CENTRAL BANK OF NIGERIA
MONETARY
POLICY REVIEW
MONETARY
POLICY REVIEW
July - December 2010
July - December 2010
Central Bank of Nigeria
33 Tafawa Balewa Way
Central Business District
P.M.B. 0187
Garki, Abuja
Phone: +234(0)946236011
Fax: +234(0)946236012
Website
©2010 Central Bank of Nigeria
: www.cbn.gov.ng
E-mail:
ISSN: 2141-6281
iii
Mandate
Vision
Mission Statement
Ensure monetary and price stability
Issue legal tender currency in Nigeria
Promote a sound financial system in Nigeria
Maintain external reserves to safeguard the international
value of the legal tender currency
Act as banker and provide economic and financial
advice to the Federal Government
To be one of the most efficient and effective of the
world's central banks in promoting and sustaining
economic development.
To be proactive in providing a stable framework for the economic
development of Nigeria through the effective, efficient and
transparent implementation of monetary and exchange
rate policy and management of the financial system.
Core Values

Meritocracy
Leadership
Learning
Customer - Focus
Central Bank of Nigeria
CBN Monetary Policy Review
CBN Monetary Policy Review
CONTENTS
Page
Table of Contents
List of Tables
Statement by the Governor

ix
Chapter 1
Overview


Chapter 2
International Economic Developments
..
..

Chapter 3
Monetary Policy


Chapter 4
Domestic Financial Markets


Chapter 5
Domestic Price Developments and the Real Economy

Chapter 6
Economic Outlook


Table 2.1
Monetary Policy Rates of Selected Central Banks
..

Table 2.2
World GDP


Table 3.1
Decisions of the Monetary Policy Committee
(July to December 2010)


Table 3.2
Changes in CBN Key Interest Rates
..
..
..

Table 3.3
CBN Liquidity Enhancing Initiatives
..
..
..

Table 3.4
Nigerian Treasury Bills Auction ( 'million)
(January 2009-December 2010)
..
..
..

Table 3.5
CBN Standing Lending Facility ( 'billion)
(January 2009-December 2010)
..
..
..

Table 3.6
CBN Standing Deposit Facility ( 'billion)
(January 2009-December 2010)
..
..
..

Table 3.7
Monetary Aggregates..


Table 4.1
Weighted Average Money Market Interest Rates (%)..

Table 4.2
NSE All Share Index (ASI) and Market Capitalization
(MC) Dec 2009 - Dec, 2010


Table 4.3
Monthly Average Exchange Rate Movements at
Various Segments of the Market ( /US$)
..
..

Table 4.4
End-Month Exchange Rate Movements at
Various Segments of the Market ( /US$)
..
..

Table 4.5
Nominal and Real Effective Exchange Rate Indices,
Jan 2009 to Dec 2010 (November 2009 = 100)
..

Table 4.6
Total Foreign Exchange Demand and Supply
(US$'Million)


Table 4:7 CBN Monthly Foreign Exchange Flows (US$'Million)
..

Table 5.1
Measures of Consumer Prices ..
..
..
..

Table 5.2
Inflation Rate


Table 5.3
Quarterly Consumer Price Developments in 2010
(November 2009=100)..


Table 5.4
Fiscal Operations of the FGN in 2010 ..
..
..

Table 5.5
Revised Weights of the Composite
Consumer Price Index ..


Table 6.1
World Economic Outlook


Table 6.2
Outlook for Key Macroeconomic/Monetary Indicators

v
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List of Charts
Figure 2.1
Global GDP Growth (2008-2010)
..
..
.. 8
Figure 3.1
The Performance of M1, M2 and RM (2009 and 2010)

Figure 3.2
Performance of M1,M2 and RM in the First and
Second Half of 2010


Figure 3.3
Reserve Money Benchmark & Actual
(Dec.2009- Dec. 2010)..


Figure 3.4
Reserve Money Benchmark & Actual
(Jun- Dec. 2010)


Figure 3.5
The performance of Credit (NDC, Cg, CP)
2009 and 2010 ..


Figure 3.6
Performance of Credit (NDC, Cg, Cp) in the First
and Second Half of 2010


Figure 4.1
Weighted Average Money Market Rates
..
..

Figure 4.2
NIBOR and Monetary Policy Rate:
Dec. 2009-Dec. 2010


Figure 4.3
Nigerian Stock Exchange ASI and MC
..
..

Figure 4.4
NSE Market Capitalisation by Sector as at
end-December, 2009 ..


Figure 4.5
NSE Market Capitalization by Sector as at
end-June, 2010


Figure 4.6
NSE Market Capitalisation by Sector as at
end-December, 2010 ..


Figure 4.7
Share Price Volatility, January 2009 December 2010 ..

Figure 4.8
FGN Bonds Yield Curves 16th December, 2009,
16th June 2010 and 16th December, 2010
..
..

Figure 4.9
Naira Average Exchange Rate Movement
..
..

Figure 4.10
Average Exchange Rate Movement ..
..
..

Figure 4.11
Naira end-Period Exchange Rate
..
..
..

Figure 4.12
Naira End-Month Exchange Rate
..
..
..

Figure 4.13
Real and Nominal Effective Exchange Rate Indices,
Dec 09 - Dec 10 (Nov 2009 = 100)
..
..
..

Figure 4.14
Real and Nominal Effective Exchange Rate Indices,
Jun 10 - Dec 10 (Nov 2009 = 100)
..
..
..

Figure 4.15
Demand and Supply of Foreign Exchange,
Jan 2009 - Dec 2010


Figure 4.16
Trend in Foreign Exchange Outflow
(Second Half 2009 & 2010)


Figure 4.17
Foreign Exchange Inflow and Outflow:
Dec 2009- Dec, 2010


Figure 5.1
Headline, Core and Food Inflation (Year-on-Year)
..

Figure 5.2
Year-on-Year Headline Inflation: Selected Items 2010

Figure 5.3
Actual and Seasonally Adjusted Headline Inflation
(Dec 2009 - Dec 2010)..


vi
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Page
List of Boxes
Appendices
Box 3.1
The Asset Management Corporation of Nigeria
(AMCON) ..


Box 5.1
Core Inflation in Nigeria


Box 5.2
Federal Government of Nigeria (FGN) 2010 Amended
and Supplementary Budgets (I and II)
..
..
..

Box 5.3
The New Consumer Price Index (November 2009=100)
..

Communiqué of the Monetary Policy Committee (July 2010 - December 2010)
1.
Communiqué No. 71 of 5th July 2010 ..
..
..
..

2.
Communiqué No. 72 of 21st September 2010..
..
..

3.
Communiqué No. 73 of 23rd November 2010..
..
..

vii
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Page


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ix

STATEMENT BY THE GOVERNOR
The global economy continued to show signs of economic
recovery during the last six months of 2010, despite market
anxiety over the sovereign debt crises in the euro area and the
challenges posed by rising food and energy prices. The pace
of recovery and its composition, however, differed across the
regions
with
the
smaller
export-dependent
economies
generally experiencing more pronounced growth than the
larger economies with sizable domestic demand. Most
advanced and a few emerging economies grew at a much
slower pace due to concerns of large adjustment costs and
high
unemployment
levels,
which
posed major
social
challenges to policy makers during the second half of 2010. In
contrast, growth in China and most of East Asia (except
Japan), including India, as well as sub-Saharan Africa,
remained strong for most part of the second half of 2010.

Monetary policy was largely expansionary across the regions,
with interest rates down to record lows in most advanced and
emerging market economies, while central bank balance
sheets expanded to unprecedented levels in key advanced
economies. In order to curb rising inflationary threat, the
authorities began the process of tightening monetary policy,
although interest rates still remained generally low. Despite
these challenges, the short-term baseline outlook for world
output remained positive, with global growth expected to
settle at high but more sustainable levels over the medium to
longer term.

The Nigerian economy witnessed strong economic growth
performance during the last half of 2010, supported mainly by
strong macroeconomic management and reforms, despite
the lingering effects of the global financial crisis. In response to
the rise in domestic inflationary pressures towards the end of
the year, the monetary authorities raised the monetary policy
rate by 25 basis points to 6.25 per cent. The Asset Management
Corporation of Nigeria (AMCON) commenced operations in
the last quarter of 2010. In December 2010, AMCON
purchased the non-performing loans of 21 DMBs valued at
N2.165 trillion and issued 3-year zero coupon bonds valued at
.. Asia recorded
appreciable
growth... In some
countries,
monetary policy
was tight
although real
interest rates
remained low
While monetary
policy was
expansionary,
interest rates were
generally low


CBN Monetary Policy Review

x

N1.036 trillion. It is expected that, with the commencement of
operations by AMCON, the balance sheets of the Deposit
Money Banks (DMBs) would be substantially cleaned up of
non-performing loans in their portfolios.

The overall economic outlook suggests that the current global
economic recovery would continue through 2011. While
domestic economic activity is expected to be bolstered by the
global recovery, the lingering sovereign debt crisis in a number
of Euro Area countries poses serious challenges to global
economic recovery, which might negatively affect the
prospects for Nigeria’s increased oil exports. The outlook
suggests that the stance of domestic monetary policy in 2011
would be largely non-accommodating, to forestall the risk of
inflation. Generally, the Central Bank of Nigeria would remain
committed to ensuring the attainment of the single digit
inflation objective in 2011.

Sanusi Lamido Sanusi (CON)
Governor


CHAPTER 1
CHAPTER 1
OVERVIEW


CBN Monetary Policy Review

CHAPTER 1
OVERVIEW
The primary focus of monetary policy in the second half of
2010 was to maintain price stability and provide adequate
liquidity in the banking system. Thus, while the stability of the
banking system was paramount during the second half of 2009
and the first half of 2010, this emphasis was moderated when
rising inflationary pressures threatened price stability in the
second
half
of
2010.
To
complement
the
Federal
Government’s efforts at stimulating economic growth, the CBN
provided support to agriculture, small scale industries, power,
aviation and the development of other critical infrastructure.

The Bank continued to use the Monetary Policy Rate (MPR) to
anchor short term interest rates. The major instrument of
monetary policy was open market operations (OMO) in
Treasury Bills complemented by discount window operations
(including CBN standing facilities, repo and reverse repo
transactions) and cash reserve requirement (CRR). Primary
market transactions in government securities, sales/purchases
of CBN bills, and foreign exchange were also used to manage
liquidity in the system.

In the second half of 2010, the Monetary Policy Committee
(MPC) held 3 regular meetings, an interactive retreat and a
Monetary Policy Workshop. The MPR which was maintained at
6.00 per cent since the beginning of the year was adjusted to
6.25 per cent in September and remained at that level for the
rest of the year. Also, the asymmetric interest rate corridor of
standing facilities which was introduced in the first half of the
year was maintained at 200 basis points above the MPR for the
lending facility and 500 basis points below the MPR for the
deposit facility, in July. The corridor was adjusted in September
2010 to 200 basis points above the MPR for lending and 300
basis points below the MPR for the deposit facility.

The major challenge of monetary policy was the persistently
low growth of credit to the private sector in the face of rising
credit to government. Sustained shortage of banking system
liquidity from the first half of 2010 resulted to increase in short
MPC held 3
regular statutory
meetings in the
second half of

...during the
second half of
2010, the threat of
inflation shifted
the stance of
policy...


CBN Monetary Policy Review

term interest rates. This discouraged interbank placements by
DMBs and lending/credit to private sector, prompting the
monetary authorities to de-risk the market by guaranteeing
placements in the interbank market. Consequently, short term
interest rates fell remarkably to historically low levels in the
second half of 2010. In response to anticipated inflationary
pressures towards the end of the year, the regime of monetary
easing was gradually reversed by the Bank in September. In
the end, headline inflation fluctuated to 11.8 per cent at endDecember 2010 from the 13.9 per cent recorded a year earlier.
The combined effect of the monetary and fiscal stimulus
packages, reform of the banking system and favourable
weather conditions for agricultural output contributed to a
robust real GDP growth of 7.85 per cent at the end of the
second half of 2010, up from 7.69 per cent in the first half.

The economic environment in the second half of 2010
presented significant challenges to the attainment of domestic
price stability objective and recovery of the banking system.
The stance of fiscal policy during the period was largely
expansionary.
The
continued
divestment
of
portfolio
investment by foreign investors in the first half negatively
impacted on the capital market. Although the global
economy showed signs of recovery, the demand pressure in
the foreign exchange market which was building up in the first
half intensified in the review period leading to substantial
drawdown of the stock of external reserves. While the
exchange rate depreciated early in the year, it stabilized at
around N150.56/US$ at the end of the year. The stock of
external reserves fell from US$37.40 billion at end-June 2010 to
US$32.34 billion at end-December, 2010.

The task of addressing the problem of illiquidity in some DMBs,
which continued throughout the first half of 2010, was
sustained in the second half. To clean up the DMBs balance
sheets, AMCON which was established in the third quarter of
2010, acquired non-performing loans from 21 DMBs valued at
N2.165 trillion in the last quarter of the year. In exchange, it
issued 3-year zero coupon bonds valued at N1.036 trillion. In
addition, a N500 billion infrastructure development fund
(manufacturing, power and aviation), introduced by the CBN
..major challenge
to monetary policy
was the
persistently low
level of domestic
banking sector
credit...
Short term interest
rates fell
continually as the
credit crunch
became
sustained..
..stance of fiscal
policy was largely
supportive of
monetary
expansion.
AMCON was
created to buy up
the bad debts and
non-performing
loans of the DMBs


CBN Monetary Policy Review

in the first half of 2010, also commenced operations in the
second half of the year.

The overall economic outlook suggested that the current
global recovery from the abating financial and economic
crises would stimulate aggregate demand in the domestic
economy and sustain output growth in 2011. While domestic
economic activity is expected to be bolstered by global
recovery, the debt crisis in the Euro Area poses serious
challenges to economic growth with the possibility of austerity
measures in the affected Euro Area countries, including:
Greece, Spain, Italy and Portugal. The outlook suggests that
the stance of monetary policy in 2011 would largely be nonaccommodating, to forestall the risk of inflation.


.while domestic
economic activity
is expected to be
bolstered by the
global recovery,
the debt crisis in
the Euro Area
poses serious
concerns to
growth in the
European
economies....


CBN Monetary Policy Review

CHAPTER 2
CHAPTER 2
INTERNATIONAL ECONOMIC
DEVELOPMENTS


CBN Monetary Policy Review

CHAPTER 2
INTERNATIONAL ECONOMIC DEVELOPMENTS

2.1
The Global Economy
The global economy, which witnessed low output growth in
the wake of the recent financial and economic crises,
regained momentum in the second half of 2010. High
increases in food and energy prices as well as the debt crises in
the Euro area did not dampen output evenly across the
regions. Thus, while output growth was suppressed in the
industrial countries, the emerging and developing economies
were compensated with higher output which sustained the
tempo of global recovery. The growth in the emerging and
developing countries was driven by high aggregate domestic
demand in the presence of weak external demand.
Driving the global rebound was the extraordinary amount of
liquidity injected into the national economies through
monetary and fiscal stimuli in the heat of the crises. At 5.0 per
cent, growth rate in Sub-Saharan Africa was higher than in
most
regions
except
Developing
Asia
and
Latin
America/Caribbeans, with most of that growth coming from
Nigeria, South Africa and Kenya. Nigeria’s growth was
particularly traceable to high domestic aggregate demand.
Monetary policy was largely expansionary across the regions,
with interest rates down to record lows in most advanced and
emerging market economies, while central banks’ balance
sheets expanded to unprecedented levels in key advanced
economies (Table 2.1). In Nigeria, short term interest rates
dropped to a record low in August 2010 when the interbank
interest rate was 1.26 per cent. The global financial and
economic crises led to large scale divestment of foreign
portfolio investment from the Nigerian Stock Market, leading to
substantial demand pressure in the foreign exchange market
and the resultant reserve drawdown.
The recent growth in global demand and industrial production,
together with weather-related disruptions to supply (like the
flood in some countries) and the emerging political crisis in
... rising food and
energy prices did
not dampen
growth evenly
across regions...
Growth in
emerging and
developing
countries was
high...
Driving growth
was the huge
liquidity injections
into national
economies
During the review
period, monetary
policy was largely
expansionary, and
interest rates were
generally low


CBN Monetary Policy Review

Middle-East and North Africa countries (MENA), led to general
rise in commodity prices during recent months. The rising trend
in commodity prices led to a further upward revision of the
near-term economic outlook for most countries’ terms of trade.
While core inflation remained low in most advanced
economies, the increase in commodity prices resulted in a rise
in headline inflation. Consequently, headline inflation was
expected to pick-up in 2011 across the regions, especially if the
high and rising food and energy prices and large scale natural
disasters continued.

Table 2.1
Monetary Policy Rates of Selected Central Banks
Central
Bank
Current
Rate
Reference
Rate
Date and Rate of
last Change
People’s Bank of
China
5.81%
Reserve
Requirement
Ratio
5.56% (Nov 2010)
Central Bank of
Egypt
8.26%
Overnight
Deposit Rate
8.27% (Jun 2010)
European
Central Bank
1.00%
Overnight
Rate
1.23% (Dec 2009)
Reserve Bank of
India
6.25%
Repo Rate
6.00% (Oct 2010)
Reserve Bank of
South Africa
5.50%
Repurchase
Rate
6.00% (Oct 2010)
Bank of England
0.50%
Base Rate
0.63% (Dec 2009)
Bank of Canada
1.00%
Overnight
Rate
0.75% (Aug 2010)
Bank of Japan
0.10%
Overnight
Call Rate
0.50% (Dec 2007)
Federal Reserve
USA
0.25%
Federal Funds
Rate
1.00% (Dec 2008)
Central Bank of
Nigeria
6.25%
Monetary
Policy Rate
6.25% (Aug 2010)

Source: World Economic Outlook, IMF, BoJ, January 2011
* As at end-December 2010

Higher growth,
weather
disruptions and
emerging MENA
crisis increased
commodity prices


CBN Monetary Policy Review

The Euro area public debt crisis and growth divergences were
of serious concerns across the group of industrial countries and
the rest of the global economy. The disarray in the fiscal
positions of some Euro area countries and in some cases, the
accompanying current account deficits were expected to
negatively impact on international trade and currency
valuation across the world.

GDP growth in both Asia (excluding Japan) and the United
States rose after a slowdown in mid-2010. At end-December
2010, global output growth was estimated at 5.0 per cent and
the IMF projected that this growth trend would be sustained in
2011 and 2012, though with moderations across the regions.
Output growth in the emerging and developing countries as a
group, had been projected to remain robust in 2011. Growth
performance in Sub-Saharan Africa was projected to remain
high (Table 2.2).


Table 2.2
World GDP

Source: World Economic Outlook (WEO), IMF January 2011
Despite these developments, there were differences in the
amount of unused capacity around the world, as most
developed countries continued to operate below their
potentials. Also, unemployment rate remained high, and
output growth in some countries was unlikely to return to the
pre-crisis level, in the near term.


Global
unemployment
remained
generally high
Sovereign debt
crises and poor
current Account
positions in the
Euro area may
negatively impact
trade leading to
currency
valuation
concerns


CBN Monetary Policy Review

In the last two quarters of 2010, bond yields rose significantly in
most major economies to their highest levels in a year. While
interest rates remained generally low, the upward trend in
bond yields, generally reflected the improved economic
performance notably in the United States.


