Central Bank of Nigeria Communiqué No. 76 of the Monetary Policy Committee
Meeting, May 23 - 24, 2011

The Monetary Policy Committee (MPC) met on 23rd and 24th May, 2011 to
assess
current
domestic
and
international
economic
and
financial
developments as well as the challenges facing the Nigerian economy in the
short- to medium-term.

On the international scene, the Committee noted the recovery in some of the
major developed economies along with improvements in stock market indices,
although unemployment remained high. Inflationary threats, however, still
persisted following sharp increases in international oil and commodity prices. In
addition, there are serious concerns about debt sustainability in many
developed countries, particularly the Euro-zone, requiring strong fiscal
adjustment with attendant risk of economic slowdown in the medium-term.

Emerging market economies have become the engine of the global economic
recovery, with their output levels above those recorded during the crisis years. It
is expected that growth in Asia’s exports in 2011, though below the very high
rates of 2009 and 2010, will be supported by the slow but gradual recovery in the
industrial countries. Sub-Saharan African countries are projected to record
moderate growth and to face inflation threats. Weak economic recovery in
industrialized countries may also affect exports from the region.

With regard to the domestic economy, the Committee noted the estimated
high output growth in Q1 2011, improvement in stock market indicators, modest
accretion to external reserves since the beginning of 2011 reflecting in part the
high crude oil prices, stable naira exchange rate and rise in interbank rates in
response to the tightening of monetary policy stance. Notwithstanding the

recent monetary policy tightening measures implemented since January 2011,
the Committee observed that inflation rate remained at the double digit level,
indicating the apparent role of structural factors and supply bottlenecks in the
elevated inflationary pressures in Nigeria. The Committee, therefore, urged that
economic reforms be fast-tracked to ensure that the downside risk of inflation to
growth is minimized.

Key Domestic Macroeconomic and Financial Developments

Domestic Output
The Committee noted that the impressive output growth in 2010 was sustained in
QI 2011. Provisional data from the National Bureau of Statistics (NBS) indicated
that real gross domestic product (GDP) was projected to grow by 7.43 per cent
in the first quarter of 2011, compared with the 7.36 per cent recorded in the
corresponding period of 2010. The non-oil sector grew by 8.46 per cent while the
oil sector output growth was estimated at 2.90 per cent. Thus, the overall output
growth was driven mainly by the non-oil sector with significant contributions from
services, wholesale and retail trade, and agriculture. The Committee considers
the outlook for 2011 to be generally good, underpinned by the favourable
conditions for increased agricultural production, encouraging outcomes of the
banking sector reforms and measures to channel credit to the real economy, as
well as other initiatives by governments to stimulate the economy.

Domestic Prices
The year-on-year headline inflation rate declined to 11.3 per cent in April 2011
from 12.8 per cent in March 2011. Food inflation also declined to 10.7 per cent in
April from 12.2 per cent in March and February 2011. However, core inflation at
12.9 per cent in April was slightly higher than the 12.8 per cent in March 2011.
The decline in headline inflation rate was primarily due to the decline in the

prices of some food items and non-alcoholic beverages, imported food items,
transportation, and clothing and footwear. Notwithstanding the decline in the
inflation rate in April, inflation expectations remain high owing to the subsisting
high fiscal spending, the recent increases in public sector wages, the possible
removal of subsidy on petroleum products in the near-term, and further liquidity
injection due to AMCON activity.


Monetary, Credit and Financial Market Developments

Provisional data showed that the growth in broad money (M2) during the first
four months of 2011 was 3.24 per cent, or 9.72 per cent when annualized.
Aggregate credit continued to decline largely as a result of reduction in credit
to the core private sector, and to state and local governments. Net foreign
assets, which posted positive growth in February and March, declined in April
2011. The huge growth in credit to government against the backdrop of
continuing decline in private sector credit clearly indicates that government
borrowing is crowding-out private sector credit. Besides, in the post-crisis period
banks in their bid to rebuild their balance sheets have become increasingly riskaverse, and have preferred to channel their funds into the relatively risk-free
government sector. The Committee, therefore, urged that efforts be sustained to
de-risk the real economy through appropriate reform measures.

