Central Bank of Nigeria Communique No 107 of the Monetary
Policy Committee Meeting of Monday and Tuesday 23rd and 24th
May 2016
The Monetary Policy Committee met on 23rd and 24th May 2016
against a backdrop of challenging global and domestic
economic and financial conditions. The Committee assessed the
global
and
domestic
macroeconomic
and
financial
developments, the short-to medium-term prospects for the
domestic economy and the outlook for the rest of the year. In
attendance were 9 out of the 12 members.
International Economic Developments
The Committee noted with concern, the tapered growth and
continued decline in global output since 2014. At an estimated 3.2
per cent, global output in 2016 was only 0.1 percentage point
below the 3.1 per cent in the corresponding period of 2015. The
sluggish global output was traced to weak fundamentals in both
the advanced economies and Emerging Markets and Developing
Economies (EMDEs), including increased volatility in global
financial markets, sustained softness in commodity prices, sluggish
global trade, resulting in persistent fragility, particularly in the
EMDEs.
The United States (US) economy slowed to 0.5 per cent in Q1 2016,
a steep decline compared with the 1.4 per cent growth recorded
in the last quarter of 2015. The deceleration in US growth was
attributed to contraction in non-residential fixed investment and
energy businesses, a strong dollar which harmed exports,
slowdown in government spending and moderation in private
consumption expenditure (PCE). Japan which is currently in
deflation is projected to grow by 0.5 per cent in 2016, the same as
in 2015, on the back of persistently weak aggregate demand. The
Bank of Japan’s (BoJ) monthly asset purchase of ¥6.7 trillion
(US$61.73 billion) resulted in the Bank holding about one-third of
outstanding government bonds, while the economy remained
largely intractable with a credit crunch, indicating that the
programmme may have lost its steam. In response to the
contraction in credit, BoJ since January 2016, adopted a negative
interest rate policy.
Real GDP growth in the Euro area at 0.6 per cent in Q1, 2016 was
a phenomenal improvement compared with the 0.3 per cent
achieved in Q4 2015. The European Central Bank (ECB), at its
meeting of 21st April, 2016 maintained the soft policy stance by
holding its refinancing rate at 0.0 per cent, lending rate at 0.25 per
cent and deposit rate at -0.4 per cent. The Bank also maintained
its monthly asset purchase program of €80 billion (US$87.2 billion),
hoping to further stimulate output growth and achieve its 2 per
cent inflation target.
The Bank of England (BoE) also retained its monthly assets
purchase programme, financed through the issuance of reserves
at ₤375 billion (US$543.75 billion). At the end of its April 13, 2016
meeting, BoE retained its policy rate at 0.5 per cent, with a
commitment to raise inflation to its 2.0 per cent long run path.
Weaknesses in major EMDEs, including low capital inflows, rising
costs of funds and continuing geopolitical factors, have been
identified as key constraints to growth. Adverse commodity prices
continued to provide strong headwinds against growth, defining
other
economic
and
financial
conditions
in
the
EMDEs.
Consequently, the IMF (WEO April 2016 Update) downgraded the
2016 growth forecast for this group of countries from 4.3 to 4.1 per
cent.
Disruptions to oil supply in Canada, Nigeria and Kuwait and,
demand spikes following expectations of a US interest rate hike
and build-up of crude oil inventories, contributed to mild oil price
recovery in April 2016. Inflation remains largely suppressed in the
advanced countries but tepid consumption spending and
vulnerabilities in the financial markets continue to hamper
financial intermediation and growth. Consequently, the monetary
policy stance in most advanced economies remained largely
accommodative and most likely to be maintained throughout
2016. On the contrary, monetary policy in the EMDEs could
continue to diverge substantially, reflecting the diversity of shocks
confronting them.
Domestic Economic and Financial Developments
Output
In the first quarter of 2016, the economy suffered from severe
shocks related to energy shortages and price hikes, scarcity of
foreign exchange and depressed consumer demand, among
others. Consequently economic agents could not undertake new
investments or procure needed raw materials. Shortage of foreign
exchange arising from low crude oil prices manifested in low
replacement levels for raw materials, other inputs as well as new
investments. In addition, the energy crisis experienced in the first
five months of the year, resulted in increased power outages and
higher electricity tariffs, as well as fuel shortages; which led to
factory closures in some cases. The prolonged budget impasse
denied the economy the timely intervention of complementary
fiscal policy to stimulate economic activity in the face of
dwindling foreign capital inflows. Aggregate credit to the private
sector remained highly tapered while credit to government grew
beyond the programmed benchmark for the period. The
Committee, however, noted that many of the prevailing
conditions in the economy during the review period were outside
the direct control of monetary policy, but hopes that the
implementation of the 2016 Federal Budget, supported by
relevant sectoral policies and easing supply shocks in energy and
critical inputs, would provide the needed boost to the economy.
Against this backdrop, data from the National Bureau of Statistics
(NBS) for May 2016, indicated that domestic output in Q1, 2016
contracted by 0.36 per cent, the first negative growth in many
years. This represents a drop of 2.47 percentage points in output
from the 2.11 per cent reported in the last quarter of 2015, and
4.32 percentage point lower than the 3.96 per cent recorded in
the corresponding period of 2015. Aggregate output contracted
in almost all sectors of the economy, with the non-oil sector
declining by about 0.18 per cent in Q1 2016, compared with 3.14
per cent expansion in the preceding quarter. Only agriculture and
trade grew by 0.68 per cent and 0.40 per cent, respectively, while
Industry, Construction and Services recorded negative growth of -
0.93, -0.26 and -0.08 percentage point, respectively.
Prices
The Committee noted a further increase in year-on-year headline
inflation to 12.77 per cent and 13.72 percent in March and April
2016, respectively, from 11.38 per cent in February 2016. The
increase in headline inflation in April reflected increases in both
food and core components of inflation. Core inflation rose sharply
for the third time in a row to 13.35 per cent in April from 12.17 per
cent in March, 11.00 per cent in February and 8.80 per cent in
January having stayed at 8.70 per cent for three consecutive
months through December, 2015. Food inflation also rose to 13.19
per cent from 12.74 per cent in March, 11.35 per cent in February,
10.64 per cent in January and 10.59 per cent in December, 2015.
The rising inflationary pressure continued to be traced to legacy
factors including energy crisis reflected in incessant scarcity of
refined petroleum products, exchange rate pass through from
imported goods, high cost of electricity, high transport cost,
reduction in food output, high cost of inputs and low industrial
output.
The
Committee
observed
that
in
an
economy
characterized by high import dependence, the shortage of
foreign exchange provided some basis for price increases as
currently being experienced. The Committee noted that the
economy needed to aggressively earn and build up its stock of
foreign reserves in order to avoid distortions when faced with
severe shocks. The Committee further noted that the current
inflation trend, being largely a product of structural rigidities and
inadequate foreign exchange earnings would continue to be
closely monitored, and in coordination with fiscal policy, with a
view to addressing the underlying drivers of the upward price
movements.
Monetary, Credit and Financial Markets Developments
Broad money supply (M2) grew by 3.49 per cent in April 2016, a
1.29 percentage growth from the March level of 2.20 per cent
and compared with the 3.67 per cent in April 2015. When
annualized, M2 grew by 10.47 per cent in April 2016 against the
provisional growth benchmark of 10.98 per cent for 2016. Net
domestic credit (NDC) grew by 7.87 per cent in the same period
and annualized at 23.61 per cent. At this rate, the growth rate of
NDC was above the provisional benchmark of 17.94 per cent for
2016. The development in NDC essentially reflected the significant
growth in credit to government of 35.97 per cent in the month,
annualized to 107.91 per cent. Credit to the private sector grew
by 3.52 per cent in April 2016, which annualized to a growth of
10.56 per cent, below the benchmark growth of 13.28 per cent.
The Committee observed with concern, the continuous dismal
performance of growth in credit to the private sector, noting that
in spite of the Bank’s efforts, DMBs continued to direct credit
largely to low employment elastic sectors of the economy, a
phenomenon that had significantly contributed to the low
performance of the economy. Money market interest rates
reflected the continuing liquidity surfeit in the banking system.
Average inter-bank call rate, which stood at 4.50 per cent on 21st
March 2016, closed at 8.67 per cent on March 18, 2016. Between
March 25th and 14th April 2016, interbank call rate averaged 2.00
per cent. The Committee noted a decline in activity in the interbank market in the period under review, which was due to the
payment of FAAC statutory allocations and the maturity of CBN
securities.
The Committee also noted a further improvement in the equities
segment of the capital market as the All-Share Index (ASI) rose by
3.34 per cent from 25,899.91 on March 24, 2016 to 26,763.86 on
May 18, 2016. Similarly, Market Capitalization (MC) rose by 3.14 per
cent from N8.91 trillion to N9.19 trillion during the same period.
However, relative to end-December 2015, the indices declined by
6.56 per cent and 6.70 per cent, respectively. Globally, however,
the equities markets were generally bearish.

