Central Bank of Nigeria Communiqué No. 88 of the Monetary Policy
Committee Meeting of Monday and Tuesday, March 18 and 19, 2013

The Monetary Policy Committee met on March 18 and 19, 2013 with all the 12
members in attendance. The Committee reviewed the conditions and
challenges that confronted the domestic economy in the first quarter of 2013
against the backdrop of current international economic and financial
developments with a view to reassessing the monetary policy options in the
short-to-medium term.
International Economic Developments
At the outset, the Committee observed that global growth remained
subdued throughout 2012 due to the softer than expected level of activities
in the euro area and the slipping of Japan into recession during the second
half of the year. Weak and fragmented growth was also recorded across
major economies and regions including the US. The emerging market
economies, however, showed a fair degree of resilience.
The growth outlook, however, appears promising. The IMF January 2013 WEO
Update, projected a global output growth of 3.5 per cent in 2013 compared
with the 3.2 per cent achieved in 2012. In the Advanced Economies, output
was estimated at 1.4 per cent for 2013 compared with the 1.3 per cent
achieved in 2012.

Recession is expected to continue in the euro area although the magnitude
of the contraction, estimated at 0.2 per cent in 2013, represents an
improvement over the 0.4 per cent contraction in 2012. A slowdown in
growth is also expected in the US in 2013, as output is projected to decline by
2.0 per cent from 2.3 per cent in 2012, owing largely to the short term effects
of its fiscal consolidation regime as well as the weaknesses in the labor and
housing markets.
The emerging Asian economies were projected to post a gradual recovery
that would propel global output growth in 2013. China, which previously
recorded a slowdown over seven consecutive quarters to Q3 2012, witnessed
improved activity in Q4 2012; confirming that an upswing in growth was
underway. The recent fiscal and monetary easing operations of the Peoples
Bank of China led to increased tempo of investment in infrastructure with
indications of further public spending in fiscal 2013. Thus, the economy is
expected to grow strongly in 2013 amid gradual improvements in the external
environment. Japan returned to growth in the fourth quarter of 2012, raising
hopes of an end to the 15-year deflation. The major setback in the region is
expected from India, with real GDP growth of 5.4 per cent in 2012 on
account of the poor performance of the manufacturing, agriculture and
service sectors.
The Committee noted that growth in Sub-Saharan Africa was still robust,
although real output growth dropped to 4.8 per cent in 2012 from 5.3 per

cent in 2011. The performance of Sub-Saharan Africa during 2013 would
partly depend on developments in the euro area as well as the extent of
recovery in China. With policy buffers weaker than they were prior to the 2008
crisis, the ability of governments to implement countercyclical fiscal policy
may be constrained.
Domestic Economic and Financial Developments
Output
The Committee was satisfied with the relatively robust output growth
projections for 2013 despite the slowing global economy, on the back of
favorable conditions for increased agricultural production, the outcome of
banking sector reforms, as well as other initiatives by government to stimulate
the real economy. The National Bureau of Statistics (NBS) reported that the
real GDP growth rate declined from 7.43 per cent in 2011 to 6.58 per cent in
2012. The decline was partly driven by the oil sector which contracted by 0.91
per cent. The major driver of overall growth, therefore, remained the non-oil
sector, with agriculture; wholesale and retail trade; and services contributing
1.37, 2.19 and 2.10 percentage points, respectively.
The Committee was concerned that the declining contribution of the oil
sector to growth, which became apparent in the second half of 2011,
continued in Q4 2012. Crude oil production, including condensates and
natural gas liquids, decreased by 37,000 barrels per day (bpd) in February