Figure 2.1


Per cent
Global GDP Growth (2008-2010)
World
Advanced Economies
Emerging & Development Economies
Sub-Sahara Africa
Source: World Economic Outlook (WEO), IMF January 2011

Conditions in the major financial markets improved in the last
quarter of 2010, with the notable exception of some Euro area
countries, where concerns about the sustainability of their
public debt exposures had reached a crisis level. This unease
led to an extensive purchase of the sovereign debt of these
countries by the European Central Bank (ECB). The successful
securitization of some public debts and further discussions on
the expansion of a Euro area support facility stabilized the Euro
area financial markets.
The sovereign bonds of the emerging market economies were
marginally affected by the European sovereign debt crisis. The
spreads between yields on emerging markets US dollardenominated sovereign debt and the US Treasury bonds
remained largely unchanged in much of the second half of
2010. Corporate bond issuance in the United States remained
strong while the spreads declined to about the levels recorded
Conditions in the
financial markets
improved
generally except
in the Euro area
where public debt
sustainability
concerns were a
threat


CBN Monetary Policy Review

before the emergence of the Greek sovereign debt crisis in
May 2010.

The improved performance of the global economy and the
renewed risk appetite of financial institutions provided a boost
to most equity markets in the last quarter of 2010. However,
performance among global equity markets, during 2010, as a
whole was mixed. The United States and the emerging Asian
economies recorded a strong equities market recovery while a
decline
in
equity
prices
in
China
was
recorded,
a
development traced to tight monetary policy in that country.
In the Euro area, Japan and Australia, there was little change
in overall equity prices in 2010.

2.2
Regional/Country Specific Developments

2.2.1
Economic Community of West African States
(ECOWAS), Africa and the Middle East
(i)
Economic Community of West African States (ECOWAS)
The countries in the Economic Community of West African
States had limited integration into the global financial markets.
As a result, most ECOWAS countries were less affected by the
effects of the global financial and economic crises unlike
countries with more integrated financial markets. In the second
half of 2010, most ECOWAS countries recorded marginal
growth rates, indicating a slowdown of 1.0 per cent in 2010
and an inflation rate of below 10.0 per cent. Most central
banks in the sub-region adjusted their monetary policy stance
to reflect changes in economic and liquidity conditions once
the risks of second-round effects of the global meltdown had
crystallized. During the crises, most central banks, including the
Central Bank of West Africa (BCEAO) lowered their refinancing
rate and provided government with direct credits and
refinancing guarantees. The low growth performance in
ECOWAS countries in the second half of 2010 however,
moderated by Nigeria’s remarkable growth performance
during the period. The inflation rate of 11.8 per cent for Nigeria
as at December 2010 was however, above the targeted single
digit rate.
..Sovereign bonds
of the emerging
market
economies were
not affected
much by the
European
sovereign debt
crisis.
ECOWAS
countries have
limited integration
to the global
economy..
recorded
marginal growth
as a group...
group inflation
was on the
average under
10.0%


CBN Monetary Policy Review

(ii)
Sub-Saharan Africa
Sub-Sahara African countries experienced appreciable growth
in the second half of 2010 and the trend was projected to
continue in 2011. Overall, output growth was estimated at 5.0
per cent in 2010 and was expected to rise marginally to 5.5 per
cent in 2011. Sound macroeconomic management and high
domestic aggregate demand provided the key to the
resilience of most sub-Sahara African countries during the
global financial crisis. Before the 2007–2009 global shocks, most
Sub-Sahara African countries experienced steady growth, low
inflation, sustainable fiscal balances, rising foreign exchange
reserves, and declining government debt. With the shocks,
countries were able to use fiscal and monetary policies, to
dampen the adverse effects of the sudden shifts in world
trade, prices, and financial flows in the short run.

As a result of the crises, unemployment rose significantly in
countries with strong manufacturing sectors while fiscal
balances deteriorated, particularly in middle-income countries
and oil exporters. While exports remained generally at their
pre-crises levels, credit growth remained subdued with risks
being weighted on the downside. On a region-wide basis,
domestic elections were scheduled in at least 17 countries and
these may slow the pace of reforms.
Oil exporting countries in the region such as Nigeria, Angola,
Gabon and Ghana, stood to benefit from higher oil prices.
Rising energy costs could slow the tempo of growth across the
region and diminish the 2011 growth prospects for many
countries in the sub-region. The problem of high oil prices was
expected to worsen if the crisis in the Middle East and North
Africa (MENA) countries continues or escalates to more
countries in the region. However, falling aggregate demand in
trading partner countries amidst rising oil prices would exert
upward pressure on domestic exchange rates in the oil
exporting countries to appreciate. The high oil earnings in the
absence of fiscal restraint may trigger high fiscal expenditure in
the oil exporting countries leading to higher inflation.


...SSA countries
experienced
high growth
traced to sound
macroeconomic
management
and sustained
increased
aggregate
demand
Countries with
strong
manufacturing
sectors had high
unemployment
rates. Recovery in
the industrial
countries is still
shaky
falling aggregate
demand in
trading partner
countries amidst
rising oil prices
would exert
upward pressure
on domestic
exchange rates in
the oil exporting
countries to
appreciate


CBN Monetary Policy Review

The five largest economies (South Africa, Nigeria, Angola,
Ethiopia, and Kenya) account for two-thirds of Sub-Sahara
Africa’s output and just under half of its population. Of the five,
only South Africa went into recession in 2009. The country had
stronger global trade and financial linkages and was already
experiencing economic downturn before the commencement
of the global crises. Consequently, the economy experienced
a loss of about 1 million jobs. In Nigeria and Kenya, real GDP
growth actually increased from 5.6 and 2.1 per cent in 2009 to
7.85 and 4.1 per cents at end-December 2010, respectively;
whereas in Ethiopia, the marginal fall in output still left growth
at about 7.7 per cent.
(iii)
Middle East and North Africa
The wave of protests which erupted in some Middle East and
North Africa (MENA) countries towards the end of 2010 led to a
chain of events which sent strong signals to the international
community on the implications of the developments for the
international oil market; especially with regards to supply
constraints and higher oil prices. Coming just as the global
economy was recovering from the effects of the unsettling
economic and financial crises, the MENA crisis, which was
largely as a result of rising cost of living and high youth
unemployment was capable of threatening global energy
security. The uncertainties associated with the MENA crisis had
strong
implications
for
global
oil
output
and
growth
expectations. While higher oil prices may imply higher oil
export earnings for countries like Nigeria, such developments
had potential for constraining aggregate demand and growth
prospects in the trading partner countries. Similarly, increased
foreign exchange from oil export earnings could cause an
appreciation in the external value of the naira, requiring a
more careful management of the foreign exchange market to
avoid exchange rate volatility.

2.2.2
China and the Rest of Asia
During the second half of 2010, economic activities in Asia
remained robust, although it moderated towards a more
sustainable pace. In the first half of 2010, economic activity
continued its rebound from the global financial crisis. The pace
of recovery and its composition remained different across the
.. the MENA crisis ,
......., is likely to
impact global
energy security
and prices, much
higher than
previously
.. Asia recorded
appreciable
growth... In some
countries,
monetary policy
was tight although
real interest rates
remained low


CBN Monetary Policy Review

region with the smaller export-dependent economies generally
experiencing more pronounced growth than larger economies
with sizable domestic demand. In particular, there was
moderation in industrial production and export growth
reflecting in part, the maturing of the global and regional
inventory cycle, particularly in IT related products which were
important for production and exports in many Asian
economies.
The
short-term
baseline
outlook
remained
generally positive, with growth expected to settle at high but
more sustainable levels. Growth was likely to remain
particularly strong in the large, domestic-demand-driven
economies of China, India, and Indonesia.

The sluggish recovery in the industrial countries was expected
to support growth in Asia’s exports, although below the very
high rates of 2009 and early 2010. A gradual withdrawal of the
policy stimulus, sustained improvements in labor market
conditions, still accommodative financial conditions were
expected to sustain domestic aggregate demand. Rising
global liquidity, relatively robust growth and low public debt
were expected to fuel capital flows to the region. Reflecting
the slowing of export growth and strong domestic demand,
Asia’s current account surplus was projected to decrease to
about 3 per cent of regional GDP in 2011.

The balance of risk was in the external environment where
underlying sovereign and banking vulnerabilities in advanced
economies remained a significant challenge. Despite Asia’s
strong growth potentials, trade and financial linkages with the
industrial economies suggested that a further deterioration in
global financial conditions and a slowing down of the global
recovery would have serious implications for Asia. Inflationary
pressures were observed in some countries indicating a
compelling need to normalize policy stance across the region.
With
monetary
and
fiscal
policies
being
largely
accommodative, and output gaps closing rapidly, inflation
pressures could intensify, resulting in the risk of pro-cyclical
policies. Overall, in the medium term, sustaining robust growth
in Asia required continued progress with rebalancing growth
toward domestic demand.


CBN Monetary Policy Review

The Chinese economy continued to record strong growth
performance over the rest of Asia, especially in the third
quarter of 2010 with GDP growth estimated at 9.7 per cent.
The trend continued till the end of the year. However, food
prices remained rather high, a phenomenon observed also in
other economies in the Asian region. The thrust of Chinese
monetary policy was to contain the upward trending inflation
rate, which was 3.5 per cent, by December 2010. The Chinese
authorities in the second half of 2010, announced a number of
monetary policy measures to address mounting inflationary
pressures, although monetary conditions appeared to remain
upward trending. Consequently, The People’s Bank of China
raised its policy interest rate by 25 basis points to 5.81 per cent
in late December 2010 and also raised the reserve ratios of
banks twice over the past two months of 2010 (Table 2.1).

2.2.3
The Euro Area

In the euro area, prospects for strong economic recovery were
generally high in the second half of 2010, but with large
divergences
across
countries.
For
example,
economic
activities remained depressed in countries where sovereign
debt concerns had been elevated. The estimate for GDP
growth in the third quarter of 2010 in the United Kingdom for
instance, indicated a fall, although this was partly explained by
poor weather condition.

Economic conditions in Portugal, Italy, Greece and Spain
(PIGS) remained largely constrained by rising sovereign debt
crises and rising domestic unemployment. Inflationary threats
and suppressed aggregate demand were also observed in
some of the countries. With high public debt being above
sustainable levels of GDP, and rising fiscal deficit concerns
mounting, most of the PIGS countries struggled to limit
government spending. Credit conditions remained generally
tight, leading to suppressed output.
Despite concerns about high debt levels in the Euro area, the
German economy continued to drive the region's economic
recovery through the second half of 2010. Until 2010,
Germany's average quarterly GDP growth was 0.29 per cent
In the euro area,
prospects for
strong economic
recovery were
high ........,
Economic
activities
remained
depressed in
countries where
sovereign debt
concerns had
been elevated.


CBN Monetary Policy Review

reaching a historical high of 2.30 per cent in June 2010 after a
record contraction of -3.50 per cent in March 2009.
Accordingly, the German economy grew by 0.7 per cent
between July and September compared with the Euro zone
average of 0.4 per cent. In the fourth quarter, the economy
grew by 0.40 per cent over the previous quarter. German
unemployment, which had been approaching 11.0 per cent in
2005, was below 7.0 per cent at end-December 2010. The
average unemployment rate for the Eurozone as a whole in
October was close to 10.0 per cent.

Consistent with ensuring compliance and soundness of the
financial system, a section of the banking system in Europe was
under close surveillance, while a significant portion of its debt
was scheduled to be refinanced in 2011. There was evidence
of tiering in the Euro area interbank market. The stronger banks
were able to issue instruments relatively easy, while the weaker
ones were required to pay considerably more for funds and, in
some cases, were entirely excluded from market funding.
Market sentiments were generally in favour of monetary policy
tightening by the ECB and the Bank of England in mid-2010.
However, the timing of the tightening was earlier than
previously anticipated, partly because of the less favourable
inflation outlook, particularly in the United Kingdom.

2.2.4
The United States of America
Output growth in the United States, especially in the third
quarter of 2010, was stronger than earlier predicted, with
household consumption showing strong signs of recovery and
major indicators of investment reflecting overall improvement.
Conditions in the labour market, however, improved only
modestly. The fall in the unemployment rate, which peaked in
2009, was partly explained by a decline in labour force
participation. Conditions in the housing market, however,
remained largely weak. Although, monetary policy had been
tightened in several other economies, no increase was
effected for the federal funds rate in 2010.
The US remained Nigeria’s major trading partner, accounting
for over 40.0 per cent of Nigeria’s foreign trade. While
conditions in the US remained promising for sustained recovery
Growth in the
United States...
was stronger than
predicted a few


CBN Monetary Policy Review

and growth, the rising cost of oil could impact negatively on
that growth. Rising US employment implies increased home
remittances for Nigerians resident there and a rebound of the
stock market due to increased foreign portfolio investment
flow.


CBN Monetary Policy Review

CHAPTER 3
CHAPTER 3
MONETARY POLICY


CBN Monetary Policy Review

CHAPTER 3
MONETARY POLICY

3.1
Introduction
The thrust of monetary policy during the second half of 2010
remained that of promoting price and banking system stability,
just as in the first half of the year. The weak growth recovery in
the global economy, which commenced in the last quarter of
2009 through the first three quarters of 2010, strengthened in
the last quarter of the year despite the sovereign debt crisis in
the Euro area. The challenge of monetary management,
therefore, was sustaining the stabilization of the banking
system, moderating inflationary pressure in the economy and
stimulating bank credit growth to the private sector.

3.2
Monetary Policy Measures
The tight liquidity conditions observed in the economy
following the global financial and economic crises (from last
quarter of 2007 through the first half of 2010) moderated during
the second half of 2010. However, the persistently low growth
in bank credit to the private sector emerged as a major
challenge in the conduct of monetary policy. In addition, the
challenge of balancing the inherent conflict between the
objectives of promoting price and financial sector stability as
well
as
stimulating
output
growth became
apparent.
Consequently, the accommodative monetary policy stance,
pursued by the Bank as part of the liquidity enhancing
measures to promote economic growth and financial stability
was reviewed in the fourth quarter of 2010. The mop-up of
excess liquidity in the banking system, which was suspended
throughout 2009 and the first half of 2010, was reintroduced in
the second half to contain rising inflationary pressure (Table
3.1).

3.2.1 Banking System Stability
A significant milestone achieved in the second half of 2010,
towards ensuring the long term stability of the banking system
was the signing into law of the Asset Management Corporation
of Nigeria (AMCON) Act by the President of the Federal
Republic of Nigeria on July 19, 2010. Consequently, the Board
persistently low
level of credit to
the economy
emerged as a
major issue to
contend with.
The thrust of
monetary policy in
the second half of
2010 remained
that of ensuring
price and banking
system stability

...aggressive mop
up which was
suspended .......,
was introduced to
contain
inflationary
pressures in the
second half of
2010.


CBN Monetary Policy Review

of AMCON was inaugurated by the President on August 30,
2010. In order to effectively support AMCON’s activities, the
CBN agreed to place N50 billion annually with the Corporation
over the next ten years. In addition, each of the 24 DMBs
would contribute an amount equivalent to 30 basis points (0.3
per cent) of its total assets as at the date of its audited
financial statement for the immediate preceding year over the
next ten years.

AMCON was established to buy up the non-performing loans
and clean up the balance sheets of the DMBs, in addition to
deepening the financial system, through: the provision of
liquidity to the banks that had liquidity crisis; provision of capital
to banks to shore up their capital base; facilitation of Mergers
and Acquisitions transactions and fostering of strategic
partnerships, including attracting institutional investors, through
increasing access to restructuring/refinancing opportunities for
borrowers. The Asset Management Corporation of Nigeria
(AMCON) commenced operations in the last quarter of 2010.
In December 2010, AMCON purchased the non-performing
loans of 21 DMBs valued at N2.165 trillion and issued 3-year
zero coupon bonds valued at N1.036 trillion.


A significant
milestone in the
2nd half of the
year ......was the
signing into law of
the AMCON Act
by the


CBN Monetary Policy Review

Box 3.1
THE ASSET MANAGEMENT CORPORATION OF NIGERIA
(AMCON)
The Asset Management Corporation of Nigeria was jointly
established by the Central Bank of Nigeria (CBN) and Federal
Ministry of Finance (FMF Inc.) as a distress resolution vehicle to
address the challenge of the toxic assets in the banking
industry. The Act, establishing the Corporation, was passed
into law by the National Assembly during the first half of 2010,
while the President gave his assent on July 19, 2010. The
authorized share capital of the Corporation is N10.0 billion,
which was fully subscribed to by the Federal Government and
held in trust by the Central Bank of Nigeria and Federal Ministry
of Finance (Inc.) in equal proportion of 50.0 per cent.

The objects of the Corporation include: assisting eligible
financial institutions to efficiently dispose of eligible bank assets;
managing and disposing of eligible financial assets acquired
by the Corporation; and obtaining the best achievable
financial returns on eligible bank assets or other assets
acquired by it pursuant to the provisions of the Act.

AMCON commenced operations in December 2010 with the
issuance of consideration bonds (subsequently, tradeble
bonds would be issued) worth N1,036.3 billion of which N740
billion was earmarked for purchase of the non-performing
loans in five commercial banks. The breakdown is as follows:
Wema Bank N15.2 billion; Intercontinental Bank N146.0 billion;
Bank PHB N140.0 billion; Oceanic Bank N200.0 billion, Union
Bank N239.0 billion and others N295.8 billion. The rescued
banks were expected to enjoy two sets of funds injection: one
was to buy up their non-performing loans and the other, to
cater for their capital adequacy.

In all, the Corporation has signed a debt purchase agreement
with 21 banks in the country, in which over N2,000.0 billion
worth of non-performing loans would be purchased before the
end of the first quarter of 2011.


CBN Monetary Policy Review

Another major policy introduced in the review period was the
implementation of a new banking model to replace Universal
Banking, effective November 15, 2010. The modification
became necessary as the DMBs had spread their operations to
areas outside the supervisory purview of the CBN and
engaged in widespread expansion into a broad range of
financial services and other activities, which unduly exposed
their balance sheets to risks. These activities also increased
their propensity to put depositor funds at risk, thereby
heightening financial system risk.

Under the new banking model, banks were licensed as either
commercial banks, merchant banks or specialized banks. The
import of the new model was that banks were only permitted
to operate in core banking activities as defined by Section 66
of the Banks and Other Financial Institutions Act (BOFIA), 2007.
Commercial banks were only permitted to carry on banking
business on a regional, national or international basis, in
accordance with the rules, regulations and guidelines
governing the category of their license.

On the other hand, specialized banks such as non-interest
banks were authorized to carry on banking business on a
regional or national basis in accordance with the terms and
conditions of their license or as may be modified by the CBN
from time to time. Banks wishing to continue with activities
outside core banking were required to divest the businesses to
holding companies that would be licensed by the CBN in the
category of other financial institutions. The banks were required
to submit plans for ensuring compliance with the new
regulations, not later than ninety days from October 10, 2010.

To strengthen the corporate governance structure in the
banking system, the CBN enforced the 10-year maximum
tenure stipulated for bank chief executives. Consequently, all
bank Chief Executive Officers (CEOs) who had served their
various banks for 10 years or more by July 31, 2010 were asked
to leave.

The CBN extended its guarantee of all foreign credit lines,
interbank and pension funds placements with banks, which
...another giant
stride ......was the
implementation of
the modified
Universal Banking
Model,

...the CBN
enforced the 10year maximum
tenure stipulated
for bank chief
executives


CBN Monetary Policy Review

commenced in July 2009 – June 30th, 2011. The guarantee
provided for the repayment of deposit money bank’s
exposures to foreign banks and inter-bank takings, in the event
of a sudden closure of any DMB. The CBN also pledged to
continue to take necessary steps to protect creditors in line
with its commitment to the safety and soundness of the
banking system.

The banking system had received over US$1,800 million foreign
direct investments over the last one year from major financial
institutions like the International Finance Corporation (IFC) and
the African Development Bank (AfDB). However, the funds
were largely concentrated in a few big banks, thus leaving a
majority of the banks without the needed foreign capital
investment.