External Sector Developments
The average naira exchange rate remained stable at the interbank segment of the foreign exchange market during the review
period. The exchange rate at the interbank market opened at
197.00/US$ and closed at N197.00/US$, with a daily average of
N197/US$ between March 25 and May 13, 2016. The Committee,
therefore, remains committed to its mandate of maintaining a
stable naira exchange rate. The MPC noted the level of activity in
the autonomous foreign exchange market especially, following
the deregulation of the downstream petroleum sector with
attendant increased demand in the interbank market, thus further
exerting pressure on the naira.
The Committee recalls that over the last two consecutive
meetings, it had signalled the imperative of reform of the foreign
exchange market. In the intervening period, the Committee
interrogated the issues around the current foreign exchange
market regime, tracing them to the low foreign exchange
earnings of the economy. Consequently, in the Committee’s
opinion, the key issue remains how to increase the supply of
foreign exchange to the economy. The Committee observed that
while the Bank has been working on a menu of options to ensure
increased supply of foreign exchange, there was no easy and
quick fix to the foreign exchange scarcity problem as supply
remained essentially a function of exports and the investment
climate.
The Committee is aware that a dynamic foreign exchange
management framework that guarantees flexibility could not
replace the imperative for the economy to increase its stock of
foreign
exchange
through
enhanced
export
earnings.
Consequently, such a structure must evolve to provide basis for
radically improved investment climate to attract new investments.
The Committee recognizes the exchange rate as a very important
macroeconomic variable, which must be earned by increased
productive activity and exports, noting with satisfaction that the
Bank had made very significant and satisfactory progress with the
reforms framework.
The Committee was of the view that the current adverse global
and domestic economic and financial conditions and the
imperative imposed by the demand and supply shocks to the
domestic economy and considering the express intensions of
Government as enunciated in the 2016 budget, policy must
respond appropriately as the market continues to demonstrate
confidence in the Bank’s ability to deliver a credible foreign
exchange market. Accordingly, the MPC decided that the Bank
should embrace some level of flexibility in the foreign exchange
market. Given the imperative for growth, the Management of the
Bank has been given the mandate to work out the modalities for
achieving the desired flexibility that is in the overall interest of the
Nigerian economy and when the implementation of the new
framework would begin.
The Committee’s Considerations
The
Committee
acknowledged
the
severely
weakened
macroeconomic
environment,
as
reflected
particularly
in
increased inflationary pressure, contraction in real output and
rising unemployment. The Committee recalls that in July 2015, it
had hinted on the possibility of the economy falling into recession
unless appropriate complementary measures were taken by the
monetary and fiscal authorities. Unfortunately the delayed
passage of the 2016 budget constrained the much desired fiscal
stimulus, thus edging the economy towards contractionary output.
As a stop-gap measure, the Central Bank continued to deploy all
the instruments within its control in the hope of keeping the
economy afloat. The actions, however, proved insufficient to fully
avert the impending economic contraction. With some of the
conditions that led to the contraction in Q1, 2016 still largely
unresolved, the weak outlook for growth which was signaled in
July 2015 could extend to Q2. To this effect, today’s policy actions
have to be predicated on a less optimistic outlook for the
economy in the short term, given that, even after the delayed
budgetary passage in May 2016, the initial monetary injection
approved by the Federal Government may not impact the
economy soon, as the processes involved in MDAs finalizing
procurement contracts before the disbursement of funds may
further delay the much needed financial stimulus to restart growth.
The
Committee
noted
that
the
CBN
had
implemented
accommodative monetary policy from July 2015, with the hope of
achieving growth, up until March 2016, when the MPC switched
into a tightening mode. However, while the underlying conditions
necessitating tight monetary policy remained largely in place,
sundry administrative measures implemented by the Bank and
recent macroeconomic conditions on the back of the 2016
Budget are expected to significantly dictate a key policy
preference in the dilemma now faced by monetary policy -
stagflation. Given the current limited policy space, it is imperative
to balance stability with growth stance while working on options
that in the short term, are certain to isolate seasonal and transient
factors fuelling the current price spiral.
Other than credit to government, growth in all monetary
aggregates remained largely below their indicative benchmarks,
yet; headline inflation spiked in April 2016, far above the upper
limit of the policy reference band. Inflation has continued to be
driven mainly by supply side factors such as fuel scarcity, increase
in tariff and deterioration in electricity supply, increase in the price
of petrol, higher input costs as a result of scarcity of foreign
exchange, persistent security challenges and exchange rate passthrough to domestic prices of import. While the Committee
believed that the recent deregulation of the downstream sector
of the petroleum sector was in the right direction and would lead
to increased supply, the pass-through effect of prices to other
products has to be factored in policy considerations. Mindful of
the limitations of monetary policy in influencing structural
imbalances in the economy, the Committee stressed the need for
policy coordination with the fiscal authorities in order to effectively
address the identified pressure points.
The Committee noted that the continued excess liquidity in the
banking system was responsible for the low level of activity in the
interbank market. This is in addition to contributing to the sustained
pressure in the foreign exchange market. The Committee
expressed hope that efficient implementation of the recently
passed 2016 Federal Budget, especially; the capital expenditure
portion, would help invigorate growth in the economy as business
confidence rejuvenates.
The Committee expressed concern over sustained pressure in the
foreign exchange market and the necessity of implementing
reforms to engender greater flexibility of rate and transparency in
the operation of the inter-bank foreign exchange market.
Accordingly, the Committee noted that it was time to introduce
greater flexibility in the management of the foreign exchange
market.
The
Committee
reaffirmed
commitment
towards
maintenance of price stability and reiterated the need to
reappraise the coordination mechanism between monetary and
fiscal policy and initiate reforms, for the purpose of more efficient
policy synchronization and management.
The Committee’s Decisions
The Committee, in its assessment of the relevant risk profiles, came
to the conclusion that although, the balance of risks remains tilted
against growth; previous decisions need time to crystalize.
Consequently, in a period of stagflation, the policy options are
very limited. To avoid complicating the conditions, the Committee
decided on the least risky option to hold. The foreign exchange
market framework, now ready, the MPC voted unanimously to
adopt greater flexibility in exchange rate policy to restore the
automatic
adjustment
properties
of
the
exchange
rate.
Consequently, all 9 members voted to hold and introduce greater
flexibility in managing the foreign exchange rate. The Bank would
however, retain a small window for funding critical transactions.
Details of operation of the market would be released by the Bank
at an appropriate time.
In summary, the MPC voted to:
i.
Retain the MPR at 12.00 per cent;
ii.
Retain the CRR at 22.50 per cent;
iii.
Retain the Liquidity Ratio at 30.00 per cent; and
iv.
Retain the Asymmetric Window at +200 and -500 basis points
around the MPR
v.
Introduce
greater
flexibility
in
the
inter-bank
foreign
exchange market structure and to retain a small window for
critical transactions.
Thank you for listening.
Godwin I. Emefiele
Governor, Central Bank of Nigeria
24th May 2016