2013 to 2.035m bpd compared with the level of 2.072m bpd attained in
December 2012. Oil theft in the Niger-Delta remained a source of concern.
The Committee was also concerned that the decline in the growth rate of
agricultural output which started in the 4th quarter of 2011 continued up to
the end of 2012.
The Committee was of the view that although the GDP growth projection
remained high, there were a number of risk factors that were likely to affect
output performance. These include perception of increased levels of
corruption and impunity in the country, insecurity particularly in the northern
part of the country, as well as mixed signals from power and petroleum sector
reforms.
Prices
Headline inflation which had decreased to a four-year low of 9.0 per cent in
January 2013 inched up to 9.5 per cent in February, driven largely by the
food component. Food inflation, which was 10.1 per cent in January 2013,
increased by 0.87 percentage point in February due mainly to increases in
the prices of farm produce and imported food items. Core inflation,
however, moderated slightly between January and February 2013. The
Committee noted that the sharp drop in inflation in early 2013 compared with
early 2012 is largely a result of the base effect of the partial removal of fuel
subsidy in January 2012. With the tapering off of the first and second round

effects of the increase, the prudent monetary policy stance and stable
exchange rates are yielding lower headline inflation figures.
Monetary, Credit and Financial Market Developments
Broad money supply (M2) grew by 2.86 per cent in February 2013 over the
level at end-December 2012, which annualizes to 17.16 per cent. Aggregate
domestic credit (net) grew by 10.17 per cent over the same period (an
annualized rate of 61.02 per cent). The significant growth in net credit in the
period was due to the huge increase in credit to government (net), which
rose by 108.18 per cent.
Interest rates in the interbank money market declined between January 21
and March 14, 2013 owing to liquidity surfeit in the banking system. The
interbank call and the OBB rates, which opened at 10.35 and 10.33 per cent
on January 21, closed at 10.29 and 10.28 per cent, respectively, on March 15,
2013. The average interbank call and OBB rates for the period were 11.38 and
11.23 per cent, respectively. The average prime lending rate inched up
slightly from 16.54 per cent in December 2012 to 16.56 in February 2013, while
the maximum lending rate more or less remained flat at 24.60 per cent during
the period. The weighted average deposit rate, however, increased from
3.77 to 5.37 per cent during the review period.
The Committee noted the upswing in activities in the capital market, as
equities market indicators all trended upwards in the review period. The AllShare Index (ASI) increased by 17.3 per cent from 28,078.81 on December 31,

2012 to 32, 950.08 on March 15, 2013 while Market Capitalization (MC) rose by
17.5 per cent, from N8.97 trillion to N10.54 trillion. The Committee, however,
observed that the improved performance was largely induced by the
substantial portfolio inflows, as foreign investors took advantage of the
favourable domestic environment brought about by the high yield on
government debt instruments, and stability in the naira exchange rate.

External Sector Developments
At the Wholesale Dutch Auction System (wDAS), interbank and the BDC
segments of the foreign exchange market, the exchange rate opened at
N157.29/US$, N157.10/US$, and N159.00/US$ on 22nd January 2013 and closed
at N157.32/US$, N158.65/US$, and N160.00/US$, respectively, on March 15,
2013. The average wDAS, interbank and BDC exchange rate during the
period was N157.30/US$, N157.65/US$, and N158.94/US$, respectively. The
Committee noted the slight depreciation in the exchange rate at the wDAS
and interbank segments of the foreign exchange market. The BDC segment,
however, appreciated during the period due to the low patronage by
speculators on account of the improved supply of foreign exchange by oil
companies, increased inflow from portfolio investors, and the effect of the
prohibition of the simultaneous access to the CBN window (Repo and
Standing Lending Facility) and wDAS transactions by DMBs. The Committee
expressed satisfaction with the significant accretion to external reserves
which stood at US$49.38 billion as at March 14, 2013, representing an increase

of US$ 5.5 billion or 12.68 per cent over the level of US$43.83 billion at endDecember 2012. The increase in reserves was driven largely by the proceeds
from crude oil and gas sales and crude oil-related taxes, as well as reduced
funding of the wDAS. The reserves level could finance over 13 months of
imports. The Committee urged the Bank to continue the monitoring of
portfolio and foreign direct investment flows, while being conscious of the
risks to financial stability of a rapid outflow of hot money.