3.2.2
Price Stability
The major challenge to monetary policy in the second half of
2010 was moderating the double digit, year-on-year headline
inflation rate, which stood at 14.1 per cent at the end of the
first half, and 11.8 per cent at end-December 2010. To this
end, the CBN continued to use the Monetary Policy Rate
(MPR) to signal the desired direction of interest rate changes in
the economy, while the primary instrument of monetary policy
remained
Treasury
Bills
auction
through
Open
Market
Operations.

3.3
Activities of the Monetary Policy Committee (MPC)
The MPC held 3 regular meetings, an interactive retreat and a
Monetary Policy Workshop in the second half of 2010. The
meetings of the Committee and the various fora reviewed
trends in domestic and global economic conditions and the
challenges facing monetary policy in an ever changing
financial environment.

3.3.1 Decisions of the MPC
At its July 5 and 6, 2010 meeting, the MPC noted that the
unfolding sovereign debt crisis in the Euro Area posed a threat
to the steady recovery of the global economy, especially its
contagion effect on global commodity prices and implications
for fiscal sustainability and stability. The Committee noted that
...the major
challenge to price
stability in 2010
was moderating
the double digit,
year-on-year
headline
inflation....


CBN Monetary Policy Review

the growth drivers of the domestic economy remained robust
enough to mitigate the likely inflationary risks arising from the
rebound of international commodity prices (Table 3.1).

Table 3.1
Decisions of the Monetary Policy Committee
(July - December 2010)


Source: Central Bank of Nigeria

In the light of the above, the MPC retained the subsisting easy
monetary policy stance by keeping the MPR at 6.0 per cent
and its asymmetric corridor at 200 basis points above and 500
basis points below the policy rate, for lending and deposits,
respectively.

At the September 21 and 22 meeting, the MPC observed the
slack in global economic growth and recovery underlined by
the third quarter decline in the US GDP, incipient property
bubble following massive Chinese fiscal stimuli and risk aversion
in the Euro area financial markets, arising from sovereign debt
concerns.
The
Committee,
however,
observed
with
satisfaction,
the
sustained
stability
of
domestic
macroeconomic variables but cautioned on the likely
inflationary impact of the proposed minimum wage policy,
spending towards the 2011 general elections, as well as the


CBN Monetary Policy Review

anticipated cleaning up of the balance sheets of the rescued
deposit money banks by AMCON.

In order to address the concerns identified, the MPC reactivated the Open Market Operations to mop-up excess
liquidity, raised the MPR from 6.0 to 6.25 per cent and adjusted
the asymmetric corridor to 200 basis points above and 300
basis points below the policy rate.

The last meeting of the MPC in 2010 was held on November 22
and
23.
The
Committee
considered
the
background
economic report and expressed concern over the reported
huge US trade deficit that clogged the pace of global
economic recovery. The MPC emphasised the urgent need for
fiscal retrenchment and structural reforms to remove supplyside bottlenecks, as part of the strategy to subdue rising
inflationary pressure in the domestic economy.

In the light of the foregoing, the MPC retained the MPR at 6.25
per cent; adjusted the asymmetric corridor to a symmetric
corridor of plus or minus 200 basis points; retained the policy
stance of maintaining a stable exchange rate; and reaffirmed
its commitment to leverage monetary policy to support existing
fiscal mechanisms to bolster domestic output growth (Table
3.2).


... at its July 5th
and 6th meeting,
.......the MPC
retained the
subsisting
monetary policy
decisions by
keeping the MPR


CBN Monetary Policy Review

Table 3.2
Changes in CBN Key Interest Rates
Source: Central Bank of Nigeria

3.3.2 MPC Retreat and Monetary Policy Workshop
The MPC held a Retreat in the second half of 2010 to review
the conduct of monetary policy for enhanced efficiency and
effectiveness, as well as discuss issues relating to its design and
implementation. The Retreat identified the obstacles to
effective communication of monetary policy and was
attended by all members of the Monetary Policy Committee,
Departmental Directors and Deputy Directors in the Economic
Policy Directorate of the Bank. The Workshop provided a
platform for generating ideas to assist the Bank in improving
the design, implementation and communication of monetary
policy.

3.4
Liquidity Conditions and Management
Banking system liquidity conditions in the second half of 2010
improved significantly compared with the situation in the first
half which was characterized by persistently volatile and rising
short term interest rates, low DMB balances with the CBN, low
level of other reserves of the banking system and increased
activity at the CBN lending facility window. Consequently, the
Bank introduced series of quantitative easing measures to
support existing policy measures. The measures included: the

MPR
(%)
Standing Facility
(%)
CRR
(%)
Liquidity
Ratio
(%)


SDF
SLF


MPC
Communiqué
No.71


MPC
Communiqué
No.72


MPC
Communiqué
No.73


The major tool of
liquidity
management in
the second half of
2010 remained
Open Market
Operations...

... Economic
Policy Directorate
organized a
retreat for
members of the
MPC to generate
new ideas
towards improving
the conduct of
monetary policy


CBN Monetary Policy Review

funding of the N200 billion Commercial Agricultural Credit
Scheme (CACS), N200 billion SME Credit Guarantee Scheme
(SMECGS), N620 billion bailout funds to troubled banks, N500
billion Asset Purchase Facility Fund (APFF), and the N500 billion
Bank of Industry (BOI) debentures in support of investment in
power, aviation and manufacturing (a N200 billion SME
Refinancing and Restructuring Facility was established as part
of the N500 billion BOI facility), (Table 3.3).

Table 3.3
CBN Liquidity Enhancing Initiatives
Name of Scheme
Size of Intervention
Draw down
as at Dec, 2010
Agricultural Credit
Guarantee Scheme Fund
(ACGSF)
75.0% guarantee of
loans granted by
DMBs for agricultural
purposes
N 7.74 billion
Agricultural Credit Support
Scheme (ACSS)

N50.0 billion
N19.43bilion
Commercial Agricultural
Credit Scheme (CACS)

N200.0 billion
N96.81 billion
Refinancing/Restructuring
Small and Medium
Enterprises (SME)
Manufacturing Fund

N200.0 billion
N197.59 billion
Small and Medium
Enterprises (SME) Credit
Guarantee Scheme
(SMECGS)
N200.0 billion
N107.50 million
Power and Aviation
Infrastructure Fund (PAIF)

N300.0 billion
NIL
The Nigerian IncentiveBased Risk Sharing System
for Agricultural Lending
(NIRSAL)
US$500.0 million
NIL
Source: Central Bank of Nigeria


CBN Monetary Policy Review

The major tool of liquidity management in the second half of
2010 remained Treasury Bills auction through Open Market
Operations, complemented by Discount Window Operations
and Statutory Reserve Requirements. Total subscription to
Nigerian Treasury Bills (NTBs) in the primary market during the
second half of 2010 stood at N1,269.49 billion compared with
N734.46 billion in the first half of 2010 and N775.26 billion in the
corresponding period of 2009, representing an increase of
72.85 per cent and 63.75 per cent, respectively (Table 3.4).

Table 3.4
Nigerian Treasury Bills Auction (N 'million)
(January 2009-December 2010)
Date

% Change
Jan
115,466.62
149,834.17

Feb
80,106.56
100,217.01

Mar
80,000.00
65,000.00

Apr
101,356.24
160,494.88

May
120,217.01
100,217.01

Jun
120,000.00
158,700.00

1st Half
617,146.43
734,463.07
19.01
Jul
125,356.17
250,912.17

Aug
105,217.01
141,157.45

Sep
91,648.64
206,567.24

Oct
170,260.38
167,012.31

Nov
120,217.01
205,930.87

Dec
162,557.83
297,909.82

2nd Half
775,257.04
1,269,489.86
72.85
Total
1,392,403.47
2,003,952.93
43.92

Source: Central Bank of Nigeria

Other complementary liquidity management tools were also
used to maintain the improved liquidity condition in the
banking system. Consequently, the MPR, which was 6.0 per
cent in the first half of 2010, was raised to 6.25 per cent in the
second half of 2010 to contain inflationary pressures and the
effect of anticipated high liquidity injections into the system
arising from increased spending in the run up to the 2011
general elections and the AMCON activities.
For most part of
the 1st half of 2010,
there was low
level of activities
at the CBN
lending window
compared with
the second half of
the year.


CBN Monetary Policy Review

3.5
Standing Lending/ Deposit Facilities
As liquidity conditions in the banking system improved, short
term interest rates crashed but banks still adopted a cautious
approach to lending. Generally, activities at the CBN lending
window increased compared with the level in the first half.
Although activities at the CBN deposit window recorded a
decline in the second half of the year, but in terms of overall
annual performance, there was a considerable improvement
over the level of activities in 2009. Total transactions declined
from N35.29 billion to N17.88 billion in the second half,
representing a decrease of 49.33 per cent. However, the level
of activities in the second half represents an increase of 107.2
per cent over the level of activities in the corresponding period
of 2009. In terms of overall annual performance, total amount
of transactions at N53.17 billion in 2010 represented an
increase of 516.22 per cent over total amount of transaction in
2009 (Table 3.5).

Reserve money remained the operating target of monetary
policy and the monetary policy rate (MPR) the nominal
anchor. The MPR operated within an asymmetric corridor, the
Standing Lending Facility (SLF) and Standing Deposit Facility
(SDF). The SLF was 200 basis points above the MPR and
represented the upper corridor, while the SDF was 500 basis
points below the MPR and was the lower corridor. The intention
of the wide asymmetric corridor was to encourage the DMBs
to lend amongst themselves

Since influencing liquidity conditions to realize the operating
target is an important activity of the Bank, access to the
Standing Lending Facility (SLF) of the Bank provided avenue for
smoothening liquidity conditions during the second half of 2010
(Table 3.5). For most part of the second half of 2010, it was
apparent that although the system was awash with liquidity,
the DMBs cautiously approached lending both between
themselves and the private sector, but rather preferred to
deposit their unused funds with the CBN instead of lending or
trading in the money market. This trend was further
strengthened by the continued existence of non-performing
loans on the books of some banks, which remained until


CBN Monetary Policy Review

December 2010, when the AMCON began to buy up those
category of non-performing loans of the banking system.

Consequently, the volume of transactions at the CBN SLF in the
second half of 2010 stood at N3,340.6 billion compared with
N428.2 billion in the first half and N13,488.5 billion in the
corresponding period of 2009, representing an increase of
680.2 per cent and a decrease of 75.2 per cent over the levels
in the first half and corresponding period of 2009, respectively.

Table 3.5
CBN Standing Lending Facility (N'billion)
(January 2009-December 2010)

Date

% Change
Jan
846.18
135.50

Feb
3,457.57
-

Mar
4,592.69
-

Apr
3,875.48
-

May
2,581.43
270.97

Jun
3,691.75
21.70

1st Half
19,045.11
428.17
(97.75)
Jul
4,675.02
55.76

Aug
3,733.78
0.00

Sep
2,287.90
73.10

Oct
1,231.61
983.44

Nov
537.58
1,374.80

Dec
1,022.60
853.50

2nd Half
13,488.49
3,340.60
680.20
Total
32,533.60
3,768.77
(88.42)

Source: Central Bank of Nigeria


CBN Monetary Policy Review

Table 3.6
CBN Standing Deposit Facility (N'billion)
(January 2009-December 2010)

Date

% Change
Jan
-
5,622.63

Feb
-
6,101.90

Mar
-
9,413.45

Apr
-
6,853.06

May
-
1,735.45

Jun
-
5,563.64

1st Half
-
35,290.13
-
Jul
162.00
4,055.52

Aug
1,453.38
6,849.71

Sep
1,058.75
4,224.80

Oct
3,106.30
1,117.30

Nov
1,050.59
443.78

Dec
1,797.92
1,191.78

2nd Half
8,628.94
17,882.89
(49.33)
Total
8,628.94
53,173.02
516.22

Source: Central Bank of Nigeria

3.6
Performance of the Monetary Aggregates
The growth in broad money stock in the second half of 2010
remained below the indicative target. In absolute terms, broad
money grew by N643.22 billion or 5.93 per cent compared with
N78.12 billion or 0.73 per cent in the first half of the year. The
rates of monetary expansion in both periods, however, fell
substantially below the programme targets. Moreover, the
reserve money target remained largely unmet throughout 2010
(Table 3.7 and Figure 3.1).


...performance of
broad money
was fairly better
in the second half
of the year
compared with
its level in the first
half of 2010


CBN Monetary Policy Review

Table 3.7
Monetary Aggregates


Source: Central Bank of Nigeria


M2 (%)
M1 (%)
RM (%)
M2 (%)
M1 (%)
RM (%)

Per cent
Figure 3.1
The Performance of M1, M2 and RM (2009 and 2010)
Target
Actual
Source: Central Bank of Nigeria


CBN Monetary Policy Review

3.7
Movement in Broad and Narrow Money
The overall growth of M2 for the whole year was 6.70 per cent,
compared with the 29.25 per cent target for the year.
Monetary expansion in the period under review and indeed
the whole year 2010, showed considerable moderation,
compared with the 17.50 per cent increase recorded in 2009
(Table 3.6 and Figure 3.2).


M2 (%)
M1 (%)
RM (%)
per cent
Figure 3.2
Performance of M1,M2 and RM in the First and Second Half of 2010
Change in 2010:H1
Change in 2010:H2

Source: Central Bank of Nigeria

Similarly, narrow money (M1) grew by N616.47 billion during the
review period compared with a reduction of N85.88 billion in
the first half. This translated to a growth of 12.53 per cent in the
second half as against the contraction of 1.72 per cent in the
first half. Cumulatively, narrow money grew by 10.60 per cent
compared with the programme target of 22.36 per cent for
the year and the actual growth of 3.02 per cent in 2009 (Figure
3.3).


...increased
growth in broad
money.....notwiths
tanding, the
overall growth for
the whole year at
6.70 per cent
.......was
considerably
lower than the
17.46 per cent
recorded in fiscal

CBN Monetary Policy Review


N' billion
Figure 3.3
Reserve Money Benchmark & Actual (Dec. 2009 - Dec. 2010)
Benchmark
Actual

Source: Central Bank of Nigeria

3.8
Reserve Money
Following the trend in the broad and narrow monetary
aggregates, reserve money performed better during the
review period, compared with the first half of 2010. Reserve
money increased by N268.80 billion or 17.51 per cent in the
second half, in contrast to the fall of N118.75 billion or 7.18 per
cent in the first half of 2010. In fiscal 2010, reserve money grew
by 9.07 per cent against the indicative benchmark of 34.98 per
cent (Figure 3.4).


Jul-10
Aug-10
Sep-10
Oct-10
Nov-10
Dec-10
N' billion
Figure 3.4
Reserve Money Benchmark & Actual (Jul. - Dec. 2010)
Benchmark
Actual
Source: Central Bank of Nigeria


reserve money
performed better
in the second half
of 2010 than in the
first half of the
year


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3.8.1 Aggregate Credit to the Domestic Economy
In the second half of 2010, aggregate bank credit to the
domestic economy increased by N350.03 billion or 4.06 per
cent to N8,962.97 billion, compared with the 8.97 per cent
growth recorded in the first half. The growth in bank credit
considerably moderated to 13.40 per cent in 2010, from the
59.61 per cent, recorded in 2009. The realized growth rate fell
substantially below the 51.43 per cent policy prescribed target
for the year. The moderation was attributable, largely to the
sharp fall in claims on the private sector, as bank credit to
Government increased.


3.8.2 Credit to the Private Sector
Credit to the private sector fell by N399.11 billion or 3.95 per
cent in the second half of 2010, compared with the decline of
N103.26 billion or 1.01 per cent in the first half. In fiscal 2010,
bank credit to the private sector declined by 4.10 per cent in
contrast to the benchmark growth of 31.54 per cent, and the
26.63 per cent increase recorded in 2009. Overall, low private
sector credit was influenced by the liquidity conditions in some
of the banks and the general cautious approach to lending in
the banking system.

3.8.3 Credit to Government
Bank credit to government witnessed a considerable growth in
the second half of 2010, recording a 50.28 per cent increase
compared with the 35.28 per cent rise in the first half. In fiscal
2010, credit to government increased by 64.20 per cent,
compared with the 25.10 per cent, targeted for the year and
the 25.92 per cent increase realized in 2009. The growth in
credit reflected Deposit Money Banks’ subscription of FGN
bonds. This notwithstanding, government remained a net
creditor to the system during the period. (Figure 3.5 and 3.6).

Credit to the
private sector
reduced by
N399.11
billion...this
translates to a
negative growth
of 3.95 per cent in
the second half


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NDC
Cg
Cp
NDC
Cg
Cp

Per cent
Figure 3.5
The performance of Credit (NDC, Cg,CP) 2009 and 2010
Target
Actual

Source: Central Bank of Nigeria


NDC
Cg
Cp
Per cent
Figure 3.6
Performance of Credit (NDC, Cg,Cp )in the First and Second Half of 2010
Change in 2010:H1
Change in 2010:H2


Source: Central Bank of Nigeria

3.8.4 Net Foreign Assets
In the period under review, Net Foreign Assets (NFA) of the
banking system fell by N181.12 billion or 2.79 per cent. The
decline during the period was modest, compared with the N1,
108.57 billion or 14.59 per cent recorded in the first half. The
moderation in the fall in net foreign assets was partly due to
improvements in world oil prices and crude oil output. In fiscal
2010, NFA declined by N1,289.69 billion or 16.98 per cent
compared with the reduction of 11.19 per cent in 2009.

......the suboptimal
performance of
M1 and M2 during
the period was
traceable to the
underperformanc
e in credit to the
private sector and
NFA.


CBN Monetary Policy Review

The fall in net foreign assets exerted a moderating effect on
monetary expansion during the period under review. Similarly,
the fall in bank credit to the private sector had a
contractionary
effect on
money
supply
but
this
was
substantially offset by the expansionary effect of the growth in
bank credit to government.


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CHAPTER 4
CHAPTER 4
DOMESTIC FINANCIAL
MARKETS


CBN Monetary Policy Review

CHAPTER 4
DOMESTIC FINANCIAL MARKETS

4.1
Introduction
Activities in the financial markets during the second half of
2010 were influenced, largely, by the fallout of the global
financial and economic crises in the preceding one and half
years. In particular, the money market stabilized in the review
period as a result of the extension of the CBN guarantee of
interbank transactions in January and May 2010. The May 2010
extension of the interbank guarantee was expected to remain
till June 2011. The growth of the evolving domestic commodity
and derivatives markets was constrained by the poor
performance of the stock market, which remained bearish.

The impact of the liquidity crunch in the global financial system
was disproportionally distributed across regions. Its effect on
the Nigerian financial system resulted in sustained bearish trend
in the stock market. The CBN intervened boldly with far
reaching liquidity measures designed to improve the tight
liquidity conditions in the system.


One of the major challenges to monetary policy in the third
and fourth quarters of 2010 was the need to facilitate credit
flow to the domestic economy. Thus, the Bank sustained
policies, such as promoting good corporate governance,
enhancing liquidity conditions in the banking system and
improving access to bank credit, pursued since 2009, through
the second half of 2010. Accordingly, key areas of attention
included coordinated regulation of the financial system,
capacity building by the regulatory authorities; fast-tracking
the implementation of risk-based, consolidated and crossborder supervision; and improving governance structures and
practices with a view to bolstering confidence in the system.

Increased political activity in the third and fourth quarters of
2010, preparatory to the 2011 general elections and escalating
global food and energy prices, heightened inflationary
pressures, leading to a review of the accommodative
monetary policy stance pursued since 2009. In line with these
... the DMBs still
maintained a
cautious
approach to
lending to the
private sector.