The interbank market rates fluctuated at the various segments since the
beginning of the year. Key interbank rates moved in tandem with the upward
revision of the monetary policy rate (MPR) to 7.5 per cent from 22nd March, 2011.
Between March 22 and May 13, 2011, the inter-bank call and open buy-back
(OBB) rates fluctuated, increasing to a high interbank call rate of 11.95 per cent
on April 12, 2011. A significant decline in both rates was recorded thereafter,

following the enhanced liquidity in the banking system occasioned by the use of
AMCON bonds to secure funds and the impact of the new reserve averaging
policy. Consequently, interbank and OBB rates softened, with the OBB recording
a low of 6.90 per cent on 9th May, 2011.

Retail lending rates, however, remained relatively high with the spread between
the maximum lending rate and the consolidated deposit rate widening slightly
to 19.64 percentage points in April 2011, from 19.57 percentage points in March.

The All-Share Index and market capitalization recorded increases as the capital
market began a gradual recovery since the last MPC meeting. This was due
largely to share price increases in the Banking, Food/Beverages and Insurance
sectors. With the ongoing reforms by the regulatory authorities and robust
growth prospects, the outlook in the medium-term remains generally good.


External Sector Developments
The Committee noted the persisting demand pressure in the foreign exchange
market between March 23 and May 18, 2011. The total supply to the wDAS
segment by the CBN (including US$160.00 million worth of maturities at the wDAS
Forwards) amounted to US$4.32 billion.

The foreign exchange market remained relatively stable owing to a deliberate
policy on the part of the CBN to increase supply to the market to maintain the
exchange rate within a band of ±3 percentage points, complemented by
funding from autonomous sources. At the wDAS segment, the Naira/Dollar
exchange rate opened at N152.63/US$ (including 1% commission) on March 23,
2011 and closed at N154.74/US$ on May 18, 2011, representing a slight
depreciation of 1.38 per cent (or N2.11k). The interbank rates opened at

N155.97/US$ and closed at N156.70/US$, a depreciation of 0.47 per cent. The
premium between the rates at the WDAS and other segments of the market
narrowed towards the end of the review period.

The Committee noted the modest accretion to the external reserves in recent
months. It, however, noted that inflow into the CBN is not consistent with the high
oil prices and, this underscores the need for tighter fiscal controls around oil
revenues as well as first line charges including JVC deductions and subsidies. A
higher rate of retention of oil revenues should facilitate the efforts at maintaining
exchange rate stability as an antidote to imported inflation without excessive
reliance on monetary tightening measures.

The Committee’s Considerations

The Committee urged that in a highly import-dependent economy with large
pass-through effects of import prices on domestic prices, it is necessary to create
a climate conducive to larger foreign capital inflows through appropriate fiscal
measures, particularly in the light of the gains that could be made in the current
context of high crude oil prices. The MPC, therefore, stressed the importance of
continuing structural reforms and infrastructural development to enhance
domestic production to reduce the import bill and its pass-through effects on
inflation. It also noted the inflationary impact of the likely deregulation of
petroleum product prices.

The Committee held that it would be prudent to adopt a monetary policy
stance that is consistent with the need to address inflationary expectations
associated with excessive liquidity and pressure on foreign exchange market.
Although the fiscal authorities have declared their intention to fiscal

consolidation, the MPC recognizes that time will be required for fiscal
adjustment to take place. In the interim, monetary policy will have to bear the
burden of adjustment through further tightening in order to rein in inflation to
maintain price stability, as well as continuing with the progress toward positive
real interest rates.

Decisions
In the light of the above, Members of the Committee voted as follows:

1. 9:1 in favour of further tightening of monetary policy. All nine in favour of
tightening voted for an increase in CRR from 2 per cent to 4 per cent with
effect from June 8, 2011 to align with the next reserve averaging
maintenance period; Six (6) members voted for 50 basis points increase in
MPR from 7.5 per cent to 8.0 per cent, three (3) voted for 25 basis points
increase while one (1) voted for no change; and
2. Maintain the symmetric corridor of +/- 200 basis points around the MPR.