The Committee’s Considerations
The Committee was pleased with the prevailing macroeconomic stability
despite shocks from both external and domestic environments; a
development which informed the tightening stance of monetary policy since
the third quarter of 2010. Having achieved a reasonable degree of
moderation in the rate of inflation, there were compelling arguments to
consider easing monetary policy, at least from the perspective of stimulating
growth in the real sector. Given the slowdown in overall GDP and agricultural
GDP growth, inability of the SMEs to borrow at the current lending rates, and
crowding out effects that may require monetary easing. The Committee
carefully weighed the option of relaxing monetary policy against the likely
risks in the near-to-medium term, noting that reversing the current stance of
monetary policy was not likely to produce a neutral outcome, as it may signal
the preference for a higher inflation rate on the part of the CBN.

At 9.0 and 9.5 per cent in January and February, respectively, the price data,
which largely reflected the base effect of the first and second round impact
of the fuel subsidy removal in January 2012, sends a clear signal that there
was still an upside risk to inflation in the near-to-medium term. Furthermore,
yields on FGN bonds have been declining steadily, signalling the impact of
increased inflows while equity prices have been trending upwards.
Quantitative easing, especially in the US and the EU is already creating a
potential new round of asset bubbles globally. The Committee was of the
view that the growth in the domestic capital market was driven largely by the
huge capital inflows. The principal risk to stability in the medium-to-long-term
can be addressed through diligent implementation of sound policies of fiscal
consolidation and structural reforms. Without these, the economy will not be
able to attract long term foreign capital inflow that makes the gains of
monetary policy sustainable and insulate the economy from the risks
associated with external shocks and capital flow reversals. Monetary policy
will, therefore, seek to preserve the current gains of macroeconomic stability
in the short term, while fiscal and structural reforms kick in.

The Committee also noted the wide spread between deposits and lending
rates, which it attributed to the inefficiencies in the market requiring
institutional and structural reforms that would enforce behavioural change on
the market, consistent with the long term needs of the economy.

The Committee was of the view that sustainable low lending rates, could be
achieved if the necessary infrastructure such as stable power and good
roads, amongst others, were put in place. The Committee noted that the
present infrastructural condition has always provided an incentive for
asymmetric response on the part of the banks to the policy rate in a manner
that was not always beneficial to the small and medium customers. With
respect to the price level, the Committee observed that the rising pressure in
February after a significant moderation in January, was indicative of the fact
that there were some underlying factors that could constitute a threat to
inflation in the medium term.

The Committee noted the 2013 Federal Government Budget of N4.9 trillion,
passed by the National Assembly and signed into law by the President, which
represents an increase of about 5 per cent. Furthermore, the budget,
predicated on an oil benchmark price of US$79/barrel as against
US$75/barrel, proposed by the Executive, potentially slows down the pace of
fiscal consolidation with implications for accretion to the Excess Crude
Account and gross external reserves. In addition, the Committee observed
that the foreign exchange market has started experiencing pressure in March
2013, mainly reflecting compression of yields in the fixed income market as
well as outflows to pay dividends by multinational corporations. However, the
Committee noted that the exchange rate has remained within the target
range and also that the current monetary conditions are conducive to further

tightening using Open Market Operations without recourse to an increase in
the MPR.

In view of these developments, the Committee was faced with three options:
(i) An increase in rates in response to the uptick in headline and food
inflation; and pressure on exchange rates;
(ii) A reduction in rates in view of declining core inflation and GDP growth;
(iii) Retaining current monetary policy stance to sustain the gains of monetary
policy while utilizing the existing space in the corridor to influence yields and
exchange rates in the short term.

The Committee’s Decisions
The Committee considered and rejected option 1 as being unnecessary
since there are no major inflationary concerns at this time. While
acknowledging the merit of the arguments in favour of option 2, it was also
rejected by the majority because it could send wrong signals of a premature
termination of an appropriately tight monetary stance. The Committee,
therefore, decided by a majority vote of 9:3 to accept option 3 and maintain
the current policy stance i.e. to retain the MPR at 12 per cent with a corridor
of +/- 200 basis points around the midpoint; retain the Cash Reserve
Requirement at 12 per cent and Liquidity Ratio at 30 per cent with the Net
Open Position at 1 per cent.

Thank you.

Sanusi Lamido Sanusi, CON
Governor
Central Bank of Nigeria
19th March 2013