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developments, the MPC in September 2010 raised the MPR by
25 basis points to 6.25 per cent. The MPR remained at this level
till the end of the year.

4.2
The Money Market
The money market remained the most active segment of
Nigeria’s financial markets. The main instrument in the money
market was the Nigerian Treasury Bills (NTBs). Other instruments
were Discount Window (DW) operations, Repurchase (repo)
transactions, Reverse repo transactions, Pledges and Open
Buy Back.

4.2.1
Developments in Short-Term Interest Rates
The containment and stabilization of the upward trending and
volatile short-term money market interest rates were the
challenges facing monetary management in the first half of
2010. The major challenge was the need to address the
lingering effects of the global financial crises and manage
short term interest rates to levels that would allow for market
competitiveness. Consequently, monetary policy actions and
signals were designed to influence short-term interbank interest
rates. The guaranteeing of interbank transactions by the CBN
partly eased the pressure in the money market during the
second half of 2010.

Following the liquidity enhancing measures, short term interest
rates crashed to record low levels in the third quarter of 2010
while lending rates remained relatively high, due to high cost
of funds. The CBN encouraged the banks to share facilities to
bring down the cost of operations so that the lending rates
could be brought down to efficient economic levels.

...containment
and stabilization
of the upward
trending volatile
short-term money
market interest
rates was a major
challenge to
monetary policy
in the first half of

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Table 4.1
Weighted Average Money Market Interest Rates (%)
(July 2009 – December 2010)
Month
Monetary
Policy
Rate
Call
Rate
OpenBuy-Back
NIBOR
7-Day
NIBOR
30-Day
Jul-09

Aug-09

Sep-09

Oct-09

Nov-09

Dec-09

Jan-10

Feb-10

Mar-10

Apr-10

May-10

Jun-10

Jul-10

Aug-10

Sep-10

Oct-10

Nov-10

Dec-10


Source: Central Bank of Nigeria

(i)
Interbank Interest Rate
Following signs of inflation resurgence, the monetary authorities
took steps to reverse the regime of monetary easing and
embarked on monetary tightening. Towards this end, the MPR
was raised by 25 basis points to 6.25 per cent in September
2010. Consequently, the weighted average interbank call rate
which was 2.73 per cent at the end of the first half 2010 rose to
8.03 per cent at the end of the second half (Figure 4.1).


CBN Monetary Policy Review


Per cent
Figure 4.1
Weighted Average Money Market Rates (Dec. 2009 - Dec. 2010)
MPR
Interbank
OBB

Source: Central Bank of Nigeria

(ii) Open Buy-back Rate
The average weighted open buy-back (OBB) interest rate,
which was 1.80 per cent at the end of the first half of 2010
crashed to a historical low of 1.2 per cent in August 2010
before rising to 7.48 per cent in October, 2010. At 6.93 per
cent by end-December 2010, the upward trend in short term
interest rates had been re-established despite the existing CBN
guarantee (Figure 4.1). The downward trending OBB rate in
August began an upward movement despite the subsisting
CBN guarantee when in September 2010 the Bank increased
the MPR to address inflationary concerns.

Other money market interest rates, such as the Nigeria
Interbank Offered Rate (NIBOR) for 7-day and 30-day tenors,
moved in tandem with the interbank and OBB interest rates in
the second half of 2010 (Figure 4.2). The 7-day and 30-day
tenors for Nigeria Interbank Offered Rate (NIBOR), which stood
at 3.35 and 5.71 per cent at end-June 2010, moderated to 2.05
per cent and 4.66 per cent, respectively, by end- August, 2010,
but closed at 9.31 per cent and 11.50 per cent at endDecember, 2010 (Figure 4.2). There were no transactions under
the NIBOR because it remained a reference rate as in other
jurisdictions.


...average
weighted OBB rate
which was 5. 82
per cent at the
end of the first half
of 2010 crashed to
a historical low of
1.1 per cent in
August 2010
... Other money
market interest
rates ...moved in
tandem with the
interbank and
OBB interest rates
throughout the
second half of

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Overall, while the short term interest rates started an upward
trend by September, the DMBs maintained a cautious
approach to lending such that the low interbank rates did not
translate to low lending rates nor in higher credit to the real
sector. Indeed, lending rates remained
relatively high
throughout the review period despite these developments.
The underlying basis for the upward trending short term interest
rates was the more stringent regulatory framework in which risk
management principles were strongly embedded.


Per cent
Figure 4.2
MPR, NIBOR 7-Day and NIBOR 30 Day Rates (Dec. 2009 - Dec. 2010)
MPR
NIBOR 7-Day
NIBOR 30-Day

Source: Central Bank of Nigeria

4.3
Capital Market
Improved liquidity conditions in the banking system, especially
at the beginning of the second half of 2010, positively
impacted on activities in the capital market. The adjustment in
the MPR affected the prices of equities and bonds traded in
the capital market. Thus, developments in the banking system
during the second half of 2010 had substantial impact on
activities in the capital market.

4.3.1
Equities Market
Trading activities on the floor of the Nigerian Stock Exchange
(NSE) in the second half of 2010 was largely bearish, relative to
the first half of the year and the corresponding period of 2009.
Overall, the All-Share Index (ASI) declined by 2.4 per cent to
24,770.52 at end-December, 2010, from 25,384.14 at end-June,
compared with the 21.9 per cent increase in the first half of the


CBN Monetary Policy Review

year. On a year-on-year basis, however, it increased by 18.9
per cent over the level at end-December, 2009 (Figure 4.3).
Market Capitalization (MC) increased by 28.2 per cent to N7.91
trillion at end-December, 2010 from N6.17 trillion at end-June,
compared with the increase of 23.9 per cent in the first half of
the year and 58.5 per cent, over the end-December, 2009
level (Table 4.2). The rise in market capitalization resulted
mainly from new listings and price appreciation of quoted
equities.

Table 4.2
NSE All Share Index (ASI) and Market Capitalization (MC)
(December 2009 – December 2010)

Date
All Share Index (ASI)
Market Capitalization
(N’ Trillion)*
Dec-09
20,827.17
4.99
Jan-10
22,594.90
5.44
Feb-10
22,985.00
5.53
Mar-10
25,966.25
6.28
Apr-10
26,453.20
6.39
May-10
26,183.21
6.36
Jun-10
25,384.14
6.17
Jul-10
25,844.18
6.32
Aug-10
24,268.24
5.94
Sep-10
23,050.59
5.65
Oct-10
25,042.16
7.98
Nov-10
24,764.65
7.91
Dec-10
24,770.52
7.91

Source: Central Bank of Nigeria

*Note: Market Capitalization reported in Table 4.2 is for the
equities market alone and does not include other securities
listed on the Nigerian Stock Exchange

The total market capitalisation (equities and securities) listed on
the NSE increased by 41.10 per cent from N7.03 trillion in
... Trading
activities on the
floor of the NSE in
the second half of
2010 was largely
bullish, relative to
the 1st half


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December 2009 to N9.92 trillion in December 2010. The rise in
market capitalization resulted mainly from listings of 7 new
equities and State Government bonds coupled with price
appreciation.


N' Trillion
Index
Figure 4.3
Nigerian Stock Exchange ASI and MC (Dec. 2009 - Dec. 2010)
All Share Index (ASI)
Market Capitalization (N’ Trillion)

Source: Central Bank of Nigeria

The general increase in activities on the stock exchange was
apparently traceable to technical correction in stock prices
from overvaluations associated with the boom era. In addition,
policy initiatives such as the new code of corporate
governance for quoted companies which came into effect in
the first half of 2010, sustained the survival of the stock market
during the period. Also, the commencement of operations by
AMCON and the change in top management staff in both the
Nigerian Stock Exchange and three DMBs, enhanced investor
confidence in the market and the rebound of activities.

4.3.2
Sectoral Contribution to Market Capitalization
Banking sector continued to dominate activities on the floor of
the Nigerian Stock Exchange during the review period. The
sector’s share of the overall market capitalization was 34 per
cent as at end-December, 2010, down from 38.0 and 45 per
cent at end-June, 2010 and end-December of 2009,
respectively. The drop in the dominance of banking sector
shares is attributable to portfolio switching, especially given
that the sector was more severely affected during the burst
era. The share of all other sectors dropped, except that of
Building Materials, whose percentage share rose from 6.0 to
26.0 per cent, from their levels at the end of December, 2009.


improved
performance of
the market was
attributable to the
new code of
corporate
governance for
quoted
companies


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The exceptional performance of the Building Materials subsector was attributable to the listing of 15.5 billion shares of
Dangote Cement at N135 per share, on the floor of the
Nigerian Stock Exchange in October, 2010 (Figures 4.4, 4.5 and
4.6).

Breweries
12%
Banking
45%
Foods Bev. and
Tobacco
12%
Conglomerates
5%
Insurance
4%
Petroleum
Marketing
5%
Foreign Listing
3%
Building
Materials
6%
Other Sectors
8%
Figure 4.4
NSE Market Capitalisation by Sector as at endDecember, 2009
Source: Nigerian Stock Exchange


CBN Monetary Policy Review

Source: Nigerian Stock Exchange


Breweries
11%
Banking
34%
Foods Bev. and
Tobacco
11%
Conglomerates
4%
Insurance
2%
Petroleum
Marketing
4%
Foreign Listing
3%
Building Materials
26%
Other Sectors
5%
Figure 4.6
NSE Market Capitalisation by Sector as at EndDecember, 2010

Source: Nigerian Stock Exchange


Breweries
12%
Banking
38%
Foods Bev. and
Tobacco
13%
Conglomerates
4%
Insurance
3%
Petroleum
Marketing
6%
Foreign Listing
2%
Building
Materials
6%
Other Sectors
16%
Figure 4.5
NSE Market Capitalization by Sector as at endJune, 2010


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4.4
Market Turnover
4.4.1
Equities
In the second half of 2010, the stock market recorded a
turnover of 38.550 billion shares valued at N360,600.0 million, in
contrast to a total of 54.785 billion shares valued at N436,951
million in the first half. The value and volume of stocks traded
declined by 17.47 and 29.63 per cent, respectively, over the
first half of 2010. Overall, market turnover in the Nigerian Stock
Exchange (NSE) closed the year at 93.335 billion shares valued
at N797,551.0 million (or 3.22 per cent of GDP). While the value
of stocks traded showed an increase of 16.31 per cent, the
volume dropped by 9.25 per cent from the 102.85 billion shares
valued at N685,720.0 million (2.9 per cent of GDP) recorded in
2009. Average daily transactions dropped from 414.73 million
shares valued at N2,800.0 million traded in 2009 to 377.9 million
shares valued at N3,200.0 million in 2010. The bulk of the
transactions were in equities, which accounted for N797,540.0
million or 99.99 per cent of the market turnover compared with
N685,300.0 million or 99.94 per cent recorded in 2009. The
dominance of equity trading on the NSE was due to the
underdeveloped nature of the bonds market.

4.4.2
Government Debt Instruments
Trading in Federal Government of Nigeria (FGN) bonds in the
Over-the-Counter (OTC) or secondary market was generally
sluggish in the second half of 2010. Thus, a turnover of 5.6
billion units worth N5, 636.4 billion in 48,682 deals was recorded,
in contrast to the 8.2 billion units worth N9,703.6 billion in
88,398.0 deals recorded in the first half. However, a turnover of
13.8 billion units valued at N15,340.0 billion in 137,080 deals was
recorded in the Over-the-Counter (OTC) market for FGN bonds
in 2010, as against 17.1 billion units valued at N10,440.0 million
in 78,248 deals in 2009.

Transactions in State Government bonds were minimal,
accounting for only 13,000 units, valued at N141,500.0 million in
2010. On the other hand, trading in Industrial Bonds and
Preference Stocks in the secondary market in 2010 were
inactive compared with the N412.8 million traded in 2009.


.. bulk of the
transaction were
in equities which
accounted for
99.99 per cent of
the market
turnover
.. Trading in
Federal
Government
bonds on the floor
of the NSE was
generally inactive.


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4.5
Market Dominance
In the second half of 2010, the banking sector, with trading
valued at N432,100.0 million, was the most active of all the
sectors, accounting for 49.52 billion shares or 53.1 per cent of
the total volume of shares traded. This was followed by the
insurance subsector with 14.84 billion shares or 15.9 per cent
volume of traded securities valued at N15,100.0 million.

4.6
Share Price Volatility
In the first half of 2010, share prices trended upwards and were
volatile, due largely to market apprehension arising from
uncertainties about the direction of global economic recovery
and domestic economic prospects (Figure 4.7). The global
financial and economic crises of 2008-2010 had significant
negative impact on equity prices worldwide. The modest
global economic recovery, which commenced in the last
quarter of 2009 and sustained through the first half of 2010,
equally reflected in recovery in equity prices. However, the
economic recovery became threatened by the sovereign
debt crisis in the Euro area during the second half of 2010. In
Nigeria, commitment to domestic structural and institutional
reforms led to high growth but equity prices remained
dampened despite the enhanced investor confidence
promoted by sound macroeconomic management.


Source: Nigerian Stock Exchange


Dec-09
Jan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10
Jul-10
Aug-10
Sep-10
Oct-10
Nov-10
Dec-10
Figure 4.7
Share Price Volatility (Jan. 2009 - Dec. 2010)
Share Price Volatility
Pre cent
.. Despite
developments in
the Euro area,
global financial
markets picked up
in the second half
..


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4.7
Yields on Federal Government Securities
The yield curve of FGN bonds on December 16, 2010 increased
by approximately 200 basis points over the level on June 16,
2010. Overall, yields on long-tenored FGN bonds remained
below the end-December 2010 inflation rate of 11.8 per cent,
except the 7th FGN Bond 2030 Series 3, which closed at 14.03
per cent on December 16, 2010 (Figure 4.8). Yields on FGN
securities were largely affected by the effect of structural
rigidities in the bonds market.

The pricing of FGN bonds relative to inflation expectations in
Nigeria was consistent with conventional yield curve theory.
Thus,
inflation
expectations
influenced
key
portfolio
adjustments as these played a critical role in yield formations
that underlie the yield curve.


Source: Data obtained from Financial Markets Dealers Association
4.8 New Issues Market
The Nigerian Stock Exchange considered and approved 31
applications for new issues, valued at N2,440.0 billion or 9.83
per cent of GDP in 2010, as against 30 applications for new
issues valued at N279,250.0 million or 1.2 per cent of GDP in
2009. Of the total amount approved in 2010, the non-bank

Yields (%)
Term to Maturity (Years)
Figure 4.8
FGN Bonds Yield Curves 16th December, 2009 , 16th June 2010
and 16th December, 2010
Jun 16, 2010
Dec 16, 2010
Dec 16, 2009
.. yields on long
long-tenored FGN
bonds remained
below the endDecember 2010
inflation level of
11.8 per cent....
.. Nigerian Stock
Exchange
considered and
approved 31
applications for
new issues valued
at N2,440.0 billion
or 9.83 per cent.


CBN Monetary Policy Review

corporate issues of eighteen (18) applications valued at
N1,420.0 billion accounted for 58.2 per cent, while the banking
sector accounted for 36.1 per cent with seven (7) applications
valued at N88,000.0 million. State Government bonds
applications were six, valued at N14,000.0 million or 19.3 per
cent.

Of the non-bank applications, the building materials subsector, with one application accounted for N2,100.0 billion in
value or 86.0 per cent of the total approved new issues in 2010.
Similarly, the insurance sub-sector with four applications
accounted for only N6,320.0 million or 0.3 per cent of the total
applications considered. Unlike in 2009, a total of N5,200.0
million was raised through initial public offers while a total of
N46,600.0 million was raised through ‘rights issues’ and
N193,700.0 million in bonds, including four State Government
bonds. Listings by introduction accounted for N17,700.0 million,
while shares placing, with ten applications, accounted for
N92,800.0
million
and
mergers
with
two
applications
accounted for N2,091.8 billion.

4.9 New Listings and De-listings
The NSE listed 4 new equities in the second half of 2010
compared with 1 in the first half. In addition, 1 FGN bond each
was issued in the first and second half of the year. Similarly, 5
State government bonds, and 4 industrial loans/bonds were
listed in 2010. Conversely, 16 matured securities were delisted
during the year compared with 65 in 2009. The delisted
securities which matured and were redeemed included: 12
fixed income securities viz. 9 FGN Development Stocks; 1 State
government bond (Lagos State N15,000.0 million Fixed Rate
Bond); and 2 industrial loans.

4.9.1 Federal Government of Nigeria (FGN) Bonds
In 2010, the following FGN bonds were listed: the 5.5 per cent
FGN, Feb 2013 (formerly 7th FGN Bond 2013 Series 1), listed in
the first half; the 10.0 per cent FGN July 2030 (formerly 7th FGN
Bond 2030 Series 3), listed in the second half. Overall, Federal
Government borrowing through securities issued by the Debt
Management Office (DMO) to finance budget deficit
amounted to N1,104.30 billion in 2010.


CBN Monetary Policy Review

4.9.2 State Government Bonds
The following State bonds were listed in 2010: Bayelsa State
Fixed Rate Development Bond (N50,000.0 million); Ebonyi State
Fixed Rate Development Bond (N16,500.0 million); Kaduna
State Fixed Rate Bond (N8,500.0 million); Niger State Fixed Rate
Redeemable Bond (N9,000.0 million); and Lagos State Fixed
Rate Bond (N57,500.0 million).

4.10
The Foreign Exchange Market
4.10.1 Average Naira Exchange Rate
The naira exchange rate remained relatively stable in the
period under review. The average exchange rate of the naira,
at the official window (wDAS) depreciated by 0.35 per cent,
from N150.04/US$ in the first half of 2010 to N150.57/US$ in the
second half. The naira depreciated by 0.08 per cent in the
corresponding period of 2009.

At the bureaux-de-change (BDC) and interbank segments of
the market, the naira depreciated marginally by 0.38 and 0.45
per cent from N152.77/US$ and N150.75/US$ in the first half
2010 to N153.35/US$ and N151.43/US$, respectively, in the
second half.

Rates at the BDC appreciated by a substantial 5.63 per cent in
2010, while the interbank market rate depreciated by 0.36 per
cent over the same period (Table 4.3; Figures 4.9 and 4.10). The
naira depreciated largely at the wDAS and interbank
segments of the foreign exchange market during the second
half of 2010, due largely to arbitrage opportunities in other
markets.
.. average
exchange rate of
the naira at the
official window
depreciated by
0.35 per cent
.......in the second
half...


CBN Monetary Policy Review


Naira per US$
Figure 4.9
Naira Average Exchange Rate Movement (Dec. 2009 - Dec. 2010)
Inter-bank
BDC
w/DAS
Source: Central Bank of Nigeria


Jun-10
Jul-10
Aug-10
Sep-10
Oct-10
Nov-10
Dec-10
Naira per US$
Figure 4.10
Average Exchange Rate Movement (Jun - Dec 2010)
Inter-bank
BDC
w/DAS

Source: Central Bank of Nigeria


CBN Monetary Policy Review

Table 4.3
Monthly Average Exchange Rate at Various Segments of the
Market (N/US$) (January – December 2010)

CBN
BDC
IFEM

January

February

March

NA
150.07
April

NA
150.45
May

NA
151.48
June

H1 Average

July

August

September

October

November

December

H2 Average

Annual
Average


Source: Central Bank of Nigeria

4.10.2 End-Period Exchange Rate
The end-period exchange rate of the naira at the wDAS
depreciated by 0.45 per cent, from N149.99/US$ as at endJune, 2010 to N150.66/US$ as at end-December, 2010. Over
the one year period, the naira depreciated from N149.58/US$
as at end-December, 2009 to N150.66/US$ as at endDecember, 2010 (Table 4.4).