Sanusi Lamido Sanusi, CON
Governor
Central Bank of Nigeria

May 24, 2011

PERSONAL STATEMENTS BY MPC MEMBERS:
1.0
ALADE, SARAH
Although headline inflation moderated to 11.3 in April from 12.8 in the previous
month, a combination of intense pressure on the exchange rate as a result of
pass through effect of imported prices, and the anticipation of frontloading of
government expenditure in the second quarter calls for a modest tightening of
monetary policy rate. In addition, policy tightening is needed to address the
negative real interest rate in the economy.
While headline inflation has started to trend down, domestic inflation outlook
going forward, will be impacted on what happens to global food prices. Global
food and energy prices are expected to harden in the coming months, driven
by a combination of supply constraints and rising global demand as the
advanced economies consolidate their recovery. This suggests that the current
downward trend in headline inflation in Nigeria could be short-lived. Although
food inflation moderated to 11.6 percent in April from 12.2 percent in March, the
high international commodity prices could spill over to domestic prices.
Core inflation is also increasing. Core inflation which edged up to 12.9 percent
in April was driven mainly by housing and electricity /gas prices. The prices of
building materials like cement increased by more than 40 percent from its price
in the last quarter of 2010 and all these prices are determined by global prices.
These poses risk to the inflation outlook going forward.
The risk of expansionary spending in the second quarter is anticipated.
Although negotiations are on-going to reduce the exact amount of the 2011
Federal Government budget, the possibility of frontloading expenditure in the
second quarter is real. Given that the 2011 budget are yet to be passed, there is

a good chance that frontloading of expenditure could occur in the second
quarter of 2011for a number of reasons: First to accelerate already budgeted
expenditures
on
critical
government
projects
and,

secondly,

the
implementation of the new minimum wage. These spendings are bound to
have some inflationary impact, therefore monetary tightening is needed to
mitigate the inflationary impact of such expansionary fiscal injection to the
economy.
The equity market is benefiting from the return of confidence in the economy
after the successful general election. The declining trend that was observed in
the equity markets in March and February seems to have stabilized during the
month of April. The Nigerian Stock Exchange All-Shares Index (ASI) increased
marginally by 1.7% in April. Foreign investment inflow into the country increased
marginally to US$ 1.8 billion in first quarter as against the US$1.5 billion in fourth
quarter of 2010. Share equity and loans accounted for the bulk of the first
quarter inflows. I believe containing inflationary pressure and reviewing interest
rate will help increase confidence and participation in the market.
AMCON bond issue will further inject liquidity in the system. As AMCON tries to
conclude the resolution of the troubled banks by bond issues, more liquidity will
be injected into the system, putting additional pressure on the inflation
dynamics.
Monetary tightening is needed to preserve the value of the domestic currency.
Despite strong fundamentals (high oil prices, increased oil output, high GDP
growth rate), the naira continues to depreciate against the US dollar. Although
a number of factors could be responsible, one of such factor is the supply side
effects of money supply. Tightening monetary policy will ease the pressure on
the foreign exchange market.

Based on the above, monetary policy should focus on managing inflation
expectation for price stability. Therefore, I will recommend a modest tightening
of the monetary policy rate to 50 basis points and 2 percent increase in Cash
Reserve Requirement (CRR).
2.0
BARAU, SULEIMAN
The modest decline in the year-on-year Headline Inflation from 12.8 percent in
March to 11.3% in April should ordinarily give MPC the comfort that the
inflationary pressure is moderating and this trend may be sustained. The key
question for me therefore is that, is this trend sustainable?
In order to take a position, one must look for the factors responsible for this
decline, determine their outlook and those of the other key components of the
inflation basket. The decline in year-on-year Headline is largely due to the food
component of the inflation index. Accordingly, Food Inflation over the
corresponding period declined sharply from 12.2% to 10.7% on account of the
fall in farm produce and relative decline in the contribution of the imported
food component during the same period.
Indeed the outlook for the farm produce looks positive with the harvest season
in sight. This is also consistent with Staff Projections. However, I do not want to
loose sight of the huge demand side issues of the inflation equation which may
tilt the balance of risk in favour of an increased inflation rather than a decline, at
least on a sustained basis. These factors include:
• The deficit nature of the Federal budget.
• Activity of AMCON and its impact on systemic liquidity
• The threat of imported inflation as energy and food prices remained high.
• Upward review in minimum wage particularly for State employees.
• Possible withdrawal of petroleum subsidy.