PERSONAL STATEMENT BY THE MONETARY POLICY COMMITTEE
MEMBERS

1.0
ADELABU, ADEBAYO

The macroeconomic condition has remained challenging since
the beginning of the year with the performance of key variables
pointing to increasing fragility of the domestic economy. The
condition appears a little bit more complicated to the monetary
authority because the weakness is intensified from the end of both
price and output, heightening the risk of dilemma in policy
choices. Acceleration in headline inflation, which was significant
throughout fiscal 2015 is not yet moderated with the provisional
estimate for April 2016 in the neighbourhood of 14 percent. This is
clearly above the acceptable threshold for sustained expansion in
economic activities. Furthermore, the softness in output growth,
which commenced in the latter half of 2014, has eventually
entered a negative territory with the estimated GDP for 2016Q1
being -0.36 percent, raising the probability of a recession in the
near future. The precarious condition is further threatened by
significant headwinds like the lingering pressure on domestic
currency due to low accretion to external reserves, suppression of
aggregate demand on account of default in salaries payments
by many sub-national governments, and adverse income shock
like the recent upward adjustment in fuel price and electricity
tariffs.
From the conventional policy view point, the signal is less cloudy;
with headline inflation at about 14 percent and policy rate at 13
percent, it means the effective policy rate is -1.0 percent which is
equivalent to an expansionary monetary policy in the face of
rising
inflationary
pressure.
Thus,
the
way
forward,
from
conventional rationale, should logically include an upward
adjustment in nominal policy rate. However, from the evolving
paradigm in macroeconomic management, which I strongly
subscribe to, the issue is not as that straight forward. The policy
rate was increased by 100 basis points at the last meeting, though
a step in the right direction, but inflation pressure still appears
strong. This, among others, points to the appropriateness of
engaging in wholesale assessment of our macroeconomic policy
principles. A key challenge to policy at this period arises from the
fact that the underlying drivers of the current macroeconomic
outcomes are not confined to economic factors alone given that
a number of non-economic factors are equally at play. Thus, in as
much as the relevance of the conventional approach is not in
contention, I am of the view that our response to the unfolding
developments should be carefully weighed and hinged on the
delicate peculiarities of our economy.
My thoughts on the critical thrust of monetary policy which I have
shared a couple of times in my previous statements are not only
still current but their validity appears to have been reinforced by
the prevailing conditions. A major thrust of our macroeconomic
policy should be a coordinated structural and monetary policies
to
remove
the
lingering
bottlenecks
in
the
production
environment which have always been constraining the efficacy of
monetary policy. A quick diagnosis of inflationary development
shows that both core and food components experienced
considerable uptick. On year-on-year basis, farm produce
increased by 6.75 percent in March 2016 while transport also
increased by 0.88 percent during the period. The implication is
that the underlying driver of rising price trend is not much of a
monetary factor but structural issue like increase in fuel price and
agricultural production shortfall. Thus, further tightening through
interest rate may not really address the underlying issue but rather
exacerbate the depression in aggregate demand which is
already under threat from non-payment of salaries by some state
governments.
Perhaps more disturbing is that while global energy price is
plummeting, fuel price in the domestic economy is rising as a result
of the impact of the sliding value of domestic currency on
importation. It therefore shows that the enduring solution lies in
structural policy that would expand domestic supply of refined
petroleum products to meet domestic demand. It is against this
background that I would re-emphasize the need for the relevant
agencies of government like the Central Bank, Ministry of
Petroleum Resources, Ministry of Finance, and other government
institutions to work together with a view to enhancing domestic
production of refined petroleum products to meet domestic
needs.
Again, the driver of core inflation is basically imported items. For
instance, imported food inflation increased by 16.33 percent in
March 2016 on year-on-year basis. This occurred at a time global
inflation was easing, suggesting that the rising price of imported
items has much to do with the sliding value of the domestic
currency. The naira has been kept at an average rate of
N197/US$ in the official market since last year but economic
agents have been referencing the parallel market rate, which is
above the official rate by almost 100 percent, in quoting
transactions. The behavior of economic agents, even those that
access the official market, seems logical in view of the many
constraints in the official market. The challenge in the official
foreign exchange market could have been exacerbated by the
demand side but the well-known underlying cause is from the
supply side. The likelihood of an improvement in supply in near to
medium term is highly diminished given that the driving force is
permanent negative term of trade shock. Apart from the effect of
term of trade shocks on current account, available statistics show
that the advanced countries’ currencies particularly the US dollar
has appreciated against emerging countries’ currencies since the
latter part of 2015 on the backlash of the commencement of
monetary tightening by the US Federal Reserves.
The point here is that the current exchange rate framework is not
compatible with the realities from the dynamic operating
environment. It is therefore imperative to review the current
framework to a model that permits a great deal of flexibility to
accommodate shocks from the external environment. Such a
model has an advantage of providing forward market guidance,
discovering the equilibrium rate, eliminating speculative trading
and arbitrage and consequently anchor inflation expectation