At the BDC and interbank segments of the market, the naira
depreciated by 0.64 and 1.53 per cent, respectively, or from
N155.00/US$ to N156.00/US$ and from N149.67 to N152.00
between end-December 2009 and end–December 2010
(Table 4.4 and Figures 4.11 and 4.12). The naira depreciated in
all segments of the market due largely to increased demand
pressure fueled by the slugish activities in the stock exchange
and low interest rate regime in the money market. The supply
.. end-period
exchange rate of
the naira in the
second half of
2010 at the official
window of the
foreign exchange
market
depreciated by
0.45 per cent....


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of foreign exchange to the interbank market was affected by
increased sales from oil companies.


Naira per US$
Figure 4.11
Naira End - Period Exchange Rate
(Dec. 2009 - Dec. 2010)
w/DAS
Inter-bank
BDC

Source: Central Bank of Nigeria


Naira per US$
Figure 4.12
Naira End - Month Exchange Rate
(Dec. 2009 - Dec. 2010)
Inter-bank
BDC
w/DAS

Source: Central Bank of Nigeria


CBN Monetary Policy Review

Table 4.4
End-Month Exchange Rate at Various Segments of the Market
(N/US$) (January – December 2010)

MONTH
CBN
BDC
IFEM

January

February
147.31 150.10
167.00
152.00
NA
150.05
March
147.16 149.78
170.00
151.50
NA
150.05
April
147.36 150.10
182.00
153.00
NA
151.09
May
148.17 150.27
170.00
154.00
NA
151.47
June

July

August

September 148.79 151.35
156.00
155.00
150.04 154.50
October

November

December


Source: Central Bank of Nigeria

4.10.3 Nominal and Real Effective Exchange Rate (NEER)
Indices
The NEER index increased by 1.84 to 97.20 as at end-December
2010 from the level of 95.76 as at end-June 2010. Similarly, the
Real Effective Exchange Rate (REER) index, increased by 1.58
to 92.21 in December 2010 from 90.78 in June 2010. On annual
basis, the NEER and REER decreased by 1.71 and 4.98,
respectively, over their levels in 2009 (Table 4.5; Figures 4.13
and 4.14).


.. end-period
exchange rate of
the naira in the
second half of
2010 at the official
window of the
foreign exchange
market
depreciated by
0.45 per cent....


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Table 4.5
Nominal and Real Effective Exchange Rate Indices
(January 2009 - December 2010) (November 2009 = 100)
MONTHS
NEER
REER
Jul-09
97.70
99.51
Aug-09
98.59
98.79
Sep-09
97.47
98.01
Oct-09
98.41
98.60
Nov-09
100.00
100.00
Dec-09
98.91
97.19
Jan-10
97.05
94.97
Feb-10
96.41
92.89
Mar-10
97.18
95.28
Apr-10
97.03
94.07
May-10
94.21
91.89
Jun-10
95.76
90.78
Jul-10
95.93
91.40
Aug-10
94.94
89.36
Sep-10
97.65
91.06
Oct-10
98.62
92.42
Nov-10
96.89
91.35
Dec-10
97.20
92.21

Source: Central Bank of Nigeria


Source: Central Bank of Nigeria

80.00
90.00
100.00
Dec-09
Mar-10
Jun-10
Sep-10
Dec-10
Figure 4.13
Nominal and Real Effective Exchange Rate Indices
(Dec. 2009 - Dec. 2010) (Nov. 2009 = 100)
NEER
REER
Per cent


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Jul-10
Aug-10
Sep-10
Oct-10
Nov-10
Dec-10
Per cent
Figure 4.14
Nominal And Real Effetive Exchange Rate Indices
(Jul. 2009 - Dec. 2010)
NEER
REER
Source: Central Bank of Nigeria
4.11
Demand and Supply of Foreign Exchange
In the second half of 2010, the demand for foreign exchange at
the wDAS increased by 6.61 per cent to US$15,369.5 million from
US$14,416.42 million demanded in the first half. By end
December 2010, the demand for foreign exchange declined
by 22.27 per cent to US$29,785.76 million compared to the
US$38,318.90 million demanded by end December 2009. Total
foreign exchange offered for sale by the CBN at the wDAS and
BDC windows declined by 1.79 per cent from the US$13,250.00
million recorded in the first half of 2010 to US$13,012.57 million
supplied in the second half. Total volume of foreign exchange
offered for sale amounted to US$26,262.57 million in 2010, up
from US$20,390.00 million offered in the preceding year,
representing a 28.80 per cent increase (Table 4.6 and Figure
4.15).

Actual amount of foreign exchange sold by the CBN at the
wDAS increased by 6.67 per cent, from US$12,177.66 million in
the first half of 2010 to US$12,990.23 million in the second half.
Total sales of foreign exchange amounted to US$25,167.89
million in 2010, compared with US$23,272.50 million in the
preceding year, representing an increase of 8.14 per cent.


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Table 4.6
Total Foreign Exchange Demand and Supply
(US$ ‘Million) (December 2009 – December 2010)

Demand
Supply
(Amount
Offered)
Supply
(Actual Sales
at
rDAS/wDAS)
Dec-09
1,128.54
950.00
837.08
2009: H2
13,823.70
11,040.00
9,662.76
2009 Total
38,318.90
20,390.00
23,272.50
Jan-10
2,199.15
1,600.00
1,522.05
Feb-10
2,110.77
1,950.00
1,874.35
Mar-10
2,081.23
2,150.00
1,742.79
Apr-10
2,068.61
1,750.00
1,693.52
May-10
3,214.82
2,950.00
2,761.13
Jun-10
2,741.85
2,850.00
2,583.82
2010: H1
14,416.42
13,250.00
12,177.66
Jul-10
1,795.82
1,750.00
1,612.49
Aug-10
2,789.10
2,000.00
1,948.52
Sep-10
4,392.27
3,542.57
3,626.87
Oct-10
2,503.67
2,150.00
2,375.75
Nov-10
1,853.37
1,720.00
1,576.60
Dec-10
2,035.12
1,850.00
1,850.00
2010: H2
15,369.34
13,012.57
12,990.23
2010 Total
29,785.76
26,262.57
25,167.89

Source: Central Bank of Nigeria


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Jan-09
Mar-09
May-09
Jul-09
Sep-09
Nov-09
Jan-10
Mar-10
May-10
Jul-10
Sep-10
Nov-10
US $ Million
Figure 4.15
Demand and Supply of Foreign Exchange (Jan. 2009 - Dec. 2010)
Fx Demand
Fx Supply (Amount Offered)
Source: Central Bank of Nigeria


4.12
Foreign Exchange Inflow and Outflow
4.12.1 Inflow
Gross foreign exchange inflow of US$14,865.04 million was
recorded in the second half of 2010, compared with the
US$13,966.39 million realized in the corresponding period of
2009, representing an increase of 6.43 per cent. When
compared with the US$12,982.08 million recorded in the first half
of 2010, foreign exchange inflow in the second half increased
by US$1,882.96 million or 14.5 per cent. The increased inflow
was accounted for by the rise in world oil prices, coupled with
increased domestic oil production as a result of the Federal
Government’s policy measures to resolve the Niger Delta crisis
(Figure 4.16).

4.12.2 Outflows
During the second half of 2010, total foreign exchange outflow
through the CBN, which was mainly for financing imports of
goods and services, amounted to US$20,891.28 million,
compared with US$17,027.91 million in the first half of 2010,
representing an increase of US$3,863.37 million or 22.69 per
cent. Compared with the outflow of US$15,411.19 million in the
corresponding period of 2009, an increase of 35.56 per cent
was recorded over the one year period (Figure 4.16 and 4.17).
.. increase in
inflows was
accounted for by
the rise in oil
prices coupled
with increased
domestic oil
output
.. change in the
level of outflow
over the level in
the 1st half of 2010
represents an
increase of about
US$3,083.27 or
17.31 per cent


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July
August
September
October
November December
N' Million
Figure 4.16
Trend in Foreign Exchange Outflow (Second Half 2009 & 2010)
Outflow-2009
Outflow-2010

Source: Central Bank of Nigeria

On a year-on-year basis, total outflow in 2010 was US$37,919.19
million compared with US$35,885.62 million as at endDecember 2009, representing an increase of 5.36 per cent
above the level in the preceding year. The increased outflow
in

was
accounted
for
by
huge
investment
in
infrastructure, especially power, road construction and the
remittance of dividend payments by some multinational
companies (Table 4.7)


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Table 4.7
CBN Monthly Foreign Exchange Flows
(US$ ‘Million) (July 2009 – December 2010)
INFLOW
OUTFLOW
NET FLOW
2009:H1 Sub-Total
11,128.79
20,474.63
-9,345.80
Jul
1,690.36
2,111.26
-420.9
Aug
1,879.48
3,797.02
-1,917.54
Sep
4,513.12
3,106.61
1,406.51
Oct
1,701.76
2,161.31
-459.55
Nov
2,082.78
2,138.82
-56.04
Dec
2,098.89
2,096.17
2.72
2009:H2 Sub-Total
13,966.39
15,411.19
-1,444.80
2009 Total
25,095.18
35,885.82
-10,790.60
Jan
2,302.51
2,197.05
105.46
Feb
2,369.22
2,860.35
-491.13
Mar
1,849.40
2,512.78
-663.38
Apr
2,016.92
2,481.53
-464.61
May
2,381.63
3,590.39
-1,208.76
Jun
2,062.40
3,385.81
-1,323.41
2010:H1 Sub-Total
12,982.08
17,027.91
-4,045.83
Jul
2,289.00
3,282.56
-993.56
Aug
2,564.49
3,061.05
-496.56
Sep
2,701.52
5,078.74
-2,377.22
Oct
2,339.28
3,463.47
-1,124.19
Nov
2,209.35
2,169.84
39.51
Dec
2,761.40
3,835.62
-1,074.22
2010:H2 Sub-Total
14,865.04
20,891.28
-6,026.24
2010 Total
27,847.12
37,919.19
-10,072.07

Source: Central Bank of Nigeria


US$ Million
Figure 4.17
Foreign Exchange Inflow and Outflow (Dec. 2009 - Dec. 2010)
Inflow
Outflow

Source: Central Bank of Nigeria


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4.13.
Exchange Rate and Demand for Foreign Exchange
The movement in the exchange rate of the naira at the official
window of the foreign exchange market has implications for
both the demand and supply of foreign exchange as well as
the stock of external reserves. The principle underlying foreign
exchange management was to limit offical exchange rate
variations around an established band of +/-3 per cent of the
prevailing exchange rate of the naira. The intervention policies
of the Bank led to drawdown in external reserves to fund the
market.
The persistent demand pressure in the foreign exchange
market was traceable to the activities of speculators and
arbitraguers as well as high domestic aggregate demand.
Specifically, high import demand partly fostered by deliberate
policy to promote long term infrastructure investment to
anchor
economic
developemnt
was
a
major
reason
explaining the high demand for foreign exchange.


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CHAPTER 5
CHAPTER 5
DOMESTIC PRICE
DEVELOPMENTS AND
THE REAL ECONOMY


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CHAPTER 5
DOMESTIC PRICE DEVELOPMENTS AND THE REAL ECONOMY

5.1
Introduction
Inflationary pressures were sustained during the review period.
In this chapter, we review domestic price developments and
the measures taken to contain inflationary pressure. Against
the backdrop of the high level of political activities in the
second half of 2010 and rising government spending toward
the general elections in April 2011, the CBN implicitly targeted
the achievement of single digit year-on-year headline inflation
during the review period.
5.2
Domestic Economic Activity
Despite the global financial and economic crises, domestic
output was generally satisfactory in 2010. Growth in real GDP
in the second half of 2010 was estimated at an average of 8.53
per cent. In the second quarter, GDP grew by 7.69 per cent
compared with 7.45 per cent in the corresponding period of
2009. In the first quarter, estimated GDP growth was 7.36 per
cent while it was 5.01 per cent in the corresponding period of
2009. In the third quarter, real GDP grew by 7.86 per cent and
was estimated at 8.29 per cent for the fourth quarter. The
annual rate of real GDP growth was projected at 7.85 per cent
in 2010, which was significantly higher than the 6.96 per cent
recorded in 2009.

The non-oil sector remained the major driver of growth. This
was complemented by the sharp increase in oil sector
production following the relative peace in the Niger Delta
during the second half of the year and general world oil price
increases. The major challenges to output growth in 2010 were
the deficiencies in electricity generation and distribution,
especially during the first three quarters of the year.

The index of manufacturing production, estimated at 93.7
(1990=100) rose by 0.3 per cent and 0.2 per cent over the
levels in the preceding quarter and the corresponding period
of 2009, respectively. The improved performance of the
manufacturing sub-sector was largely attributable to improved
..GDP grew at an
average of 8.53
per cent in the
second half of
2010.
..non-oil sector
remained the
major driver of
growth.


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investor confidence resulting from policy actions to unlock
credit to the real sector. The poor state of electricity
generation and distribution adversely affected activities in the
manufacturing sub-sector, particularly the small and medium
scale sub-sector. Thus, average manufacturing capacity
utilization estimated at 54.90 per cent rose by 1.1 percentage
points, compared with the corresponding period of 2009.

Nigerian agriculture which is still largely rain fed was exposed
to the dictates of climatic conditions which played a key role
in determining the level of agricultural output. Since food
constitutes at least 51.80 per cent of the weight of items in the
CPI basket, favourable weather conditions impacted positively
on price developments in the country. In the second half of
2010, adequate and timely rainfall in most parts of the country
aided
good
agricultural
harvests
of
food
crops,
notwithstanding the severe flooding experienced in some food
producing areas, especially the northern parts of the country.

The aggregate index of industrial output, however, improved
during the fourth quarter of 2010 relative to the preceding
quarters. Consequently, the index of industrial production rose
by 0.9 and 2.0 per cent, over the level attained in the
preceding quarter and corresponding period of 2009,
respectively.
The
improvement
was
traced
largely
to
manufacturing and mining production, which rose by 0.3 and
0.4 per cent, respectively. Similarly, the index of mining
production rose by 0.4 and 0.5 per cent over the levels
attained in the preceding quarter and the corresponding
period of 2009, respectively. The rise was accounted for by the
increase in crude oil and gas production.
5.3
Inflationary Trends in the Second Half of 2010
The year-on-year headline inflation rate remained at double
digits throughout the second half of 2010. It closed at 11.8 per
cent at end-December 2010, compared with 14.1 per cent in
June 2010 and 13.9 per cent in the corresponding period of
2009.

Similarly,
the
year-on-year
core
inflation
rate
trended
downwards at end-December 2010; the rate was 10.9 per
.. year-on-year
headline inflation
rate remained at
double digit
throughout the
second half of
..food constitutes
at least 51.80 per
cent of the
weights of items in
the CPI basket
..non-oil sector
remained the
major driver of
growth.


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cent, against the 12.7 per cent recorded in June 2010 and 11.2
per cent in December 2009. The high inflation rates during the
review period were partly attributed to structural factors and
the rebased and enlarged index of consumer prices in
November 2010 to reflect current consumption patterns in the
economy.

Generally, the 12-month moving average inflation rate
persistently trended upwards during the review period. Thus,
the 12-month moving average headline inflation rose from 12.5
per cent in December 2009 to 13.1 per cent in June 2010 and
13.7 per cent at end-December 2010. Also, the 12-month
moving average core inflation rate trended upward, from 9.2
per cent in December 2009 to 10.9 per cent in June 2010 and
accelerated to 12.4 per cent at end-December 2010 (Table
5.1, 5.2 and 5.3, Figures 5.1 and 5.2).


Table 5.1
Measures of Consumer Prices
(July 2008 – December 2010)


Source: National Bureau of Statistics (NBS)


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Table 5.2
Inflation Rate
(December 2009 – December 2010)


The CPI maintained an upward trend throughout the second
half of 2010. Thus, in December, the all-items CPI rose by 6.8
per cent to 114.2, (November 2009=100) over the level in June
2009. The all items CPI was 108.8 (November 2009=100) in the
preceding period, compared with 102.2 in December 2009.

The Bank’s price stability objective implicitly targeted single
digit inflation in fiscal 2010. However, headline inflation
remained generally above that target due mainly to structural
factors as growth in money supply remained below its long
term trend.
Table 5.3
Quarterly Consumer Price Developments in 2010
(November 2009=100)


Source: National Bureau of Statistics (NBS)


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Source: National Bureau of Statistics

The breakdown of CPI index indicates that food and nonalcoholic beverages, housing, water, electricity/gas and other
fuel, contributed most to the overall change in prices.
Specifically, the index for food and non-alcoholic beverages
rose by 9.06 percentage points in July 2010 compared with 4.8
per cent in December 2010 and the 97.8 per cent in
December 2009.

The composite price index for utilities (which ranks next to food
in the CPI basket), rose from 104.8 in June 2010 to 113.2 in
December 2010, compared with 96.3 and 100.2 in June and
December 2009, respectively (Figure 5.2). Overall, the all items
CPI grew by 5.0 per cent in the second half of 2010. The
increase was a reflection of the impact of the generally weak
infrastructure base of the economy, the effect of which was
transmitted to production.


Per cent
Figure 5.1
Headline, Core and Food Inflation (Y - Y) (Dec. 2009 – Dec. 2010)
-
Food (Y -Y)
Headline (Y -Y)
Core Inflation (Y -Y)


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Dec-09
Jan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10
Jul-10
Aug-10
Sep-10
Oct-10
Nov-10
Dec-10
per cent
Figure 5.2
Headline Inflation (Y-Y): Selected Items 2010
(Dec. 2009 - Dec. 2010)
Headline Inflation
F & E
Transport

Source: National Bureau of Statistics
5.4
Actual and Seasonally Adjusted Headline Inflation
Analysis of inflation developments in the second half of 2010
indicated
evidence
of
seasonality
during
the
period.
Seasonality played a key role in dampening the headline
inflationary pressures in the second half of 2010; implying that
holding seasonal factors constant (or in their absence), would
result in higher headline inflation.

The low inflation outcome in some months was influenced in
part by the bumper harvest of food items, such as yam and
maize, which had a dampening effect on the food index
(food items are a component of the CPI most susceptible to
seasonality). Notwithstanding the effects of seasonal factors
(particularly off-farm produce supply period and year-end
festivities), inflation remained at double digits throughout 2010
(Figure 5.3).
Notwithstanding
the effects of
seasonal factors,
inflation remained
at double digit
throughout 2010


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Source: National Bureau of Statistics

5.5
Factors Responsible for Inflationary Pressures
Inflationary pressure in 2010 was heightened by the global
food and energy crises, adverse weather conditions in some
parts of the country, increased spending on political activities
preparatory to the 2011 general elections and poor
infrastructure.

The focus of the 2010 budget was spending on key
infrastructure in the areas of works, power, education and
health. Although, expenditure on infrastructure was expected
to have major foreign components, the domestic components
of infrastructure financing generated substantial domestic
demand pressures that fuelled inflationary tendencies.

5.5.1
Domestic Aggregate Demand
Growth in aggregate demand was a major factor that fuelled
upward price movements in the review period. Although
broad money supply grew by N643.22 billion or 5.93 per cent in
the second half, it was below the target growth level for the
period and lower than the level in the preceding period.
Accordingly, rising global energy and commodity prices
reflected in high domestic import bills which impacted on
prices. Although credit to the private sector was phenomenally
low, credit to government grew. Thus, government expenditure
on settling local contractor bills, funding preparations for the

per cent
Figure 5.3:
Actual and Seasonally Adjusted Headline Inflation
(Dec. 2009 - Dec. 2010)
Inflation
Inflation SA


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April 2011 general elections and paying the increase in new
salaries may have fuelled further inflationary pressures in the
economy.