I have therefore come to the conclusion after the above review that inflation
threat is still real and the arguments for tightening are compelling.
However in making my recommendation, I’m very conscious of the fact that
radical measures to tighten could hurt growth and financial stability. Growth;
since any upward adjustment of the MPR would translate into higher lending
rates particularly lending to the private sector. Financial Stability; since any
upward review of MPR would impact yields on Bonds, lead to huge market to
market losses and ultimately the profitability of Banks given their current huge
holdings of these Bonds.
However, inflation remains our enemy number one as it impacts on Nigerians
across social groups.
On the basis of the above and other factors, I’m compelled to argue for
sustained tightening and to make the following specific recommendations;
• Upward review of MPR by 0.5% to 8%.
• Increase in Cash Reserve Ratio (CRR) from 2% - 4% to directly impact
liquidity in the banking system. This would also impact directly on liquidity,
inflationary pressure and reduce speculative pressure on the Naira
exchange rate.
3.0
GARBA, ABDUL GANIYU
Justification
1. The data on Consolidated Balance Sheet of the Banking System
(December, 2010 to April, 2011) indicates that liabilities (M2) significantly
overshoots assets (NFA and Net Domestic Credit). Further, whereas M2
rose at an annualized rate of 9.27%, NFA and Net Domestic Credit
declined by 10.71% and 1.8% respectively. The policy implications of the

data are (a) reduce liabilities; grow assets or both until equilibrium is
restored. If not, excess liabilities will hurt both exchange rate stability,
growth and trigger rapid inflation. The MPC has stated clearly, its
commitment to price and exchange stability which reduce risks (inflation
and foreign exchange) and promote investment, job creation and
growth. Growing assets (NFA) will require both policy and institutional
changes that are outside the control of the MPC. Private credit has not
responded to the regime of quantitative easing and growing the public
debt has both short and long term consequences. This leaves quantitative
tightening as the only viable option.
2. A close analysis of the Forex market data reveals patterns of demand
consistent with speculative behavior. Tightening can reduce speculative
demand and ease pressure on the Naira.
3. The policies of the last MPC (March 2011) and the implementation are
producing expected impacts. The 100 basis point increase in MPR raised
the short term rates around target levels. However, FAAC releases (FAAC
Effect) and opportunities to repo AMCON bonds (AMCON Effects)
moderated the effects. FAAC Effects increased volatility while AMCON
Effect moderated the rates downwards from May 6. Inflation the key
policy objective appears to be moderating. However, the moderation
may not be sustainable given the upward movements in key categories
of food inflation and core inflation as well as the rise in global prices.
4. Before I decided, I asked three questions: (a) should we tighten further?
(b) what instruments are most effective? (c) what are the cost-benefit of
each option. The analysis convinces me that further tightening is
necessary especially given expected injections by AMCON, existing dis-

equilibrium, inflation concerns and commitment to price and exchange
rate stability.
5. The CRR is the most effective tool for tightening of liquidity. Its pass through
effects on speculative demand for forex are revealed by data on
demand for forex which show significant decline after the CRR was raised
by 100 basis point at the January MPC. A 200 basis point increase in CRR is
expected to impact significantly on liquidity and speculative forex
activities.
6. The increase in MPR by 25 basis point signals commitment to tightening. It
also takes notes that MPR effects on short term interest rates are expected
to be moderated by FAAC and AMCON Effects.
Decision
I vote for:
1. quantitative tightening
2. 200 basis point increase in CRR from 2% to 4%.
3. Increase in MPR by 25 basis point.

4.0
KIFASI, DANLADI

The current Federal Government budget under review is expected to be
expansionary due to Government’s desire to invest massively in infrastructure as
well as create employment opportunities through investment in public works
and other job- creating schemes. Moreover, various Governments’ interventions
in Agriculture, SMEs and Manufacturing have their liquidity implications.

Specifically, these have the tendency to create excess liquidity in the system
and exert pressure on foreign exchange demand.

2.
Furthermore, inflationary threats could arise from the high energy price in
the developed economies coupled with the implementation of the new
minimum wage policy.

In order to achieve the single-digit inflation objective of the Government;
ensure exchange rate stability; as well as sustain the gradual build up in the
external reserves, there is need to further tighten monetary policy.