robustly. One of the major concerns, however, is the usual
negative political sentiment associated with the initial downward
adjustment of a market determined exchange rate. My view is
that such initial downward slide in the exchange rate is not
altogether a political liability. Such market determined rate has
the inbuilt benefits of raising budget revenue from monetization of
oil proceeds and consequently reduce fiscal deficits as well as
probably stimulating aggregate demand.
A major non-economic issue which has elicited extensive
attention-albeit contentious response- in public discourse is the
harsh production environment. It is commendable that the
Federal Government is making appreciable progress in the fight
against insurgency in the north-eastern part of the country which
invariably would enhance economic activities of the region and
by extension, the whole country. The gains of such effort however
may be more than offset by the resurgence of another round of
militancy in the Niger delta areas. The political and economic
dimensions of the activities of the new militants have been
comprehensively highlighted but the economic implications could
be amplified by the fact that the softening oil prices may make
most of the marginal oil fields commercially unviable if the cost of
operation rises above certain threshold. As such, the likelihood of
permanent shut down of such oil fields may not be ruled out with
dire implication for Oil GDP which has been sliding for a fairly long
time. It is against this that a robust security arrangement for the
protection of vital oil and gas installations become an essential
component of our near to medium term macroeconomic policies
blueprint.
In the light of the foregoing, I propose that the subsisting monetary
policy measures be retained. Specifically, the MPR and the CRR
be retained at 12 and 22.5 percent, respectively. In addition, the
exchange rate framework should be revisited to allow a flexible
model that could permit the exchange rate to accommodate
shock rather than passing such shocks to the external reserves.
2.0
ALADE, SARAH O.
While the medium-term outlook remains favourable for the
Nigerian economy, in the short-term, there are risks of further
deterioration in the global environment and a persistently
lower oil price that put substantial pressure on the fiscal and
external accounts, resulting in severely depleted buffers
which have an adverse effect on the economy. For the first
time in many years, the Nigerian economy witnessed
negative growth due primarily to severe shocks related to
energy shortages and price hikes, scarcity of foreign
exchange that have affected both prices and availability of
products as new investments are stalled. As a result,
headline inflation accelerated to 13.7 percent in April up
from 12.7 percent recorded in March, the highest since
December 2012. The growth for 2016 has been further
downgraded and the prognosis for the rest of the year is not
too bright. These mixed developments have put monetary
policy at a precarious situation and calls for a delicate
balanced and caution in managing both development in
the domestic environment. This is in the face of increased
inflationary pressure and declining growth. Based on the
above, I support a hold on all variables and some flexibility in
exchange rate while we understand the direction of the
economy and effect of the budget passage.

Headline
inflation
continued
an
upward
trajectory
accentuated by severe fuel shock and scarce foreign
exchange supply. Headline inflation reached 13.7 percent in
April 2016, from 12.77 percent recorded in March. Core
inflation rose sharply for the third consecutive months to 13.35
per cent in April from 12.17 per cent in March. Food inflation
on the other hand, increased to 13.19 percent recorded in
January, while food inflation rose to 13.19 from 12.74
recorded in March and 10.64 percent in the February. The
rise in inflation is attributable to a number of factors including
scarcity of refined petroleum products, increase in the price
of the product, the pass-through effect of exchange rate,
higher transportation cost as a result of inadequate fuel
supply and seasonal effect. In addition, the increase in
energy tariff also affected the cost of goods and services
and contributed to increase in inflation. The persistent
upsurge in inflation in a normal situation would have
necessitated increase in policy rate; however in the midst of
negative growth and some structural rigidity in the economy,
increasing rate at this time will be counterproductive. Thus, in
the short to medium term monetary policy must ensure that
the economic engine is not grinded to a halt and should be
focused at resuscitating growth. Also, the factors that
contributed to the inflation are structural and one time effect
and should be monitored before monetary policy reacts to
their effect.

Depressed consumer demand is effecting Gross Domestic
Product (GDP) growth negatively. The just released first
quarter GDP numbers showed that the economy suffered
severe shock leading to a negative GDP growth of -.36
percent. Low oil price and the negative impact on
government revenue and lower foreign exchange earning
pose downside risk for domestic GDP growth in 2016 as
growth for the year is projected to be subdued. Shortage of
foreign exchange arising from low crude oil prices has
affected new investment and replacement of raw materials
for existing plants. In addition, shortages in fuel product and
pipeline vandalism resulted in prolonged power outages
and higher electricity tariff which lead to factory closures in
some cases. In the midst of these events, fiscal policy was
not at hand to complement the efforts of monetary policy
as the prolonged budget impasse denied the economy the
timely intervention needed to stimulate economic activity.
These developments suggest that both global events and
domestic risks pose huge challenge to growth in the coming
months. In addition, the non-payment of salaries by most
state government is also depressing consumer expenditure
and impacting growth. Policies should be coordinated and
complementary to help the country weather the current
storm. In addition, efforts at economic diversification should
be intensified to diversify the revenue base of the country
and consideration should be given to improving tax
administration and increase in VAT rate.