The Federal Government embarked on stimulus package,
financed mainly by borrowing through the issuance of
sovereign bonds, resulting in a provisional deficit of about
N1,105.43 billion or 3.7 per cent of GDP. This phenomenon
might have played a key role in the deterioration of inflation
outcome in 2010. In the first and second halves of the year,
fiscal policy continued to be largely expansionary, (Box 5.1
and Table 5.4).


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Box 5.1
CORE INFLATION IN NIGERIA
Core inflation measures the general level of prices in the economy
excluding certain items that face volatile price movement, like energy
and food from headline inflation. More commonly, core inflation is
the structural or underlying inflation in the economy. Like in most
other countries, food and energy are more sensitive to price changes
than other components of inflation in Nigeria. Natural and
environmental factors such as tsunami, earthquake, floods, landslides,
drought, and oil spills, often ravage large expanse of cropped land
and distort the economic landscape in the country. This creates
substantial supply bottlenecks with negative impact on the general
price level. In addition, fluctuations in oil prices may create supply
shocks which may affect prices of certain commodities or the general
price level in the economy. Food and energy prices are often more
readily related to temporary shocks which may reverse later when the
situation stabilizes. Thus, rising food and energy prices are not
necessarily indications of mounting inflationary trend as including
them could be distortionary to the trend in the general price levels.

The National Bureau of Statistics has indicated that Nigeria's food and
energy supply is often affected by a number of seasonal factors.
While agriculture is largely rain-fed, the mostly hydro based electricity
supply network depends on large harvests of rainfall to operate
optimally. A large portion of the country's fuel consumption is
dependent on international oil price movements. However, an
existing fuel subsidy absorbs the shocks associated with the vagaries
of the international oil price movements from impacting optimally on
domestic prices. Thus, while prices of the affected goods may
change rapidly, the price distortions may not be related to a trend
change in the overall price level in the economy.

By measuring core inflation in Nigeria, we attempt to isolate what is
happening to general prices without distractions arising from spikes in
volatile food and energy prices. To alter the base of core inflation in
the economy requires a substantial transformation of the underlying
foundation of economic activity in the country, which will reduce
structural bottlenecks to production. Nigeria is in that transformative
stage as it tackles its dilapidated power infrastructure through massive
investment to improve power generation, storage, distribution and
sales.


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Box 5.2
Federal Government of Nigeria (FGN) 2010
Amended and Supplementary Budgets (I and II)

Introduction
The 2010 FGN Stimulus Budget was prepared against the background of the
global economic and financial crisis. The thrust of the budget was to stabilize
the financial system, increase the liquidity of the banking system with a view to
stimulating aggregate demand which had been severely constrained by the
impact of the crises. Thus, the overall objective of the 2010 budget was to
accelerate the pace of economic recovery through targeted fiscal
interventions intended to stimulate the economy and support private sector
growth. Accordingly, improving critical infrastructure such as power was a key
priority of the budget.

The key macroeconomic assumptions of the budget were summarized as
follows: Oil production of 2.088mb/d; benchmark oil price of US$60/barrel; joint
venture cash calls of US$5.0 billion; average exchange rate of N150/US$1;
targeted GDP growth rate of 6.1 per cent; and target inflation rate of 11.2 per
cent by Government. Based on the stated assumptions, a total retained
revenue of N3,179.87 billion was projected, of which oil revenue accounted for
almost 80.0 per cent. Total spending was estimated at N5,159.66 billion of
which N2,669.01 billion was earmarked as recurrent non-debt expenditure
(51.33%), N1,764.69 billion for capital expenditure (34.20%) while N542.38 billion
was earmarked for debt service (10.51%). Consequently, an initial overall
budget deficit of 5.32 per cent of GDP was estimated for fiscal 2010 but this
was to change after the supplementary I and II budgets were consolidated
into the revised budget.

With the two supplementary budgets, the budget deficit increased from
N1,550.8 billion to N2,725.827 billion or 9.37 per cent of GDP. The deficit was to
be financed largely by domestic borrowing from the market, amounting to
N1,346.55 billion, Net FGN Consolidated share of proposed ECA of 2010 (US$2.1
billion), privitization proceeds worth N107.21 billion and international bond
issuance of N75.00 billion. Actual domestic borrowing for deficit financing was
N1,647.86 billion.

This highly expansionary budget had far reaching implications on monetary
management as the borrowing activities of government exerted pressure on
domestic interest rates as well as crowd-out private sector borrowing. This
precipitated high inflationary tendencies in the economy and constrained the
attainment of the single digit inflation objective of the CBN, at end-December
2010.

Fiscal Operations of the FGN in 2010
The review of the 2010 budget and the approval of two supplementary
budgets were motivated by the following reasons: The proposed salary
increase for civil servants; Nigeria's 50th Anniversary Celebrations; Funds for the
Independent National Electoral Commission (INEC) to conduct the 2011
general elections; Government programme for infrastructure provision; and
Capital expenditure bunching.


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Table 5.4
Fiscal Operations of the FGN in 2010
S/No
2010 Approved
Budget

Appropriation
(N’billion)
Approved
Amendment
(N’billion)

Federally Collected
Revenue
N8,061,352 .0
N6,999.149

FGN Retained
Revenue
N3,086,706.0
N3,187.7105

Total expenditure of
the FGN
N4,637,597.0
N4,427.185

1st Suppl.
Appropriation Act

N644.752

2nd Suppl.
Appropriation Act

N87,723

Total
FGN
Budget

N4,637,507.0
N5,159.659

Primary
Deficit/Surplus
(N1,550,800.0)
(N1,972.1833)

Domestic Borrowing
by DMO to finance
2010 deficit
N917.591
N1,647.864

Deficit Financed by
FGN Bonds in 2010

N1104.2955

Other Deficit
Financing Sources

N88.8917

Source: Federal Ministry of Finance (Budget Office of the Federation)

5.5.2
Aggregate Supply Constraints

Supply constraints may also have played a critical role in the
upward trend in domestic prices during the review period.
Thus, supply gap issues associated with agricultural output;
which became apparent due to inclement weather conditions
in some parts of the country, may have explained high
headline inflation in some months during the review period. In
addition, raw material constraints reflected in demand
pressure in the foreign exchange market, which impacted
negatively on the naira exchange rate. The pass through


CBN Monetary Policy Review

effect from the exchange rate to inflation had already been
empirically determined to be significant for Nigeria. Thus,
supply constraints, high imported inflation from rising global
food, energy and commodity prices may have combined to
increase the upward pressure on domestic prices.

5.5.3
Exchange Rate Developments
The naira/dollar exchange rate remained relatively stable
around N150.52/US$, especially in the second half of 2010. The
premium between the official and the BDC rates narrowed by
N3.68 or 2.45 per cent compared with N17.94 or 12.11 per cent
in the second half of 2009. However, with effect from
November 8, 2010, the CBN withdrew the licenses of all Class
‘A’ BDCs. This withdrawer was designed to enhance the
prudent utilization of officially sourced foreign exchange in
order to foster growth in the real sector and also to eradicate
money laundering, curtail speculative activities and stem gross
abuses which characterized the activities of the Class ‘A’
BDCs. The stable exchange rate of the naira in 2010 impacted
positively on the CBN anti-inflation efforts by helping to lock-in
exchange rate-induced inflation expectations.

5.6
Rebasing the Consumer Price Index (CPI)
The National Bureau of Statistics (NBS) rebased the CPI from
May 2003 to November 2009. The newly rebased CPI was
released by the NBS in November 2010. The exercise involved
a re-classification and re-assignment of weights to major items
in the CPI basket. Consequently, items which had been
understated in explaining the domestic consumption pattern in
Nigeria but which had over time constituted major recurrent
expenditure items were included in the new CPI basket. For
instance, food which had been assigned very high weight
(637.6) in the basket was assigned new weight (507.03),
implying that Nigerians now spend less on food and more on
other items like education (39.4 instead of 2.1 in the old),
telecommunications (6.8 instead of 1.1 in the old), health (30.0
instead of 13.6 in the old), transport (65.08 instead of 42.4 in the
old), energy (167.3 instead of 181.0 in the old), etc (Box 5.5).

The exercise produced a CPI Index that was fundamentally
higher in magnitude than the old series. However, the lower
.naira/dollar
exchange rate
remained
relatively stable
around
N150.52/US$,
especially in the
second half of
2010.


CBN Monetary Policy Review

weights assigned to the more volatile food and energy items
indicated that a smoother inflation rate would emerge over
time and that higher food and energy prices may not
necessarily result in very high price levels as previously
experienced (Box 5.3).


Table 5.5
Revised Weights of the Composite Consumer Price Index


Source: National Bureau of Statistics (NBS)


CBN Monetary Policy Review

Box 5.3
The New Consumer Price Index
(November 2009 = 100)

The National Bureau of Statistics (NBS) in November 2009
rebased the Consumer Price Index (CPI) base year from May
2003 to November 2009. The NBS indicated that the change in
base year became necessary in order to adjust the composite
weights of the major commodity groups. The new basket
contained new products of growing importance in the
expenditure profile in line with the changing consumption
pattern of Nigerians. Consequently, while hitherto undervalued items such non-food items such as clothing and
footwear, furnishings, household equipment and household
maintenance,
health,
transport,
communications,
and
education were assigned new weights commensurate with
their degree of importance in the expenditure basket a few
items which had ceased to be of strategic importance in the
basket were removed.


CHAPTER 6
CHAPTER 6
ECONOMIC OUTLOOK


CBN Monetary Policy Review

CHAPTER 6
ECONOMIC OUTLOOK
6.1 Introduction
The pace of recovery in global output growth during the
second half of 2010 accelerated though constrained by the
knock-on effects of the crisis in the Euro Area sovereign debt
markets and problems with bank balance sheets in most
industrial countries1. The speed of recovery differed across
regions, due to differences in initial economic conditions and
the policy response by countries. These developments further
weakened the recovery and increased the risks in the global
financial system.

On the domestic front, the positive effects of the various
reforms in the financial sector complemented by supportive
fiscal stance evidenced in substantial government expenditure
on
power
sector,
enhanced
growth
prospects
at
comparatively high levels. Consequently, the economy was
expected to sustain the trend and consolidate the gains
realized in the near to medium term.
6.2
Global Output
Growth in global output in the second half of 2010 declined to
4.7 per cent from 5.0 per cent recorded in the first half and by
4.5 per cent in the corresponding period of 2009. Following the
dominance of risks associated with the sustained sovereign
debt crisis in the Euro area, rising food and energy prices and
the unstable political environment in the Middle East and North
Africa, the global output growth was expected to weaken
further to about 4.4 per cent in 2011 (Table 6.1).

Growth in the industrial economies was steady at 2.7 per cent
in the second half of 2010 but was expected to decline to
about 2.5 per cent in 2011. The projected deceleration in
growth was premised on expected continuous adjustments
and winding down in some countries of the fiscal and
monetary stimuli introduced to contain macroeconomic

1 IMF World Economic Outlook (WEO), January 2011
..pace of
recovery in global
output in the
second half of
2010 was
Growth in global
output in the
second half of
2010 dipped to 4.7
per cent from the
5.0 per cent level
in the first half of
2010.


CBN Monetary Policy Review

imbalances arising from the global financial and economic
crises.

In the US, real GDP grew at an average of 2.5 per cent in the
second half of 2010 and was expected to improve to 3.0 per
cent in 2011, buoyed by strong growth in household domestic
demand and declining unemployment rate traced to the
effect of the fiscal stimulus.

Growth in the emerging and developing economies averaged
7.0 per cent in the second half of 2010 but was projected to
decline to an average of 6.5 per cent in 2011, due largely to
slack in demand for primary commodities by the emerging
market economies in Asia.

During the second half of 2010, growth in the Middle East and
North Africa (MENA) as well as Sub-Saharan Africa averaged
3.9 per cent and 5.0 per cent, respectively. However, while
growth may dip in the former, if the political tensions arising
from high unemployment persisted, in Sub-Saharan Africa,
growth was expected to improve to about 5.5 per cent in
2011. Growth in the MENA and the sub-Sahara African
countries was expected generally to be influenced by rising
commodity prices. For sub-Saharan Africa, an additional progrowth factor was the sustained rise in domestic demand,
especially in Nigeria, Kenya and South Africa.

Growth in developing Asia as well as Latin American and
Caribbean countries was 9.3 per cent and 5.9 per cent,
respectively, during the second half of 2010, but was projected
to slow down in 2011 to 8.4 per cent and 4.3 per cent,
respectively (Table 6.1). This was attributable to inflationary
concerns, withdrawal of stimulus packages and the tightening
of fiscal policies.

Overall, the outlook for 2011 suggested that the economies of
the industrial, emerging and developing as well as those of
sub-Sahara African countries would move from recovery to
sustained growth, while the developing Asia and Latin America
and Caribbean countries would witness a slowdown in growth.
...outlook for 2011
is that advanced
economies,
emerging and
developing
economies.......wo
uld move from
recovery to
sustained
growth....


CBN Monetary Policy Review

6.3
Global Inflation
Global inflation moderated significantly in the second half of
2010, as the risk to inflation was largely subdued. This was
attributed to the generally weak consumer demand. For
example, inflation in the advanced economies averaged 1.4
per cent in the second half of 2010, and was projected to
improve marginally to 1.3 per cent in 2011. Similarly, the US
inflation rate of 1.9 per cent in second half of 2010 was
projected to decline to 1.6 per cent in 2011. Inflationary
pressure in the sub-Sahara African countries was likely to
persist, owing to strong domestic demand and exchange rate
misalignment.


Global consumer
prices moderated
significantly in the
second half of

CBN Monetary Policy Review

6.4
Global Commodity and Energy Prices
World crude oil prices averaged US$79.80 per barrel in the
second half of 2010, representing a price increase of 4.19 per
cent over the average price of US$76.59 per barrel observed in
the first half of the year. Oil prices were projected to rise above
US$90 in 2011, due largely to strong global demand, sluggish
supply response and political crises in the MENA countries.

6.5
Outlook for the Domestic Economy
The growth outlook for the domestic economy in 2011 was
fairly optimistic. The resumption of oil production activities in
the Niger Delta, following the successful implementation of the
Federal Government Amnesty Programme, the adoption of
the Road-map on Power Reforms by the Federal Government
and the commencement of operations by the AMCON in 2010
were expected to impact positively on output growth, which
according to staff estimates, was projected at 7.4 per cent in
2011. Reforms in the Nigerian Stock Exchange by the Securities
and Exchange Commission (SEC), the directive to banks by the
CBN to recapitalize by end-2011 and the withdrawal of the
universal banking licenses in 2010 were also expected to
positively impact on output.

Table 6.2
Outlook for Key Macroeconomic/Monetary Indicators

2010*
2011**
Inflation
11.8
12.0
Real GDP
7.84
7.40
M2 Growth (%)
6.70
13.75
Income Velocity
2.6
2.8
Reserve Money
(N’billion)
1,803.92
1,936.0
Credit to Govt. (%)
67.83
29.29
Credit to Private
Sector (%)
-4.92
23.34

2010* Actual, 2011**CBN Staff Estimates
Source: Central Bank of Nigeria

..outlook for the
domestic
economy for 2011
looks fairly
optimistic ...


CBN Monetary Policy Review

6.5.1
Domestic Output Growth
Data from the National Bureau of Statistics (NBS) indicated that
real Gross Domestic Product (GDP) grew by 8.01 per cent in
the second half of 2010, up from the 7.55 per cent in the first
half of 2010. Overall, GDP grew by 7.85 per cent in 2010 up
from 6.96 per cent achieved in 2009. The non-oil sector was
expected to remain the main driver of growth in 2011. The
implication of slow growth in the US and Euro area economies
(due to protracted sovereign debt crisis) and falling domestic
aggregate demand in those countries may affect Nigeria’s
export of crude oil.

6.5.2
Inflation
Inflationary pressures persisted throughout 2010 and the current
forecast suggested that the trend would continue but, remain
within the lower double digits in 2011. Liquidity management
was expected to be challenging to the monetary authorities,
reflecting the impact of election-related expenditure for the
April 2011 general elections, the upward review of worker’s
salary/new minimum wage and the crystallization of the
quantitative
easing
initiatives
introduced
since
2009.
Consequently,
monetary
policy
was
expected
to
be
contractionary in order to reign in inflation expectations.

Although rising oil prices may be accompanied by higher oil
exports (especially if the crises in the MENA countries persist),
high global food, energy and commodity prices may increase
the level of imported inflation in the economy. Non-oil exports
are generally expected to resume their upward trend beyond
the April general elections, leading to higher capital inflows.
The rising oil receipts and increased non-oil capital inflows may
translate
into
higher
reserve
buildup
leading
to
an
appreciation of the naira. The appreciation of the exchange
rate may tamper the upward trend in domestic prices.

6.6
Lagged Impact of Policy Initiatives
Growth in aggregate demand observed in 2010 was expected
to strengthen in 2011 as the impact of the policy initiatives of
the previous period fully crystallized. The cleaning of the
balance sheets of the DMBs through AMCON operations as
well as the expected mergers and acquisitions of some banks
Inflationary
pressures persisted
throughout 2010
and the trend
would remain
within the lower
end of double
digit in 2011.


CBN Monetary Policy Review

would engender the emergence of stronger and more
competitive financial institutions with capacity to extend more
credit to the private sector. In addition, improvement in power
delivery, increased access to finance by the deprived
segment of society and the interventions in aviation and
manufacturing were expected to further stimulate domestic
economic activity. The level of foreign exchange earnings
from oil exports may stimulate higher growth than projected for
2011.

6.7
The Financial Markets
6.7.1 The Capital Market
The capital market witnessed increased activities in the second
half of 2010, with the listing of Dangote Cement Company and
Unity Bank shares on the floor of the Nigerian Stock Exchange.
This resulted in disproportionate movements in Market
Capitalization and All Share Index when compared with the
performance in the first half of the year. With the reform
measures introduced by the SEC and the purchase of the nonperforming loans of the DMBs by AMCON, the upward
movement in major market indices was expected to
accelerate in 2011.

With the expected improvement in power supply in 2011, a
number of companies were likely to resort to the capital
market to raise funds through the issuance of corporate bonds.
These actions were expected to deepen the market and
heighten the tempo of activities in both the capital market
and the banking sector.

6.7.2
The Foreign Exchange Market
The foreign exchange market witnessed sustained demand
pressure, especially towards the end of the second half of
2010, resulting in the depreciation of the naira in all segments
of the market. The surge in demand experienced in the market
was related to the financing of the importation of petroleum
products and other consumables in preparation for the
Christmas and New Year festivities. It was projected that
sustained high international oil prices would result in external
reserves buildup in 2011.

The capital
market witnessed
increased
activities in
second half of
The foreign
exchange market
witnessed
sustained pressure
especially towards
the end of the
second half of

CBN Monetary Policy Review

6.7.3
The Money Market
Money market interest rates crashed and stabilized at the low
end up to the third quarter of 2010 before assuming a modest
upward movement in the fourth quarter. The relative interest
rate stability was attributable to the de-risking of the market
through the CBN guarantee of interbank placements, and the
injection of liquidity by the Bank to support selected sectors of
the economy.

The various reforms by the CBN to make the banking sector
more resilient and promote good corporate governance in the
industry as well as the take-off of AMCON in the last quarter of
2010 would sustain lending to the real sector and stabilize short
term interest rates in 2011.

However, the expected withdrawal of CBN guarantee of
foreign credit lines and interbank money market transactions in
June 2011 was expected to raise short term interest rates, at
least in the short to medium term. It was however, reassuring
that the successful issuance and oversubscription of the
US$500.0 million FGN Euro bond facility represented a strong
indication of the confidence of international investors in
Nigeria’s macroeconomic management.