4.
In view of the above, I recommend that the Monetary Policy Rate (MPR)
be further
Increased by 50 basis points from 7.5% to 8.0%. Furthermore, the Cash Reserve
Ratio (CRR) should be increased by 200 basis points from 2% to 4%, while the
open market operations should be actively pursued.

5.0
LEMO, TUNDE
The economy continues to face inflationary pressures arising from expansionary
fiscal stance as well as the impact of international prices of energy and food on
domestic price levels. The inflation expectation remains elevated with possible
implementation of new minimum wage and removal of petroleum subsidy.

The growth in broad money exceeded the benchmark in the period under
review, with the possibility of further expansion through the proposed AMCON
injection of about N600b in the next few weeks. Credit to the private sector
declined by 4.62% in the first 4 months of the year while credit to the Federal
Government grew substantially by 35.82%. The negative credit growth to the

private sector is as a result of structural factors as well as high government
borrowings.

Unlike other major oil producing countries, gross external reserve has remained
flat (USD33.37b as at May 18, 2011), in spite of very strong international price of
crude oil and increase in average daily output of over 2m barrels.

The pressure on foreign exchange is as a result of importation of highly
subsidized refined product as well as speculative demand due to expectation of
future depreciation of the Naira. In addition to this pressure the reserve level
may be adversely affected by the likely reduction in production as a result of
the recent short-in of Shell Bonga Field.

Monetary Policy Rate remains negative in real terms. Thus, interest and deposit
rates are unlikely to influence savings mobilization for the much needed growth.
The negative yield has also had negative impact on the inflow of foreign capital
and portfolio funds.

The most important challenge remains the reduction of demand pressure on the
foreign exchange to maintain healthy foreign reserve and preserve the value of
the Naira. This is a necessary condition for the maintenance of price stability in
an import dependent economy. The current crowding out of the real sector
through increase in government borrowing should also be reversed through the
likely adjustment in interest rates to reduce inflation, and stimulate real sector
growth and increase the inflow of much needed Foreign capital flows while
not losing sight of the potential losses to banks due to correction in the bonds
yields.

DECISION

It is very clear that the pressure on the Naira, driven by excess liquidity as well as
cheap Naira (as long as interest rates remain negative, in real terms) require a
less accommodative monetary policy stance.

In view of the foregoing therefore, I vote for a further monetary tightening with
increase in MPR by 50 basis point from 7.5% to 8.0%. This will return the policy
rate to the pre-crises level. In addition, the Cash Reserve Ratio should be
increased from the present 2% to 4% being a blunt instrument should have a
more immediate impact on the system’s liquidity.


6.0
MOGHALU, KINGSLEY CHIEDU
I vote for an increase in the monetary policy rate by 50 basis points as well as an
increase in the cash reserve ratio from the present 2% to 4 % for the following
reasons:
1.
Despite the recent deceleration in consumer price inflation from 12.8% to
11.3%, the medium term outlook for inflation remains significant in light of
increases to the minimum wage - the full effects of which are yet to
register - and the potential impact of a possible removal of the petroleum
subsidy. Such a policy change, in my view, remains necessary in order to
address fundamental distortions in fiscal policy.
2.
Real interest rates remain negative; it is necessary to bring inflation down
into single digits or close the gap between interest rates and inflation.

3.
The discountability of bonds issued by the Asset Management
Corporation, and increases in money supply over the past two months
imply that liquidity clearly remains a continuing concern for the economy.
4.
While there still remains some distance to restoring full financial stability in
the banking system, Nigerian banks have been stabilized enough to
balance out the potential effects of further monetary tightening
measures. Weighed against the imperatives of combating inflation, any
concerns about the impact on credit growth must be secondary at this
time.
5.
From a strategic perspective, it is necessary to move, to the extent
possible, to improving exchange rate stability by means additional to CBN
intervention in the foreign exchange market. Higher interest rates will
attract higher levels of foreign investment as a result of expectations of
higher yields by foreign investors, and this will have a stabilizing effect on
the naira.
6.
Higher deposit rates, which in my view require further attention from the
Central Bank of Nigeria, will also bring more savers into the banking system
and discourage the disintermediation threat that has become a real
danger as a result of low deposit rates. Considering that the exchange
rate is the dominant channel of inflation in Nigeria, higher interest rates
and reducing liquidity through the cash reserve ratio will help reduce
speculative demand for the currency.