The current foreign exchange regime should be reviewed to
ensure continuation of economic activities. Reduced inflow
as a result of low oil prices is making foreign exchange
scarce in the country. While the Central Bank is making all
efforts to meet all legitimate foreign exchange demand,
more should be done to ensure that economic activities are
not grounded. I support the review of current foreign
exchange management framework in the country to ensure
continuation of economic activities. Policies that will
encourage inflows and increase supply of foreign exchange
to meet import demand should be encouraged and
implemented. The lack of flexibility in the interbank foreign
exchange market is fuelling capital outflow and currency
weaknesses
outside
the
interbank
market.
These
developments are having a dampening effect on growth
and driving inflation. At this time, monetary policy should be
focused on restoring confidence in the domestic economy
and increasing supply of foreign exchange to attract
inflows.

Against this background, I vote for a hold on Monetary
Policy Rate at 12 per cent, Private Sector Cash Reserve
Requirement (CRR) at 22.5 per cent, and greater flexibility in
the management of exchange rate to resuscitate the
economy.

3.0
BALAMI, DAHIRU HASSAN

Weak global growth continues to linger, posing a challenge to the
implementation of the 2030 Agenda for Sustainable Development.
At global level growth was estimated at 3.2 percent down from
3.4 percent for the year 2016. Growth was expected to be driven
generally by accommodative monetary policy particularly in the
advanced economies. There is also the possibility of deflation
pressure in Europe and Japan partly due to falling oil and other
commodity prices as argued in my last personnel statement. At
the global level some of the constraints include the following:
likelihood of Britain’s exit from the EU, ongoing slowdown in
China, strengthening of the Japanese yen, persistent weak oil
and other commodities prices, continued divergence of Monetary
policy between US and other major economies, the growing use
of negative interest rate by central banks to stimulate the flow of
credits to the real economy, the continuous strengthening of the
US dollar against other currencies all of which have implications on
the Nigerian economy.
The domestic economy has witnessed a negative growth rate of -
0.36 percent, the worst recorded ever in Nigeria. The low level of
growth is not unconnected with some of the constraints affecting
the Economy, partly from the global level and some domestic.
These include falling price of crude oil at the international market.
Even though oil price has moved up to $50.00 per barrel from
$40.00, the activities of the militants in the Niger Delta region has
seriously affected and is still affecting the level of the Nigerian
capacity to produce, the depreciation of the Naira at the black
market and the non-availability of it at the official window of the
CBN and DMB’S, low level of electricity supply, and high cost of
borrowing particularly the wide gap between the lending rate
and the deposits rate etc. On the whole the output in the
industrial sectors declined slightly to N3,175.45 billion in Q1 of 2016
in real terms when compared with N3,340.48, Output of the
service sector of the economy also declined to N5,984.39 in Q1
2016. The negative growth of 0.18 was partly driven by
manufacturing in Q1 2016. The level of unemployment in the
economy has risen to 12 percent and inflation rate of 13.8 percent
which falls out of the 6-9 percent Bank band. The economy is
currently facing stagflation, a situation of rising unemployment
and inflation. This is dangerous for the economy. However, the
current inflation is not a monetary phenomenon but a cost push
inflation due to rise in electricity tariffs, fuel scarcity and the rise in
PMS price between N135-N145.00 per litre, transportation cost
and imported food items etc.
The NBS shows that the Nigerian economy had two consecutive
declines in GDP growth rate for the months of April and May. If the
economy goes into recession, going by Keynesian postulation it
would require both fiscal and monetary policy stance to move the
economy forward. In depression period we require expansionary
fiscal and monetary policy. The fiscal side is expected to raise
government expenditure and lower down the tax rate to stimulate
growth. On the Monetary side it is expected to reduce the interest
rate and expand money supply in the economy. During the
period of recession, there is low level of consumption of goods
and services (aggregate demand) due to low level of citizens’
purchasing power. Stock prices would slump and investors would
be wary of such an economy. The solution to the problem of
depression is to promote production and stimulate consumption in
the economy. To promote growth of output, agriculture which is
the bedrock of the economy and the manufacturing sector need
to be attended to. For example, what are the challenges of these
two sectors of the economy? How do we rebuild the
manufacturing as well as the agricultural sectors of the economy?
What are the demand and the supply gaps in the foreign
exchange market of the economy?
The financial sector stability stress test shows low level of resilience
in the banking sector. The financial sector soundness shows that
the Capital Adequacy Ratio (CAR) has fallen from 17.66 in the
month of March to 16.52 percent, non-performing loans has risen
from 5.10 to 10.6, the liquidity ratio has fallen from 48.63 percent to
46.3 percent in April 2016. The Return on Equity (ROE) has
deteriorated from 18.07 to 16. 37. The Return on Asset (ROA) has
also nose-dived from 2.37 to 2.17 in 2016. The total operating costs
to gross income declined from 74.18 percent to 69.24 percent. It
can be seen that the level of liquidity in the economy is a source
of concern because the DMB’s are not lending to the preferred
sectors of the economy. There is also the problem of loan
concentration particularly among the big seven obligors.
However, it should be noted that too much money in the hands of
consumers will lead to demand pull inflation. Although inflation
rate stands at 23.7 percent, normal Economics requires that
interest rates should be above inflation rate to stimulate savings
and investments in the economy.
On the foreign exchange market, continued pressure on the
foreign exchange reserve is without much visible economic results
to the productive sectors of the economy. The foreign exchange
rate has been stable since January to date at the official window
- N197/N199 to the dollar. However, the black market rate has
fluctuated between N320.00 - N365.00 to the dollar. The gap
between the interbank window and the black market is too wide
leading to incentives for the following: (i) round tripping, (ii) rent
seeking, (iii) speculative demand and inefficient use of scarce
foreign exchange by economic agents. It is my opinion that there
is a need for a framework for the allocation of scarce foreign
exchange to the stakeholders. Such a framework should be
transparent to reduce levels of abuse if any.
The current structure of the Nigerian economy suggests we hold to
enable earlier policies work out. What do we intend to achieve by
voting to hold? It is expected to help resolve the inflation,
unemployment and growth problems. However this could be
achieved through collaboration between monetary and fiscal
authority to pursue a plan that will act as a guide to overcome
the current problem of stagflation and possible depression in 2016.
In-line with the above I vote to hold:
(i)
Retain MPC at 12 percent.
(ii)
Retain CAR at 22.5 percent.
(iii)
Retain liquidity ratio at 30 percent
(iv) Retain the symmetric corridor from +200/_500.
(v)
Liberalization of the foreign exchange market,
(vi) Collaboration between fiscal and monetary policy.