6.8
The Monetary Sector
The primary goal of monetary policy in 2011 would remain the
maintenance of price and financial sector stability. Bank
lending to the real sector was expected to rebound, leading
to increased production activity while growth of major
monetary aggregates would exceed their levels in 2010. The
actions of the monetary authorities in 2010 were to ensure a
balance between the goals of banking system liquidity and
maintenance of price stability. However, Monetary policy
would focus on curbing inflationary threats in 2011, arising from
expected high aggregate demand.

In general, credit to government was estimated to drop by
38.54 percentage points in 2011 from its level of 67.83 per cent
in 2010. On the other hand, credit to the private sector was
expected to increase by 28.26 percentage points from -4.92
per cent in 2010. Thus, broad money (M2) was estimated to
Money market
interest rate
stabilized at the
low end
throughout the
second half of

Lending to the
real sector is
expected to
rebound, leading
to increase in
economic


CBN Monetary Policy Review

grow by about 13.75 per cent over its level in 2010. Income
velocity is expected to rise by 0.2 percentage point over its
level in 2010 to 2.8 per cent. Overall, outlook for the domestic
economy looked largely optimistic and growth prospect for
2011 was high.


CBN Monetary Policy Review

APPENDICES
Communiqué of the Monetary Policy Committee
(July – December 2010)

Appendix 1
COMMUNIQUE OF THE MONETARY POLICY COMMITTEE MEETING NO. 71,
5TH July 2010

The Monetary Policy Committee (MPC) met on 5th July, 2010 to review domestic
economic conditions during the first half of 2010 and the challenges facing the
Nigerian economy against the backdrop of developments in the international
economic and financial environments in order to reassess the options for
monetary policy for the remainder of the year.

On the global scene, the Committee noted that market anxiety over the fiscal
positions of several Euro Area countries was posing new challenges for the world
economy even as global economic recovery remained fragile. In order to
address the weak fiscal position, governments in these countries have started
unwinding the fiscal stimuli by cutting government spending. Such cuts in public
spending may have serious implications for growth and employment and may
lead to a double dip recession with possible contagion effects on the global
economy. If this were to happen, there may be an impact on global commodity
prices, including prices of oil, with knock-on effects on the government’s fiscal
position and the foreign sector.

However, recovery remained robust in most developing and developed
countries, with the exception of high-income European countries where it
stagnated. In this regard, the Committee commended the recent commitment
of the G-20 Summit in Toronto, Canada, which agreed to safeguard and
strengthen the recovery process to lay the foundation for strong, sustainable and
balanced growth, as well as strengthen the financial systems against risks. The G20 leaders of the world’s major industrialized and emerging market economies
welcomed measures so far taken to sustain global recovery and strengthen the
financial systems, while agreeing to work together to curb public deficits,
enhance economic growth and job creation as well as global prosperity. The
Committee believes that the decision of the G-20 Summit would refocus and
galvanize global strategies towards the recovery process.

On the domestic scene, the MPC observed that financial markets, though still
fragile, have recovered faster than expected, urging greater efforts in


CBN Monetary Policy Review

accelerating reforms in the other sectors of the economy. This is critical for
economic growth. The MPC also noted the sustained rebound in commodity
prices which is helping to support growth in commodity producing regions,
including Nigeria. However, it underscored the need to diversify the economy to
protect the country from the vagaries of oil price volatility. The Committee
believes that the inflation risk of the rebound in energy prices appears mitigated
by the continuing low levels of capacity utilization, weak private demand, good
harvest, and well-anchored inflation expectations. In addition, as mentioned
above, the European fiscal crisis and the recent slowdown in manufacturing
output in China and other Asian countries may moderate the robustness of the
markets.

Key Domestic Macroeconomic and Financial Developments
Output and Prices:
The Committee observed that the impressive output growth recorded in 2009
continued in 2010. Provisional data from the National Bureau of Statistics (NBS)
indicates that real Gross Domestic Product (GDP) grew by 7.23 per cent in the first
quarter of 2010 up from 4.50 per cent recorded in the first quarter of 2009. GDP
was projected to grow by 7.68, 7.76 and 8.13 per cent in the second, third and
fourth quarters of 2010, respectively. Overall GDP growth for 2010 is projected at
7.74 per cent which is higher than the revised figure of 6.66 per cent recorded in
2009. The non-oil sector is expected to remain the main driver of overall growth,
with agriculture, wholesale and retail trade, and services contributing 2.49, 2.03
and 2.11 per cent, respectively. The Committee believes that the impressive
growth forecasts reflected prospects for moderate rainfall in 2010, which is
expected to support the production of major crops across the country, coupled
with the current peace in the Niger-Delta, which has led to an increase in crude
oil and natural gas production. It, however, cautioned that there is a thick cloud
hanging over commodity producing countries because of the current crisis
facing the Euro Area and emerging slowdown in manufacturing in major Asian
countries and the US as indicated above.

In addition, the Committee highlighted the binding constraints on the domestic
economy namely; infrastructure inadequacy, lack of access to finance, lack of
requisite skills, unfavourable trade policy and a poor investment climate all of
which have the potential to constrain economic growth. The MPC, therefore,
stressed the need for government to pursue macroeconomic, structural and
institutional reforms that appear to have slowed down in the past few years.

The year-on-year headline inflation declined to 11.0 per cent in May 2010 from
12.5 per cent in April and 11.8 per cent in March. Similarly, core inflation fell to 8.8


CBN Monetary Policy Review

per cent in May 2010 from 9.8 per cent in April and 9.5 per cent in March. The
downward trend in the domestic price level could be attributed to a number of
factors, including the continuing underperformance of monetary aggregates,
with the associated constrained demand, adequate food supply, stable
exchange rates and improvement in the availability of petroleum products,
amongst others. Notwithstanding these developments, the MPC reiterated its
earlier position on the threat of inflationary pressure arising from several factors
including the announcement effect of salary increase in the civil service and the
rising food prices against the backdrop of the famine in neighboring Niger
Republic. The Committee restated its commitment to continue to monitor price
developments with a view to taking appropriate measures to stem any
inflationary threat and ensure that the downside risk of inflation to growth is
minimized.

Monetary, Credit and Financial Market Developments: Provisional data showed
that relative to end-December 2009, broad money (M2) declined by 0.2 per cent
in May 2010, which, when annualized represented a contraction of 0.48 per cent,
compared with the indicative growth target of 29.26 per cent for 2010. Reserve
money (RM), which stood at 1,668.50 billion at end-December 2009, declined to
N1,516.55 billion at end-April and N1,534.79 billion at end-May 2010. As at June 23,
2010, the RM level of N1,618.02 billion was below the provisional 2010 second
quarter indicative benchmark of N1,872.80 billion by 13.6 per cent.

Available data showed that in May 2010, aggregate domestic credit (net) grew
by 12.38 per cent over the December 2009 level, and by 29.72 per cent when
annualized, which was still below the 2010 indicative target of 55.54 per cent.
Credit to government (net), which grew substantially by 50.87 per cent over endDecember 2009 (or 122.1 per cent on annualized basis), was the major
contributor. Credit to the private sector declined by 1.88 per cent (or 4.51 per
cent on annualized basis), in contrast to the growth benchmark of 31.54 per cent
for 2010. The substantial growth of credit to government (net) against the
backdrop of declining private sector credit reflected the risk aversion of the DMBs
to lending to non-government borrowers.

The Committee believes that in order to provide the private sector with the
necessary credit to grow the economy, further efforts are needed to unlock the
credit market in order to enhance the flow of credit to the real economy. The
rates at the inter-bank segments of the money market were much higher than
what obtained in the preceding period owing to the short-lived tight liquidity
conditions in May 2010. Consequently, in May 2010, the average inter-bank call
and Open-Buy-Back (OBB) rates rose significantly to 5.97 and 4.92 per cent,


CBN Monetary Policy Review

respectively, representing increases of 470 and 381 basis points above the 1.27
and 1.11 per cent recorded in the preceding month. In line with the increase in
rates at the inter-bank call and OBB segments, the 7- and 30- day NIBOR rates
increased by 397 and 311 basis points to 6.43 and 8.24 per cent, respectively,
from 2.46 and 5.13 per cent in April. However, with the release of statutory
revenue in the last week of May, the banking system became liquid.

As a result, the average inter-bank call and OBB rates declined from 7.71 and
7.07 per cent, respectively on May 25, 2010 to 1.17 and 1.10 per cent on June 1,
2010. Thereafter, rates remained stable and low, hovering around an average of
1.20 per cent. Developments in interest rates structure indicated that the retail
lending rates were still relatively high even though they were declining. The
average maximum lending rate dropped to 22.56 per cent in May 2010, from
23.45 percent in December, 2009. Also, the average prime lending rate dropped
to 18.77 per cent in May 2010, from 19.03 per cent in December 2009.

Similarly, the weighted average savings rate dropped marginally to 2.92 per cent
in May 2010 from 3.36 per cent in December 2009. The consolidated deposit rates
declined to 3.30 per cent in May 2010 from 6.13 per cent in December 2009. Thus,
the spread between the average maximum lending rate and the consolidated
deposit rate widened to 19.27 per cent in May 2010 from 17.34 per cent in
December, 2009. The Committee noted that the key policy challenges remained
the negative growth in money supply and private sector credit as well as the
subsisting high lending rates in the face of declining inter-bank rates.

The Nigerian capital market is still showing some signs of recovery. The All-Share
Index (ASI) increased from 20,827.17 at end-December 2009 to 25,554.35 as at
23rd June, 2010, or by 20.70 per cent. Market capitalization (MC)—equities only,
increased by 24.9 per cent from N4.98 trillion to N6.28 trillion over the same period.
The number of deals, volume and value of shares traded increased by 16.34,
19.23 and 100.00 per cent, respectively. The increase in ASI and MC was
principally due to share price increases in the Banking, Food & Beverage and
Oil/Gas sectors. The Committee welcomed the continuing improvement in the
stock market, and noted the potentials for further recovery given the passage of
the harmonized Asset Management Corporation (AMCON) Bill by both chambers
of the National Assembly.

External Sector Developments:
The foreign exchange market remained relatively stable in the first half the year.
During the period- January 01 - June 16, 2010, total sales at 45 bi-weekly wDAS
auctions amounted to US$11,155.10 million, equivalent to an average of


CBN Monetary Policy Review

US$247.89 million per auction. In the corresponding period of 2009, the sum of
US$12,995.48 million was sold at 70 daily and bi-weekly RDAS auctions, equivalent
to an average of US$185.65 million per auction. In May 2010, the average foreign
exchange demand of US$459.26 million per auction was recorded against the
average sales of US$394.45 million, representing sales as a 6 percentage of
demand of 85.89.

As at June 23, 2010 average demand for the month dropped to US$315.73 million
and, correspondingly, the average sales also declined, to US$297.69 million,
representing sales as a percentage of demand of 94.29 In June 2010, the wDAS
rate opened at N150.27US$1 (inclusive of 1% commission) and closed at
N150.09/US$1, at an average exchange rate of N150.24/US$1 for the month. This
represented an appreciation of 6 kobo (0.04 per cent) compared with the
average closing rate of N150.30/US$1 recorded in May 2010. The BDC segment of
the market recorded average selling rates of N153.26/US$1 and N153.86/US$1 in
the months of May and June 2010 respectively, representing a depreciation of 0.4
per cent. At the inter-bank market, the average selling rates for May and June
2010 were N151.48/US$ and N151.35 respectively, representing a 0.09 per cent
appreciation.

The wDAS and interbank segments of the foreign exchange market witnessed
mild naira exchange rate appreciation while the BDC segment experienced mild
depreciation. Thus, the stability of the naira exchange rate attained in the foreign
exchange market since the first half of 2009 continued in the first half of 2010. The
Committee observed that the naira exchange rate has remained stable in all
segments of the market during the review period, reflecting increased
confidence in the Naira and the efficacy of the current exchange rate policy
stance. It believes that the relative stability in the foreign exchange market is likely
to be sustained in the near term. The Committee will, however, continue to
monitor developments in the market to ensure that measures are taken to
eliminate speculative demand and volatility in the market. The Gross external
reserves stood at US$37.63 billion on 23rd June, 2010 representing a decrease of
US$1.19 billion or 3.06 per cent when compared with the level of US$38.82 billion
as at 31st May 2010. The Committee, however, noted that the current external
reserves level is still adequate as it would finance 16 months of import, compared
to the internationally recommended benchmark of 3 months of import cover for
a country’s external reserves.

The Committee’s Considerations Against the backdrop of the foregoing, the MPC
noted with satisfaction the continued macroeconomic stability. It, however,
stressed the need to grow the real sector on a sustainable basis. It also reiterated


CBN Monetary Policy Review

the possible inflation risks highlighted at the last MPC meeting, in the light of the
anticipated budget deficit and the operationalisation of the proposed Asset
Management
Corporation.
However,
monetary
aggregates
are
still
underperforming and the Asset Management Corporation is yet to take-off. On
balance, therefore, the inflation threat remained subdued in the short to medium
term. In addition, some of the approved quantitative easing measures are yet to
be completely implemented.

The Committee, therefore, considered it appropriate to continue to monitor
developments with a view to intervening as the need arises. Decisions In the light
of the above, the Committee decided that: No changes are made to the current
policy stance viz: the MPR should remain unchanged at 6.0 per cent; and
2. The asymmetric corridor of 200 basis points above and 500 basis points below
the MPR, respectively, are to be retained.

Sanusi Lamido Sanusi (CON)
Governor, Central Bank of Nigeria
Abuja
July 5, 2010


CBN Monetary Policy Review

Appendix 2
COMMUNIQUE OF THE MONETARY POLICY COMMITTEE MEETING NO. 72,
21ST September 2010

The Monetary Policy Committee (MPC) met on 21st September, 2010 to review
domestic economic conditions during the first eight months of 2010 and the
challenges facing the Nigerian economy against the backdrop of developments
in the international economic and financial environments in order to reassess the
options for monetary policy for the rest of the year.

On the global scene, the Committee noted that there had been a marked
softening of the global economic recovery, with developments in the US and
China giving cause for concern. While the US economy declined in the third
quarter, reflecting the renewed deterioration in the housing market and the
lackluster labor market performance with private sector job creation still weak,
China’s massive official stimulus packages, estimated at 14 per cent of GDP and
focused on infrastructure and housing, did not only boost aggregate demand
but also fed into a property bubble which the government is battling to contain.
As a result, growth in China, which overtook that of Japan in the second quarter
of 2010 to making the former, the world’s second-largest economy, is now
declining. In the Euro Zone, a degree of calmness had returned to the debt
market following the approval of a €750 billion (US$925 billion) European Financial
Stability Facility (EFSF).

However, fresh concerns have emerged regarding the high risk aversion in the
market, as reflected in the widening of spreads between German bonds and
those of weaker peripheral countries, such as Greece, Ireland and Portugal. In
addition, many of the region’s banks remained fragile and vulnerable to funding
constraints due to their dependence on the wholesale markets. However,
Greece whose fiscal problems ignited the Eurozone crisis continues to make
better than expected progress in fiscal reforms. Notwithstanding the recent
weakening of growth globally, the possibility of a double-dip recession is not very
likely. The softening of growth could be seen as a natural adjustment from a
period of unsustainably rapid stimulus-driven activity from mid-2009, to a slowing
phase of consolidation.

On the domestic front, the MPC noted the relative stability achieved in the
financial markets, while urging greater efforts in accelerating reforms in the other
sectors of the economy, to attain self-sustaining growth. The MPC welcomed the
continuing rebound in commodity prices which is helping to support growth in
commodity producing regions, including Nigeria, but reiterated the need to


CBN Monetary Policy Review

diversify the economy to protect the country from the vagaries of oil price
volatility. The Committee believes that the inflation risk of the rebound in energy
prices appears mitigated by the continuing weak private demand, good harvest,
and well-anchored inflation expectations.

Key Domestic Macroeconomic and Financial Developments
Output and Prices
The Committee observed that the impressive output growth recorded in 2009
continued in 2010. Provisional data from the National Bureau of Statistics (NBS)
indicates that real Gross Domestic Product (GDP) grew by 7.69 per cent in the
second quarter of 2010 up from 7.36 per cent recorded in the first quarter. GDP
has been projected to grow by 7.72 and 8.19 per cent in the third and fourth
quarters of 2010, respectively. Overall GDP growth for 2010 is projected at 7.78
per cent which is higher than the 6.96 per cent recorded in 2009.

The non-oil sector is expected to remain the main driver of overall growth, with
agriculture, wholesale and retail trade, and services contributing 2.40, 2.04 and
2.08 per cent, respectively. The Committee believes that the impressive growth
forecasts reflect prospects for continuing favourable rainfall in the remaining
months of the rainy season to support the production of major crops across the
country, coupled with the current peace in the Niger-Delta, which has boosted
crude oil and natural gas production. Crude oil prices are expected to remain
fairly stable at their current levels in the international market following the slow but
steady economic recovery being recorded in most advanced economies.

The MPC, however, cautioned that the projected slowdown in economic activity
in some major advanced economies, including the US and emerging Asia poses
a clear threat to the economies of commodity-producing countries like Nigeria.
While urging greater efforts at diversifying the economy, the Committee stressed
the need for policy reforms to address the binding growth constraints on the
domestic economy, especially, infrastructural inadequacy. The MPC welcomes
the recent revision and rebasing of the Consumer Price Index (CPI) by the
National Bureau of Statistics (NBS) to reflect the current structure of consumption
in the economy.

Based on the revised and rebased CPI, the year-on-year headline inflation rose to
13.7 per cent in August 2010 from 13.0 per cent in July 2010. Similarly, core
inflation increased to 12.4 per cent in August from 11.3 per cent in July 2010. Food
inflation also trended upward tom15.1 per cent from 14.0 per cent in July 2010.
The upward trend in the domestic price level could be attributed to the late
commencement of rains in some food producing regions in the northern part of


CBN Monetary Policy Review

the country, which may have affected the production/supply of some staple
food items, while some non-food components of the new CPI basket also
recorded price increases.

The MPC reiterated its earlier position on the threat of inflationary pressure arising
from several other factors including implementation of the new salary structure in
the civil service, expected fiscal injections arising from electioneering expenses
and the injections relating to AMCON purchase of non-performing loans of DMBs,
spillover effects of the rising food prices from famine in neighboring Niger
Republic and floods in Asia, deregulation of energy prices as well as the
expected increase in household-spending toward year-end festivities.

The Committee supports the deregulation policy of the Federal Government but
would, continue to monitor price developments with a view to taking appropriate
policy measures to stem any inflationary threat and ensure that the upside risk of
inflation to growth is minimized. Monetary, Credit and Financial Market
Developments: Provisional data showed that relative to end-December 2009,
broad money (M2) grew by 7.0 per cent in August 2010, which, when annualized
represented a growth of 10.50 per cent. Reserve money (RM), which stood at
N1,653.86 billion at end-December 2009, fluctuated downward and by
September 13, 2010, stood at N1,407.51 billion.

Available data showed that in August 2010, aggregate domestic credit (net)
grew by 18.0 per cent over the December 2009 level, and by 27.0 per cent when
annualized. Credit to government (net), which grew substantially by 65.81 per
cent over end-December 2009 (or 98.72 per cent on annualized basis), was the
major contributor. Credit to the private sector, on the other hand, declined by
0.91 per cent (or 1.37 per cent on an annualized basis). The Committee believes
that in order to provide the private sector with the necessary credit to grow the
economy, further efforts were needed to restore confidence to the credit market
and to unlock the flow of credit to the real economy.