Combating inflation and maintaining price stability is an imperative for the
CBN, but the actions of the fiscal authorities over the next several months
will influence how easily or quickly this objective can be achieved.

7.0
OLOFIN, SAM
There are sufficient indicators at this meeting to warrant a further strengthening
of the tight monetary policy stance adopted by this committee over the last two
meetings. Inflationary pressure has not abated significantly, and there is no
strong evidence that pre-election deficit spending by fiscal authorities would in
the short term be reversed, to embrace inflation curbing fiscal restraint in
recurrent government expenditure, or to encourage growth enhancing
emphasis on capital expenditure. The recently approved wage increases, and
more than overdue removal of petroleum subsidies are likely to add to
inflationary pressure. Similarly the prospects of good harvests and its likely
ameliorating effects on domestic food prices notwithstanding, rising energy
costs and imported food prices that currently account for the imported
component of inflation are not likely to trend down-wards significantly over the
short run.
As far as developments in the financial sector are concerned, there appears to
be strong indications that the threat to financial system stability, which
warranted extraordinary accommodating monetary easing measures that have
been sustained since June 2009 is about being resolved. Among other things
MPR witnessed a major reduction from an average of 10 percent to 6 percent,
going negative in real terms and has remained so, while inflation rate has
remained at a two digit level. As stability is restored to the banking sector of the
economy, there is sufficient good reason for the Committee to return to its
primary responsibility of focusing greater attention on price stability. However, if
we must sustain our tight monetary policy stance there is the problem of
determining what the most appropriate policy instrument(s) should be, and at
what magnitudes.
Developments at the foreign exchange market have been worrisome. There
appears to be a sustained attack on the Naira fuelled by a difficult to justify rise

in demand for foreign exchange that is most probably largely speculative. The
resultant effect is to produce pressure on the exchange rate with potentials for
further fuelling inflation if the excessive demand is not curbed, and supply of
foreign exchange increased, to preserve a healthy level of reserves that would
ensure a stable exchange rate and reduce the need for devaluation.
Given the foregoing, we need to focus on at least two critical elements in our in
choice of instruments to tackle inflationary expectation. First we need to work
towards a real rate of interest that would encourage net inflow of FDI and
portfolio funds that would enhance accretion to foreign reserves, without
necessarily endangering credit flows to the real sector. Available data on postcrisis capital inflows by way of FDI and Portfolio investment, show that countries
like Ghana, Mauritius, Kenya and Zambia are experiencing strong or moderate
recovery in post –crisis net capital inflows, whereas Nigeria continues to
experience decline in both net FDI and Portfolio investment inflows. The MPC’s
current monetary tightening policy stance therefore must be viewed against the
backdrop of negative real MPR, and related yield rates, and the need for
upward adjustment in rates to stem the speculative demand for foreign
exchange, and encourage inflow of FDI and portfolio funds.
Secondly there is the need to reduce the speculative hedging against the
Naira at the foreign exchange market by increasing the cost of borrowing to
finance speculative demand for foreign exchange. As we have argued
consistently in the past outright devaluation of the Naira is not a viable option in
our present circumstances. This would only accentuate the current run on our
reserves and exacerbate the inflationary pressure. The options we are left with
therefore is a double pronged approach of raising the MPR, to signal a
continuation of our tightening policy stance, and raising the CRR to curtail
diversion of loanable funds into speculative demand for foreign exchange,
thereby reducing the pressure on the Naira and its potential inflationary

consequences. One would therefore vote for a 200 basis point increase in the
current level of CRR from 2 percent to 4 percent, and raising the MRR by 50 basis
points from the current 7.5 percent to 8 percent. While the latter may not
necessarily be high enough to bring about positive real interest rates, it would be
supplemented by upward adjustment of market rates, once the current
interbank credit guarantees are removed later in the year.