4.0
BARAU, SULEIMAN

This is surely a defining moment in our economic history with the
latest data confirming the contraction of GDP in Q1 of 2016, the
first time since 2004. The fragility in the macroeconomic space is
further complicated by strong inflationary and exchange rate
pressure. Monetary policy, therefore, is at a crossroad as there are
compelling arguments for accommodative policy stance in as
much as tightening appears to be a desirable path. Monetary
easing is appealing to halt the imminent slide into recession by
bolstering aggregate demand which has been subdued by
income shock from such factors like default in payment of salaries
by many state governments, upward adjustment of petroleum
products prices, and higher electricity tariffs. On the other hand,
elevated price level, rising trade imbalances, and unprecedented
pressure on the domestic currency are issues for consideration. A
most worrisome dimension is the ascendancy of non-economic
factors in the current episode of macroeconomic downturn.
Though the issues call for conflicting solutions, I opt for retention of
existing tight measures of monetary policy, largely informed by the
need to rein-in inflation expectation. Other considerations include
building sufficient safeguard against the perennial disruptive
liquidity surfeit in the banking system as well as reducing incentives
for speculative trading in the foreign exchange market. It is not in
doubt that the decision might be accompanied by trade-off in
the short run, notably the likelihood of accentuation of the output
gap, but my view is that, given the prevailing global and domestic
challenges including structural rigidities, any other option remains
a sub-optimal choice.
Issues/Pressure Points
Global
Prolonged Slow Recovery in the Global Economy: Recovery in the
global economy since 2014 is not only at a slow pace but it has
remained fragile. There are ample evidences to substantiate
renewed episode of global asset market volatility and reduction in
momentum of growth in key advanced economies, heightening
fear that the possibility of recession is not completely averted. The
IMF has twice downgraded its 2016 projection of global growth
with the latest one at 3.2 percent, a downward adjustment of 0.2
and 0.4 basis points from the October 2015 and January 2016’s
projection, respectively. In as much as the frequent downward
revision is a serious issue but of grave concern are the underlying
currents which are not limited to economic factors as noneconomic factors are becoming highly pronounced. Economic
factors such as monetary tightening in the US, financial market
volatility in the Euro zone and fiscal consolidation in a number of
systematically important economies would continue to weigh on
global growth, even into 2017. China for example, is currently
passing through a phase of critical but complex transformation of
growth process to a consumption and services driven model.
Although the long run beneficial effect of such transformation
would not be limited to China alone as the externalities would rub
on global trade, the initial hiccups would definitely constitute a
drag on global output in the near term. Apart from economic
issues, non-economic factors such as uncertainty about the
forthcoming (June 2016) referendum in the United Kingdom with
regard to its continuous membership of the European Union,
uncertainty regarding the direction of US economic and foreign
policies in the aftermath of the forthcoming general elections,
rising geo-political strains including the extremism and sectarian
strife, unprecedented upsurge in the inflow of illegal migrants to
the EU, climate change with the attendant flooding and drought
are all potential headwinds in global economic activities.
Domestic
Macroeconomic Environment: Key macroeconomic indicators
have never been highly stressed as currently witnessed in a period
of over a decade. The softness in GDP which commenced in the
last quarter of 2014 has finally snowballed into contraction with
data showing a GDP growth of –0.36 percent in Q1 of 2016.
Headline inflation at 13.72 percent in April 2016 is clearly above
the threshold conducive for meaningful economic activities. Thus,
the economy is now confronted with the conundrum of negative
growth in the face of rising price level. It is a welcome
development that the 2016 Federal Government budget has
been finally signed to law and implementation commenced with
the recent release of N350 billion for capital projects. The
development is expected to address the physical infrastructural
deficit as part of the overall strategy of tackling the structural
constraints. However, the impact on fixed capital formation and
by extension the GDP may take quite a while, thus the
performance of GDP could still be below the long run trend.
Exchange Rate Pressure: The naira has been under intense
pressure since the latter half of 2014 for the well-known reason of
negative term of trade shock through the slump in crude oil price
at a time of liquidity surfeit. Up to this period as well as foreseeable
future, the softness in the price of crude oil has shown no signs of
abating. To complicate the precarious condition of the domestic
currency is the global financial condition. The rebound in asset
prices and ECB monetary stimulus notwithstanding, financial
condition has assumed a tightening mode in the US and even
some emerging economies. This, invariably would accentuate
capital outflows and exacerbate depreciation in domestic
currency. The stress on Naira may show further increase with the
recent payment of about N42 billion subsidy claim to independent
oil marketers who may need to source foreign exchange at the
interbank market. In other words, the already elevated demand
pressure in the foreign exchange market may be further
heightened. Another round of exchange rate depreciation would
not only have inflation effect but it would equally worsen
corporate balance sheet with implication for employment and
growth.
Upward Adjustment in Fuel Prices: One of the key drivers of core
inflation since the beginning of the year is transportation cost on
the heel of the acute fuel scarcity in various parts of the country. A
simple trend analysis of transport component of headline inflation
shows that it has consistently trended up from 0.67 percent in
January 2016, reaching 0.88 percent by April 2016, 0.21 basis point
increase during the period. With the recent upward adjustment in
petroleum product prices, further uptick albeit not of the same
magnitude should be expected in transportation cost. In
addition, the development is likely going to filter into inflation
expectation with attendant impact on contract and wage
setting. In essence, the prospect of near term deceleration in
current elevated price level appears significantly diminished.
Agitations by the Organized Labor: Following the recent upward
adjustment in pump prices of petroleum products, the organized
labor has continued to issue threat of mass protest, something
similar to 2012 episodes of massive production shutdown. If the
situation is not well managed, the attendant loss of man-hours
would definitely exacerbate the already faltered growth path.
Besides, another dimension of the protest would be in the form of
demand for upward adjustment in wages, with the likely
implication of retrenchment or further upward review in prices.
Renewed wave of Militant’s Activities in the Niger Delta: It is
commendable that the Federal Government is making significant
progress on war against insurgency in the North Eastern part of the
country as this would naturally restore economic activities in the
zone and add to growth. However, the overall economic gain to
the entire country’s business climate is heading for a setback with
the resurgence of militant activities in the Niger Delta area.
Recently released information confirmed the destruction of
Escravos and Forcadoes pipelines which supply gas to major
power stations in the country. This development has both direct
and indirect consequences on the GDP. On the direct effect, oil
prospecting and drilling in the area would slow down and directly
reduce oil GDP. Indirectly, electricity generation would nose dive
with dire consequence on production outfits.