In general, monetary aggregates are growing but remain below indicative
benchmarks for the year. The rates at the interbank segment of the money
market remained stable and low, owing to the prevailing banking system liquidity
and the de-risking of the market through the CBN guarantee of the interbank
transactions. Consequently, in August 2010, the average inter-bank call and
open-buy-back (OBB) rates fell significantly to 1.26 and 1.25 per cent,
respectively, representing decreases of 233 and 195 basis points from the 3.59
and 3.20 per cent recorded in the preceding month. In line with the decrease in
rates at the inter-bank call and OBB segments, the 7- and 30- day NIBOR rates


CBN Monetary Policy Review

decreased by 62 and 196 basis points to 3.85 and 4.55 per cent, respectively,
from 4.47 and 6.51 per cent in July.

As at September, 17, 2010, inter-bank call and OBB rates increased averaging
3.56 and 2.91 per cent, respectively. Developments in retail market interest rates
indicated that the retail lending rates were still relatively high. The average
maximum lending rate rose to 22.31 per cent in August 2010 from 22.27 per cent
in July. However, the average prime lending rate declined to 16.89 per cent in
August 2010, from 17.40 per cent in July. The weighted average savings rate
dropped to 1.41 per cent in August 2010 from 1.62 per cent in July. The
consolidated deposit rates declined to 2.27 per cent in August 2010 from 2.40 per
cent in July. Thus, the spread between the average maximum lending rate and
the consolidated deposit rate rose marginally to 20.04 per cent in August 2010
from 19.87 per cent in July.

The Committee noted that the key policy challenges remained the continuing
sub-optimal growth in money supply coupled with the negative growth in private
sector credit as well as the subsisting high retail lending rates in the face of
substantially low wholesale inter-bank and retail deposit rates. The Nigerian
capital market, which was showing signs of recovery, recently turned bearish. The
All-Share Index (ASI) decreased from 25,384.14 at end-June 2010 to 22,993.77 as
at 17th September, 2010, or by 9.4 per cent. Market capitalization (MC) - equities
only, decreased by 8.7 per cent from N6.17 trillion to N5.63 trillion over the same
period. The number of deals, volume and value of shares traded decreased by
4.6, 14.8 and 6.1 per cent, respectively.

The decrease in ASI and MC was principally due to the share price decreases in
the Banking, Food & Beverage, insurance and Oil/Gas sectors. The Committee
believes that an early resolution of the leadership impasse at the NSE and
effective take-off of the Asset Management Corporation (AMCON) would
facilitate the return of the stock market to the path of recovery.

External Sector Developments
The foreign exchange market remained relatively stable over the review period.
The total foreign exchange inflow in July 2010 was US$2.25 billion, representing an
increase of US$0.19 billion or 9.22 per cent over the US$2.06 billion recorded in the
preceding month. Of this inflow, crude oil/gas revenue was US$2.16 billion or 93.97
per cent while other inflows represented the balance of US$0.09 billion or 6.03 per
cent. Total outflows or payment in July 2010 amounted to US$4.03 billion,
representing an increase of US$0.15 billion or 3.78 per cent above the US$3.88


CBN Monetary Policy Review

billion recorded in the preceding month. Consequently, the net outflow during
the review period was US$1.78 billion.

Inflows from autonomous sources for the months of July and August 2010 were
US$5.3 billion and US$4.7 billion, respectively. Over the period January to August
2010, total foreign exchange inflows to the market amounted to US$ 52.00 billion
comprising funds from the CBN amounting to US$14.09 billion or 27.1 percent,
while the balance of US$37.91 billion (or 72.91 percent) came from autonomous
foreign exchange sources such as oil companies, international institutions and
home remittances.

The Committee noted with satisfaction that the autonomous inflows had helped
in moderating demand pressure for foreign exchange in the wDAS segment of
the foreign exchange market. Thus, the autonomous inflows continue to augment
the official inflow to ensure steady supply of foreign exchange to the market. In
August 2010, the wDAS rate opened at N150.01/US$1 (inclusive of 1% commission)
and closed at N150.78/US$1, at an average exchange rate of N150.27/US$1 for
the month. This represented a depreciation of 17 kobo (0.11 per cent) when
compared with the average closing rate of N150.10/US$1 recorded in July 2010.
As at 17th September, 2010 the exchange rate depreciated by 18k to
N150.96/US$1 (plus 1% commission) from N150.78/US$1 recorded on August 31,
2010.

The BDC segment of the market recorded average selling rates of N152.23/US$1
and N152.41/US$1 in the months of August and July 2010 respectively,
representing an appreciation of 0.11 per cent. At the inter-bank market, the
average selling rates for August and July 2010 were N150.70/US$ and N150.27/US$
respectively, and represented a 0.3 per cent depreciation. As at September 17,
2010 the interbank and BDC rates were N152.05/US$1 and N153.50/US$1
respectively.

The wDAS, interbank and BDC segments of the foreign exchange market
witnessed mild naira exchange rate depreciation. Thus, the stability of the naira
exchange rate attained in the foreign exchange market since the first half of
2009 continued into the third quarter of 2010. The Committee observed that the
naira exchange rate had remained stable in all segments of the market during
the review period, reflecting increased confidence and the efficacy of the
current exchange rate policy stance. The MPC believes that the relative stability
in the foreign exchange market was likely to be sustained in the near term. The
Committee would continue to monitor developments in the market to ensure that


CBN Monetary Policy Review

measures are taken to eliminate speculative demand and exchange rate
volatility.

The gross external reserves stood at US$36.636 billion on 13th September, 2010
and represented a decrease of US$0.50 billion or 1.3 per cent when compared
with the level of US$37.16 billion as at end-July 2010. The Committee, however,
noted that the current external reserves level is still adequate and is expected to
remain robust in view of the favorable outlook for oil price and output.
Consequently, there is no compelling reason to alter the existing exchange rate
regime stability will remain a priority.

The Committee’s Considerations
The Committee, after a review of the domestic and international financial and
economic developments, noted with satisfaction the sustained macroeconomic
stability and welcomed the explicit commitment of the federal government to
resume implementation of power sector reforms in line with the committee’s
recommendations at prior meeting. The Committee, however, sounded a note of
caution on the possibility of inflationary build up arising from several other sources
as has been highlighted earlier.

The Committee noted that the resumption of growth in M2 is a welcome
development, as it has reversed the stagnation recorded from January through
June 2010. The Committee also observed the gradual restoration of financial
stability and anticipated repair of banks’ balance sheets when the Asset
Management Corporation of Nigeria becomes operational. In view of the
foregoing the MPC underscored the importance of balancing the inflation risk
with financial sector stability objective.

The MPC observed that the large demand for foreign exchange noticed during
the review period resulted from among others, remittance of dividends by some
companies and enhanced importation of refined petroleum products due to the
Federal Government sovereign debt instruments. Thus there was no evidence of
speculative demand or capital flight observed in the foreign exchange market.
The Committee noted the federal government’s efforts to raise funds from the
domestic capital market to execute vital infrastructural projects and urged for
continuous coordination of monetary and fiscal policy as well as underscored the
need for fiscal consolidation so as to ensure macroeconomic stability.

The Committee commended the commitment of the Federal Ministry of
Finance/Securities and Exchange Commission to the reforms in the capital
market and efforts to get the oil/gas and telecommunication companies listed


CBN Monetary Policy Review

on the Exchange. The MPC further observed that the declining share of the
banking sector in market capitalization is a positive development, which is good
for rebalancing the market to reduce the overwhelming influence of the banking
sub-sector. The MPC commended the government for resuming the power sector
reforms and its decision to fast track them, which it believes will impact positively
on the cost structure of the economy.

Furthermore, the MPC commended and endorsed the CBN discussion with
PENCOM aimed at realizing part of the accumulated pension funds to finance
power sector projects on a long term basis. It noted that this initiative will assist in
shielding the power sector funding from the vagaries of the volatility of the
international capital market, and exchange and interest rate risks.

Conclusion
Having considered the above factors, the Committee considered it imperative to
commence policy actions aimed at moderating the inflationary pressures in the
economy, particularly given the outlook for government spending in an election
year and the liquidity implications of the purchase of non-performing loans (NPLs)
by AMCON. The Committee is satisfied that sufficient progress has been made in
banking sector reforms to mitigate the risk of moderate tightening in financial
institutions.

Decisions
In the light of the above, the MPC took the following decisions:
1.
The Resumption of active Open Market Operations for the purpose of
targeted liquidity management;
2.
An increase in MPR by 25 basis points from 6.0 to 6.25 per cent ; and
3.
Adjustment of asymmetric corridor to 200 basis points above and 300 basis
points below the MPR for the Standing Lending Facility and Standing
Deposit, respectively. This effectively increases interest payable on standing
deposits with the CBN by 225 basis points forthwith.

Sanusi Lamido Sanusi (CON)
Governor,
Central Bank of Nigeria, Abuja
September 21, 2010


CBN Monetary Policy Review

Appendix 3
COMMUNIQUE OF THE MONETARY POLICY COMMITTEE MEETING NO. 73,
23rd November 2010

The Monetary Policy Committee (MPC) met on 22nd and 23rd November, 2010 to
review domestic and international economic and financial conditions in order to
reassess the options for monetary policy for the rest of the year and beyond.

On the global scene, the Committee noted with concern the continued
slowdown in global economic recovery, especially in the US against the
backdrop of the huge US trade deficit, requiring both domestic and external
rebalancing of demand.

On the domestic front, the MPC noted the high economic growth rate and the
progress made towards restoring stability in the banking sector. It, however,
observed with concern the continued high inflation rate and reiterated the
urgent need for fiscal consolidation and the continuation of comprehensive
economic and structural reforms to remove supply-side bottlenecks.

Key Domestic Macroeconomic and Financial Developments
Output and Prices:
The Committee observed the sustained impressive output growth recorded thus
far in 2010. Provisional data from the National Bureau of Statistics (NBS) indicates
that real Gross Domestic Product (GDP) is estimated to grow by 8.29 per cent in
the fourth quarter of 2010, up from 7.86 per cent recorded in the third quarter.
Overall GDP growth for 2010 is projected at 7.85 per cent compared with 6.96 per
cent recorded in 2009. The non-oil sector remained the main driver of overall
growth. The Committee, however, cautioned that the recent slowdown in
economic activity in some major advanced economies could have adverse
effects on commodity-producing economies like Nigeria, notwithstanding the
expected high crude oil prices in the international markets.

While urging greater efforts at diversifying the economy, the Committee stressed
the need for policy reforms to address the binding growth constraints on the
domestic economy, especially, infrastructural inadequacy. The Committee noted
with satisfaction the progress made thus far on the power sector front, but
stressed the need for renewed focus on the petroleum and agricultural policy
sectors. The continued dependence of the country on imported food and
energy, which is totally avoidable, is one of the main sources of erosion of our
foreign reserves. The year-on-year headline inflation (rebased) stood at 13.4 per
cent in October 2010 relative to 13.6 per cent in September 2010. Food inflation


CBN Monetary Policy Review

was 14.1 per cent in October, down from 14.6 per cent in September. However,
core inflation rose to 13.2 per cent in October from 12.8 per cent in September.

The persistence of high inflation remains a major challenge, when viewed against
the relatively good harvests, improved supply of petroleum products and weak
expansion of credit to the private sector. This reality further underscored the need
for addressing supply-side constraints in the medium to long term, and the urgent
need to restrain debt-financed government spending in the short term. The MPC
reiterated its earlier position on the threat of inflationary pressure arising from high
inflation expectations, calling for stronger fiscal prudence to support the
monetary policy stance. This is particularly critical for improving the dynamics of
policy coordination. Nevertheless, the Committee would continue to monitor
price developments with a view to taking appropriate policy measures to stem
any inflation threat and ensure that the upside risk to growth is minimized.

Monetary, Credit and Financial Market Developments:
Provisional data showed that relative to end-December 2009, broad money (M2)
grew by 4.25 per cent in October 2010, which, when annualized represented a
growth of 5.10 per cent. Reserve money (RM), which stood at N1,653.86 billion at
end-December 2009, fluctuated downward and by November 15, 2010, stood at
N1,4449.95 billion. Available data showed that in October 2010, aggregate
domestic credit (net) grew by 19.69 per cent over the December 2009 level, and
by 23.63 per cent when annualized. Credit to government (net), which grew
substantially by 53.35 percent over end-December 2009 (or 64.02 per cent on
annualized basis), was the major source of expansion in aggregate credit.

Credit to the private sector, grew marginally by 3.22 per cent (or 3.86 per cent on
an annualized basis). In general, the growth in monetary and credit aggregates
remained below the long term trends. The interest rates at the interbank segment
of the money market responded to the increase in the Monetary Policy Rate
(MPR) effected at the last meeting of the MPC in September in line with policy
expectation. Consequently, in October 2010, the average inter-bank call and
open-buy-back (OBB) rates rose significantly to 8.45 and 7.53 per cent,
respectively, representing increases of 526 and 461 basis points from the 3.19 and
2.92 per cent recorded in the preceding month.

Developments in market interest rates indicated that the retail lending rates were
still relatively high. The average maximum lending rate moderated slightly to 21.85
per cent in October from 22.20 per cent in September while the average prime
lending rate stabilized at 16.66 per cent. The weighted average savings deposit
rate remained relatively stable while the consolidated deposit rates increased to


CBN Monetary Policy Review

2.31 per cent in October from 2.07 per cent in September. Thus, the spread
between the maximum lending rate and the consolidated deposit rate narrowed
marginally to 19.54 per cent in October from 20.14 per cent in September. The
domestic capital market continued to show some signs of recovery.

The All- Share Index (ASI) increased from 23,050.59 at end-September to 25,301.34
as at 15th November, 2010, or by 9.8 per cent. Market capitalization (MC) -
equities only, increased by 43.1 per cent from N5.65 trillion to N8.08 trillion over the
same period. The number of deals increased by 21.6 per cent, while the volume
and value of shares traded decreased by 38.5 and 62.7 per cent, respectively.
The increase in ASI and MC was principally due to the share price increases in the
Banking, Food & Beverage, insurance and Oil/Gas sectors, and new and
supplementary listings of shares on the exchange. The Committee believes that
the effective take-off of the Asset Management Corporation (AMCON) and
progress made on resolution of the banking system crisis have been major
contributions to this improvement in sentiment.

External Sector Developments
The
foreign
exchange
market
remained
relatively
stable.
The
total
foreignexchange inflow in October was US$2.38 billion, representing a decrease
of US$0.32 billion or 11.85 per cent below the US$2.70 billion recorded in the
preceding month. Total outflows or payments in October amounted to US$3.46
billion, a decrease of US$1.62 billion or 31.89 per cent compared with US$5.08
billion recorded in the preceding month. Consequently, the net outflow during
this period was US$1.09 billion. Inflows from autonomous sources in October were
US$10.43 billion compared with US$7.55 billion in September. Cumulatively from
January-October 2010, total foreign exchange inflows to the market amounted
to US$ 88.32 billion comprising funds from the CBN (US$21.15 billion) and from
autonomous sources such as oil companies, international institutions and home
remittances (US$67.17 billion).

The Committee noted with satisfaction the complementary role of autonomous
inflows in moderating demand pressure in the foreign exchange market. In
October, the wDAS average closing rate was N151.25/US$ compared with
N151.07/US$ recorded in September, representing a depreciation of 18 Kobo
(0.12 per cent). On November 15, 2010, the wDAS exchange rate was
N150.29/US$ compared with
N151.25/US$ for October, representing an
appreciation of 96 kobo (0.64 per cent).

At the interbank segment, the average buying and selling rates for October, were
N151.68/US$ and N151.78/US$, compared with N152.51/US$ and N152.61/US$


CBN Monetary Policy Review

respectively recorded in September, representing an appreciation of 83 kobo (or
0.54 percent). On November 15, 2010 the corresponding rates were N150.65/US$
and N150.75/US$ as against N151.68/US$ and N151.78/US$, in October, registering
an appreciation of 103 kobo (or 0.68 per cent) At the BDC segment, the average
buying and selling rates in October were N151.98/US$ and N153.98/US$
respectively, compared with N152.30/US$ and N153.80/US$ in September. The
buying rate represented an appreciation of 32 kobo (0.21per cent) while selling
rate represented a depreciation of 18 kobo (or 0.12 percent). The buying and
selling rates on November 15 were N151.50/ US $ and N153.50/ US$ compared
with N151.98/US$ and N153.98/US$ for October, represented an appreciation of
48 kobo (or 0.31 per cent). Thus, the stability of the naira exchange rate since the
first half of 2009 continued into 2010.

The MPC believes that the relative stability in the foreign exchange market is likely
to be sustained in the near term. The Committee would continue to monitor
developments in the market to ensure that measures are taken to eliminate
speculative demand and exchange rate volatility. The gross external reserves
stood at US$34.27 billion on 15th November, 2010 compared with US$33.597 billion
as at end-October and US$34.59 billion as at end-September. The committee
noted the elevated demand for foreign exchange at the wDAS which led to an
increase in reserve utilization to defend the currency. It also noted recent
moderation of demand pressure following Central Bank’s interventions to curtail
speculative demand. It, however, stressed that the solution to reserve accretion
have to be in implementation of appropriate reforms to industrial and trade
policy aimed at reducing import-dependence, and these are beyond the scope
of monetary policy.

The Committee’s Considerations
The key concerns noted by the Committee were:
1.
The elevated inflation levels;
2.
Rising government expenditure and borrowings with the possible crowding
out effects on the private sector; and
3.
Demand pressure in the foreign exchange market, leading to reduction in
external reserves.
The view of the Committee is that the solution requires both fiscal and monetary
measures, and reiterated the need to eliminate unnecessary subsidies that add
to government expenditure and debt. There is need also for continuing reforms in
the economy particularly in the energy and agricultural sectors to curb high
import bills through appropriate fiscal policies. The Committee remains conscious
of its core mandate and reaffirms its commitment to price stability to engender
sustainable economic growth.


CBN Monetary Policy Review

The MPC remained committed to exchange rate stability in order to attract
foreign direct investment and anchor expectations. The MPC emphasized greater
communications with stakeholders to remove speculative demand in the foreign
exchange market. It also held that, in view of the low price elasticity of demand
for imported necessities, depreciation of the currency would not in itself address
the structural problem of import-dependence. The Committee continued to urge
greater fiscal responsibility and commitment to reforms that will enhance the
effectiveness of monetary policy.

Overall, members agreed that there is need for tightening, but the discussions
centered on the form and the timing of the tightening. After due consideration of
the pros and cons of various policy options, the Committee agreed on a majority
decision of 6 to 4 members to retain the current policy rate, given the need to
retain flexibility and allow the effect of the previous rate increase to work through
the system, against the argument for immediate increase in view of the elevated
inflation risk. Also, the Committee agreed by a majority of 9 to 1 members to
narrow the corridor around the MPR by reintroducing the symmetry of +/- 200
basis points.

Decisions
The MPC’s decisions were therefore:
1.
To Retain the Monetary policy Rate (MPR) at 6.25 per cent.
2.
To adjust the corridor to +/- 200 basis points, implying Standing Lending
Facility (SLF) rate of 8.25 per cent, and Standing Deposit Facility (SDF) rate of
4.25 per cent.
3.
Maintain the policy stance of a stable exchange rate.
4.
Continue to monitor inflationary trends with a view to taking appropriate
steps as and when necessary.
5.
On the stance of monetary policy in the year ahead, the Committee
reaffirmed that monetary policy would seek to exert pressure on aggregate
demand, thereby helping to lower inflation expectations. In addition,
monetary policy would stand ready to provide adequate and timely
liquidity to support credit dynamics that would sustain fiscal mechanisms to
bolster growth.

Sanusi Lamido Sanusi (CON)
Governor,
Central Bank of Nigeria, Abuja
November 23, 2010