8.0
SALAMI, ADEDOYIN
The moderation in Headline inflation from 12.8% in March to 11.3%, YoY, in April
and -0.54% change in the monthly index in the same period is doubtless
welcome. A sharp deceleration in food prices – including imported food –
provided the impetus for lower pace of price rises recorded. It is however
noteworthy that Core Inflation rose faster than that of food. Taken with figures
since January, a clear trend is not discernible.
With regard to the outlook for inflation, while some factors, for example
approaching harvest season, gives a basis for a positive outlook, there are
significant upside risks which cannot be ignored. Having noted the likely
moderation of inflation by harvests, we must continue to keep an eye on global
food prices. In addition to global food prices, the role of the exchange rate in
influencing imported food prices cannot be understated.
Liquidity, especially resulting from fiscal operations remains a source of concern.
Q1 2011 outcomes show Federal Government revenues, at NGN540.98bn, to be
almost 24% below expectation. Notwithstanding lower than ‘budgeted’
spending – amounting to NGN874bn (63% of which was recurrent expenditure),
the resulting deficit of NGN333.4bn in Q1 is only marginally lower than the NGN
347.44bn provided for in the ‘budget’. It is thus not surprising that lending to the

government continues to surge – growing almost 36% since December 2010 –
despite strong oil prices.
Notwithstanding encouraging noises from both the Executive and Legislative
Arms of government about ‘reshaping’ the 2011 budget, it remains to be seen
how quickly this can be done to reduce the pressure exerted by rising
government borrowing. Whilst deregulation of Petroleum product prices will
undoubtedly go a long way towards achieving a more sustainable fiscal
environment, it is again not clear how quickly this will be achieved. Minimum
wages are also anticipated to add to spending at the sub-national level. It is
important that whilst awaiting action to reshape the budget, government must
be made aware of the cost implications of its borrowing activities.
Unlike the public sector, private sector borrowing has continued to shrink –
declining by a further 4.5% this year. Resolution of the banking sector issues
however represents a risk to systemic liquidity. The impending injections into the
banks by AMCON – estimated at approximately NGN600bn – represent a clear
risk to liquidity. Added to the Central Bank’s guarantee on interbank market
transactions, the AMCON-related liquidity is likely to reinforce the negative ‘real’
interest rates which characterize the deposit side of our financial system. Action
to move ‘real’ rates into positive territory needs to continue.
Perhaps the biggest threat to the outlook for price stability is the exchange rate.
Since the beginning of the year the Naira has depreciated by almost 3% -
notwithstanding successful conclusion of the general elections. With strong oil
prices and volumes continuing to rise, the depreciation of the Naira is counter
intuitive. The thick opaqueness surrounding Nigeria’s oil industry – upstream and
downstream - affords an explanation for the discrepancy between oil prices
and receipts. A scenario which combines foreign currency inflows lagging both
oil prices and production volumes and increasing outflows offers an incentive to

speculation against the Naira. A depreciating currency not only spells difficulty
for the goal of attaining price stability but if allowed to continue for any length
of time will itself fuel inflation. In this light, it becomes imperative to take
measures which deter speculation against the Naira.
Bearing all of these in mind, I am clear that steps need to be taken to
• Mitigate the speculative attack on the exchange rate;
• Ensure that the government pays adequately for the resources it utilizes;
and
• Encourage the emergence of positive ‘real’ interest rates.
I am thus comfortable to see a further tightening of the monetary conditions. An
increase in both the Monetary Policy Rate (MPR) and the Cash Reserve Ratio
(CRR) should stem the flow of liquidity for speculation against the Naira.

9.0
UCHE, CHIBUKE U.
1. The attainment of price stability, which is the core mandate of monetary
policy, depends on the ability of a central bank to contain inflation and
maintain a stable exchange rate. Price stability should however not be
seen as an end in itself. Its underlying essence is the promotion of
economic growth. This is a very tall order in a rentier mono product
economy where prudent fiscal management is not considered a priority
by government. It is troubling that the current increase in government oil
revenues is positively correlated with increased government borrowing.
The recurrent expenditure dominance of the budget simply means that
vital infrastructural development is not responsible for this trend. Growing
concerns about oil income leakages further complicate monetary policy.