Way Forward/Recommendation
Given that the underlying causes of the current fragile economic
conditions transcend monetary factors, the way forward calls for
multi-pronged approach of structural, fiscal, and monetary
policies. Some of the measures should be geared towards the
following objectives;
Build and Sustain Confidence in the Macroeconomic Environment:
The need to build the confidence of economic agents in the
macroeconomic environment cannot be more critical at any
other period than now. Among other issues, stemming the inflation
tide is imperative. Current inflationary pressure is from both the
core and food components, reinforcing the call for robust policy
response. Available statistics (growth in monetary aggregates)
shows that aggregate demand is not a key driver of current
inflationary pressure, indeed, there appears to be a suppression of
aggregate demand. As such, I would like to keep the Monetary
Policy Rate (MPR) at the subsisting level. Major components of
core inflation that have experienced significant uptick in price
level on year-on-year basis included imported food inflation which
increased from 11.22 to 16.33 percent between January and April
2016. This is at a time when global inflation is on the downward
trend, suggesting that a key driver is the depreciation of the
domestic currency. Managing expectation in terms of exchange
rate stability is therefore crucial to prevent the destructive selfreinforcing inflationary phenomenon. The interbank rate should
be properly managed and thus the issue of excess liquidity cannot
be tolerated at this period, as such the CRR should be
appropriately used. Besides, the exchange rate should also be
allowed to reflect basic economic fundamental like supply and
demand factors in order to prevent undue speculation. As such I
would like to canvass for some flexibility in the exchange rate in
line basic
fundamentals in order to effectively
manage
expectation and reduce speculation in the market.
Concrete Programme for Expanding Refineries Capacity: The
recurring fuel scarcities, reduction cum removal of subsidy have
been a thorny issue in the management of the economy for
decades. Recently released statistics show that the existing
refineries could only meet 40 percent of total domestic
consumption if all of them are operating at full capacity. This,
invariably suggests continuous reliance on importation to meet
domestic needs. With the current slow accretion to external
reserves, this is definitely an unsustainable model but the
development also offers the right opportunities for complete
deregulation. Subsidy is unsustainable given the huge fiscal deficit.
As such concrete efforts should continue to lay the foundation of
sustainable economic prosperity by expanding the refineries
through private investment.
Adequate Security Measures around Oil and Gas Facilities: It is
most disturbing that revenue from oil is not dwindling on account
of softness in price alone but shortfall in production is becoming a
greater threat. Average crude oil production in April 2016 was
about 1.64 million bpd compared to about 1.86 million bpd Q2 of
2015. Besides, between March and April 2016, there was an
average production shortfall of 0.056 million bpd. The crude oil
production benchmark in the 2016 Federal Government budget is
2.2 million bpd. This statistics clearly shows that if the trend
continues, the planned budgetary revenue is at a risk. This new
trend calls for serious concern because unlike in the previous
episodes of militancy activities, the current price of crude oil prices
has reduced the incentives for oil prospecting and drilling. The
prevailing price regime has reduced the bottom lines of the oil
companies with the implication that any phenomenon that jerks
up the cost of operation such as unfriendly production
environment could make them operate below viability level and
consequently
leads
to
total
shut
down
of
operations.
Consequently government would need to scale up security
around oil and gas facilities in the country.
Decisions
Given that non-economic factors have played significant role in
the prevailing economic challenges, it is expedient that we
continue to call for the structural issues highlighted earlier to be
addressed. With respect to monetary policy, maintaining stability
in macroeconomic environment is germane, thus I would like to
keep monetary condition tight by maintaining all the existing
measures of monetary policy. Specifically, MPR and CRR at 12 and
22.5 percent, respectively, while the asymmetric corridor around
the MPR remains at +200/-500 basis points.


