Central Bank of Nigeria Communique No. 61 of the Monetary Policy
Committee Meeting, February 09, 2009

The Monetary Policy Committee (MPC) met today, February 9, 2009 and
reviewed the current domestic and international economic and financial
developments. The Committee, at the outset, noted that the country’s
present economic and financial situation and its near-term prospects are
impacted largely by exogenous factors. The deepening recession in
industrialized economies and the slowdown in economic activity of
emerging countries, the fall in capital flows into Nigeria through remittances
and foreign investments and the drying up of credit lines for Nigerian banks
would, in the view of the Committee, impact negatively on Nigeria’s
external and fiscal positions. The latest estimates of economic outlook of
industrialized and emerging economies show that their performance in 2009
would continue to be a major drag on the world economy. The sub-Saharan
Africa too is projected to post a lower rate of output growth in the year
ahead.

On the domestic scene, the Committee noted that macroeconomic outcomes
in 2008 weakened slightly relative to the previous year due largely to the
global financial crisis and the attendant economic slowdown. Indeed, the
Committee observed that output growth in 2008 was more or less unchanged
from the 2007 level. High food prices throughout the year continued to drive
head line inflation. Interest rates trended upwards from the third quarter and
remained elevated through November, but moderated in December. The
Naira exchange rate was stable through November, but depreciated sharply
in December and January 2009 following increased demand pressures.

The international developments, in the view of the Committee, present
serious challenges to policy making in the short term notwithstanding signs
of inherent resilience of the domestic real and financial sectors of the
Nigerian economy. Monetary policy in particular has a major role to play in
moderating the price variables—interest rates and exchange rates—in a
manner that would foster business confidence and economic growth, price
and exchange rate stability and financial soundness.

Key Macro-economic Developments

Inflation
The Committee noted that the year-on-year headline inflation rate at end
December 2008 was 15.1 per cent compared with 6.6 per cent at end-
December 2007. Similarly, the core inflation trended upwards to 10.4 per
cent in December 2008 from 3.6 per cent at the end of 2007. The Bank’s six
month forecast horizon suggests gradual moderation of the year-on-year
headline inflation, although may likely remain in the double-digit zone in the
first half of the year. Similarly, core inflation is projected to moderate during
the period.

Output
The latest estimates of the aggregate output as measured by the Gross
Domestic Product at 1990 constant basic prices, provided by the National
Bureau of Statistics (NBS) shows that aggregate output growth for 2008 was
estimated at 6.41 per cent, close to the 6.45 per cent achieved in 2007.
Agriculture contributed 2.75 percentage points to overall growth.

Monetary Aggregates
Provisional data for broad money (M2) grew sharply by 58.02 per cent in
2008. The MPC noted that the growth in M2 was driven largely by the rise
in credit to the private sector, which grew by 59.52 per cent. Staff estimates
indicate that monetary expansion in 2009 is likely to moderate on account of
the expected decline in net foreign assets, complemented by the anticipated
deceleration in growth in credit to the domestic economy.

Exchange Rate
The Committee noted the sharp depreciation in the naira exchange rate that
took place in all the segments of the foreign exchange market in December
2008 following the sudden surge in demand, induced largely by the
perceived negative impact of the global financial crisis. The reduced inflow
to the economy has constrained supply to the market leaving the CBN as the
main source of foreign exchange. However, with the measures taken in
January 2009, the exchange rate depreciation has moderated.

External Reserves
The MPC noted the recent foreign exchange demand pressure and decline in
foreign exchange earnings which resulted from the fall in the international
oil price and assured that efforts were being made to forestall the rapid
depreciation of the naira and preserve the country’s external reserves
position in spite of the enormous challenges posed by the current turmoil in
the global economy.

Capital Market
The MPC noted with cautious optimism the improvement in the activities at
the equities segment of the Nigeria Stock Exchange (NSE) since January 30,
2009 against the backdrop of the bearish performance that characterized the
market from the second quarter of 2008. With appropriate policy
interventions, it is expected that the current positive development would be
sustained.

Outlook
In line with seasonal pattern, growth in broad money is expected to moderate
in the first quarter of 2009, owing to the lull in fiscal operations and
economic activity during the period. Consequently, staff projections indicate
that headline inflation would moderate during the first and second quarters
of 2009.

Conclusions and Decisions
The paradox that we face currently is that excess liquidity is co-existing with
rising interest rates, which in real terms and in relation to the deposit rate
seem to be high. On the one hand we need to tighten liquidity to address
inflation and exchange rate concerns; while on the other hand, we would
need to address high interest rate by relaxing monetary conditions. Another
paradox is that the observed excess liquidity has not translated to
commensurate credit creation; in fact credit growth appears to have slowed
down.

The Committee also noted the currently heightened risk perception and
changes in liquidity management, accompanied by uncertainties in the fiscal

arena given that the budget for 2009 has not been passed. The outlook for
the foreign exchange market is however positive.

In the circumstance the MPC is concerned about achieving the multiple
objectives of a sound financial system, price and exchange rate stability, as
well as ensuring that credit continues to flow to the rest of the economy.
Consequently the MPC decided as follows:
a. Monetary Policy Rate (MPR) will be kept unchanged at 9.75 per cent;
b. Open market operations will be actively used for achieving effective
liquidity management;
c. The CBN is seriously concerned about the rising lending rates and
especially the re-pricing of existing facilities by banks as well as the
wide spread between deposit and lending rates. The CBN will be
meeting with the bank chief executive officers to agree on modalities
to check excesses, especially in the light of the global economic and
financial crisis.
d. To anchor expectations and stabilize the exchange rate, MPC remains
committed to managing the exchange rate within a band of +/-3 per
cent until further notice.
e. The difference between the CBN buying and selling rates shall not be
more than 1 per cent; while that of banks and BDCs will not be more
than 1 per cent and 2 per cent, respectively around the CBN rate.

Professor Chukwuma C Soludo, CFR
Governor,
Central Bank of Nigeria,
Abuja.
February 09, 2009