2. The above scenario has led to a situation where our currency is now under
immense speculative attack. The consequence is that the demand for
foreign exchange has increased at an alarming rate in recent times. A
strict interpretation of the MPC price stability mandate means that the
MPC will need to increase the MPR and possibly use other monetary
tightening mechanisms in order to curtail money supply and stem the
speculative attacks on the Naira. On the face of it, this option looks
attractive. I am however not convinced that it can lead to economic
development which is the underlying reason for the price stability
objective of monetary policy. This is because given the structure of our
credit system the real sector would be the first to be crowded out in a
further tightened market. Furthermore, it would be overly optimistic to
expect that a government that has resorted to increased borrowing even
in periods of jumbo oil prices to fund predominantly recurrent items would
curb borrowing just because MPR has been increased. Stemming the
speculative attacks on the Naira through credit tightening only may
therefore not be sustainable even in the near future. It is in the light of the
above, that I am reluctant to recommend another increase in MPR.
3. At another level, I believe that we need to allow more time for the CBN
banking sector intervention to resolve in order to be in a position to fully
appreciate the interest rate lending mechanics of commercial banks. As
argued by Dr. Doyin Salami, the current CBN interbank guarantee distorts
the real dynamics of interest rates. In the light of the above, I am of the
view that MPC should maintain the status quo at this time. Doing nothing,
no doubt, has risks especially in the arena of hastening a possible
devaluation of the Naira. While this is a legitimate concern, I am not
convinced that the continued aggressive tightening of money supply will
exterminate this threat. The March 2011 100 basis points increase in MPR
has done little to stem the speculative attacks on the Naira. If the Central

Bank, which is also financial adviser to the Federal Government, is unable
to convince it to adopt a more prudent fiscal stance, then I believe that
tightening monetary policy which will further crowd out an already
battered private sector and negatively impact on the current banking
sector distress resolution, may not be enough to contain Naira speculators
even in the near future. This is the painful reality of the entwinement of
fiscal and monetary policy.


10.0 SANUSI LAMIDO SANUSI
Governor of the Central Bank of Nigeria and Chairman of the Monetary Policy
Committee

The principal question facing us today is the appropriate stance to adopt in
view of the decline in the year-on-year inflation rate to 11.3% in April from 12.8%
in March.

On the one hand there is the argument that the significant tightening since the
last MPC meeting is beginning to show an impact. Staff reports however
indicate that the principal drivers of this deceleration were imported food and
farm produce components of the Consumer Price Index. Considering the fact
that we are approaching the harvest season, it is indeed plausible that in the
short-term inflationary pressures may remain subdued.
On the other side of the argument are significant risk factors. First, although food
inflation declined, there has been a continuation of inflation in other
components, mainly diesel, kerosene, rent and household utilities. In addition
there continues to be an increase in distribution costs. The sustained strong
demand for foreign exchange has exerted pressure on the naira and this

heightens the risk of cost – push inflation through the import/exchange rate
channel.

In addition, this strong demand for foreign currency is clearly an indication of
significant systemic liquidity driven by fiscal spending and recent AMCON
activity. Both of these sources of liquidity are expected to remain active in the
short-term as AMCON recapitalizes distressed banks and Government grapples
with the challenges of reducing the cost of governance and overheads.

The economy is not helped by the fact that actual foreign exchange inflows to
the Central Bank from the oil sector fall short of expected levels given the
significant increase in oil price and output, as well as in comparison to the
inflows at comparative price levels pre-crisis. In addition to the oft-repeated
concerns about NNPC deductions for JVC Cash Calls and Petroleum subsidies, it
would seem that there is a need to look closely at the quality of fiscal controls
around oil revenues in order to block apparent leakages.

The oil revenue shortfall restricts the ability of the Central Bank to significantly
increase foreign exchange sales and use a strong currency as an antidote to
imported inflationary pressure.

The sum total of the second argument would suggest that the outlook for
inflationary expectations is such that the recent decline may be unsustainable
without measures aimed at addressing excess liquidity and reducing the
demand pressure at the foreign exchange window.

For these reasons I am inclined towards siding with the majority argument for
tightening. I also agree with the majority that given the effectiveness of the Cash

Reserve Ratio as a blunt tool, an increase to 4% from the current 2% level should
impact the liquidity of the main banks driving foreign exchange demand.

On the actual level of systemic liquidity tightening as reflected in the MPR, my
view is that given the 100bp increase at the last MPC, and the CPI figure for
April, a gradual tightening by raising MPR by 25bps should suffice for now. In
July, based on a review of developments, we may consider further measures. I
therefore do not agree with majority view of a 50bp hike in MPR.
My vote therefore is for:
1. An increase in the CRR from 2% to 4%
2. An increase in the MPR from 7.5% to 7.75%
3. Retention of the symmetric corridor around the MPR