorded at end-December 2008. Overall,
the net outflow of foreign exchange has moderated significantly from
US$5.6 billion, US$3.8 billion, and US$931.93 million to US$138.37
million in the first, second, third and fourth quarters, respectively.
Notwithstanding the decline in the level of external reserves as at end-

December 2009, the Committee was satisfied that the level of reserves
remained robust and significantly higher than initially projected at the
beginning of the year. However, if the elevated price of crude oil in the
international market in recent months is sustained, then, given improvement
in output with peace in the Niger Delta, there is likely to be an improvement
in the level of foreign exchange reserves. The strong reserve position
enhances the Bank’s ability to maintain exchange rate stability and protect
the currency from speculative attack.

The Committee’s Considerations
The Committee welcomed the optimistic growth forecast for 2010 by the
NBS but noted that the growth had been without employment owing to the
stagnation in the manufacturing sector, and the failure to link growth in
agriculture to industry. The Committee stressed the need for improvements
in power and infrastructure to further enhance and sustain the growth
process. In this regard, the MPC welcomes the commitment of the Bankers’
Committee at its Enugu Retreat to provide the platform for increased
financing for infrastructural development in support of economic growth. It
restated its commitment to work with the government to create the enabling
environment that will facilitate the financing of the real sector by the DMBs,
including strong advocacy for the fast-tracking of stalled reforms in the
power sector, including review of the tariff regimes for gas and electricity
and concessioning of the transmission company.

The Committee also observed that the focus of the reform measures in the
banking sector is to impact the overall efficiency and stability of the system
in a manner that will ensure that banks play their appropriate roles as

transmission channels for resources to the real sector. This is expected to
increase credit to the growth-enhancing sectors of the economy and
therefore, engender an all inclusive growth, as well as avoid a recurrence of
crises provoked by over exposure to speculative and non-value-adding
ventures.

The Committee further cautioned against being overly optimistic in our
expectations about the outlook for the price of oil, and welcomed the prudent
benchmark used in the budget for 2010. It noted that the current price of
crude oil was being driven by the low value of the US dollar and the low
interest rates in the US and once these reverse crude oil prices may be lower
than they are today. It expressed the hope that all stake holders will give
support to the Finance Ministry in keeping to this benchmark price, and
resist the temptation to push for an increase based on short-term
consideration.

The Committee took cognizance of the expansionary nature of the 2010
Federal budget, the continued implementation of the 2009 Budget up to Q1
2010, expected liquidity injection/inflow during the recapitalization of the
troubled banks and resolution of toxic asset problems, and the eventual
deregulation of the downstream petroleum sector and their possible
inflationary impact. In this regard, the MPC affirmed that it will closely
monitor price developments in the near-term and will take appropriate policy
measures, if necessary, to ensure the attainment of price and financial sector
stability.

On the other hand, the Committee recognised the need to maintain the
growth trajectory of the economy, to ensure that lending rates are not placed
under further upward pressure and to provide sufficient liquidity during the
resolution process of the banking system.


Decisions

In the light of the above, the Committee unanimously took the following
decisions:

1. The Monetary Policy Rate (MPR) will remain unchanged at 6 per cent
with the asymmetric corridor of interest rates remaining at 200 basis
points above the MPR and 400 basis points below the MPR.

2. The CBN will extend the guarantee on all interbank transactions up
till December 31, 2010. However, the CBN has the discretion to
terminate the guarantee on a case-by-case basis as part of the ongoing
reform process.

3. The MPC approved the Monetary Programme for 2010/2011 and the
Monetary, Credit, Foreign Trade and Exchange Guidelines for Fiscal
years 2010/2011.

Sanusi Lamido Sanusi
Governor,
Central Bank of Nigeria
Abuja

January 5, 2010