5.0
GARBA, ABDUL-GANIYU
Context
My attention focused on four core issues at the March 2016 MPC
meeting: (i) the urgent need for rigorous, critical, mandate
focused and evidence based diagnostics; (ii) dangers of quick-fix
measures because of the their damaging long term effects; (iii)
the growth of the public debt stock and their crowding-out effects
on fiscal operations and constraints to effective monetary policy
and (iv) the urgent need to harness, direct and put to effective
use the best available intellectual and political resources to
engage the fiscal authorities to develop a forward looking
strategic macroeconomic management framework for Nigeria”
for the medium to the long term effectiveness of macroeconomic
management compatible with the long term wellbeing of
Nigerians.” The four issues remained the core of my concerns at
the May 2016 MPC meeting. Indeed in my view, they have
become more urgent.
The excellent reports by Bank Staff and the growth, expenditure,
employment and inflation data of the National Bureau of Statistics
(NBS) and the PMI (Purchasing Manager’s Index) all point to an
even more challenging time for Nigerian macroeconomic
management in May than when MPC last met in March. The
conditions for fiscal operations, monetary policy and other
associated
policies
could
hardly
be
more
challenging.
Governments, real businesses and households have to deal with
stagnation and inflation co-existing amidst rising inequality and
poverty.
What we know about stagflation (coexistence of stagnation and
inflation) is from the experience of the 1970s and the research that
sought to explain it. We know for instance, that the use of
traditional demand management tools worsened the two
problems in the United States and that the negative effects
spilled-over to the rest of the world. We also know that Volcker’s
cure –disinflation policy through monetary contraction was very
costly for the United States and for the global economy: it
triggered global recession of 1982 and unemployment levels not
seen since the Great Depression. The global recession was
transmitted to Nigeria and many developing countries through
negative commodity price shocks, exchange rate pressures, debt
overhang and macroeconomic instability. The debt overhang
though triggered by Volcker’s cure on interests rates on sovereign
and commercial debts, was caused by strategic failures inherent
in decades of fiscal policy. We now know that it took Nigeria
almost a quarter of a century to exit the debt trap at costs
(financial and opportunity) that have not been fully evaluated.
We now know from the global experience of the 1970s and the
1980s that there is no quick-fix for the problem of stagflation. Also,
that every option has heavy costs that have long lasting impacts.
Stagflation like cancer is a problem that is better prevented than
cured. Unlike the stagflation of the 1970s and 1980s, the current
situation is complicated by the hysteresis of the costs of past policy
conflicts; the domestic and external vulnerabilities of the economy
and the negative growth of key components of aggregate
demand (capital accumulation and private consumption) and by
supply shocks due to rising energy costs, declining value of the
Naira and shortages of forex and PMS. Indeed, the inflationary
pressures have been moderated by at least three factors: (i) the
negative budget effects of the cost push inflation on fixed income
earners; (ii) the non-payment of salaries and pensions by many
state governments and many local government councils and (iii)
the negative wealth effects of the collapse of the capital market
bubbles. Traditional monetary policy is no match for stagflation in
a situation with the type of initial conditions in Nigeria today.
Disinflation policies will be ineffective to reduce prices which are
being driven primarily by self-inflicted supply shocks. On the other
hand, with the Naira losing value and with financial institutions
unwilling to pass on the benefits of lower interest rates to
borrowers, increasing the supply of Naira will not reduce pressure
on the Naira or lower interest rates to agents with the most
employment
and
output
elasticities.
In
addition,
in
the
malfunctioning credit market where-in credit is concentrated by
obligors and by sectors and interest rate spread is rising, small and
medium scale enterprises and real sector operators with high
employment and growth elasticities are squeezed out by the
preference of financial institutions for a limited set of big ticket
obligors and relatively highest risk sectors.
The cross-cutting causes of the stagflation demands analytical
breadth, depth and clarity well beyond the typical requirements
for monetary policy because the networks of cause-effect
relations that produce stagflation extend far beyond the domain
and reach of monetary policy. It is a potentially disastrous error to
expect and to demand that monetary policy carries the economy
either through traditional instruments or in combination with
expansions in its balance sheet. It should be common sense to
expect that two hands will more easily carry a heavy load than
one hand. Even Usain Bolt would lose a 100 dash were he to
choose to hop on one leg or two discordant legs while his rivals
run on two coordinated legs. That is why in my last personal
statement I used the example of the US to argue that even the
largest economy would not remain in its position were it to
handicap its macroeconomic management.
I have consistently argued for “the urgent need to harness, direct
and put to effective use the best available intellectual and
political resources to engage the fiscal authorities to develop a
forward
looking
strategic
macroeconomic
management
framework for Nigeria” for the medium to the long term
effectiveness of macroeconomic management compatible with
the long term wellbeing of Nigerians.” Unfortunately, the longer
the recognition, consensus and action lags by the relevant actors
in the macroeconomic policy space, the higher will be the
economic and welfare costs in all runs.
Decision
My vote is to hold. This means I vote to keep CRR at 22.5%;
increase MPR at 12%; Asymmetric Corridor of -5 (SDF), +2 (SLF) and
liquidity ratio at 30%.
I have no doubts that monetary policy is at its limits and that
piecemeal policy in a global economic system characterised by
interests driven networks is dangerous. Monetary policy in the last
six years has been relatively more effective in achieving price
stability but at avoidably high sacrifice ratios (due mainly to a lack
of coordination between key macro and prudential authorities
and policies). To pursue price stability as Volcker did, given, the
already high sacrifice ratios; will be counterproductive hence, ill
advised. Yet, holding does not address the stagnation problem:
declining growth and rising unemployment none of which started
in the first quarter of 2016! This is why a mandate guided strategic,
coordinated and forward looking macroeconomic and prudential
plan developed jointly by monetary and fiscal authorities is
urgently needed.
At the risk of repeating myself in each MPC personal statement,
my vote is; for changing the strategic character of Nigeria’s
macroeconomic and prudential management. To want yet, do
nothing, is not to have: nothing concrete can be produced out of
nothing!
6.0
SALAMI, ADEDOYIN

At the conclusion of this meeting, I voted with my colleagues to
retain the status quo with respect to monetary policy parameters –
Monetary Policy Rate (MPR), Corridor around MPR, Liquidity Ratio
(LR) and Cash Reserve Ratio (CRR). In my view changing any of
these parameters would not deal with any of the issues
confronting our economy.

Data in the run-up to the meeting confirmed a worsening of the
economic environment. A combination of shrinking economic
activity and sharply rising inflation, the Nigerian economy was in a
very difficult position. Aggregate output growth, estimated by the
National Bureau of Statistics (NBS) at – 0.34percent in Q1-2016,
simply confirmed what had been anecdotal evidence of a
challenging situation. Rising inflation – the Overall Consumer Price
Index (CPI) recorded by the NBS at 13.72percent in April – worsens
the ‘wind chill’ impact of contracting output.

Unsurprisingly, the unemployment situation also continues to
deteriorate – rising to 12.1percent at end Q1-2016. This is almost
double the 6.4percent in Q4-2014. With underemployment adding
a further 19.1percent, the challenge to the social cohesiveness of
our nation becomes obvious. From a monetary policy perspective,
the figure for non-performing loans as a ratio of total Banking
System lending – which provides a sense of threats to financial
system – is my biggest concern. At 10.06percent in April 2016, the
NPL Ratio has risen from 4.88percent at year-end 2015 and is
double the policy threshold. Having continuously drawn attention
to the challenge of ensuring financial system stability I hope that
the data provided truly captures the complete situation!!

Given the foregoing, the context for and the nature of policy
choices will be framed by the answer provided to the questions
below –
Given rising prices, what to do about our primary mandate
of price management?
What can monetary policy do to reverse or at least prevent
economic activity from continuing to shrink?
How does the obvious worsening of Financial System Stability
parameters affect the set of available choices?

With respect to prices, I am clear that inflation is not a monetary
phenomenon and requires no monetary policy response! Analysis
provided by the NBS is unequivocal that inflation is essentially a
reflection of costs increasing as a result of supply side pressures.
Rising energy costs – both power and fuel – have combined to
raise inflationary pressure. If eventually Nigeria is to sustainably
resolve her energy challenges, the move towards cost reflective
electricity
tariffs
is
inevitable.
Similarly,
the
incomplete
deregulation of fuel prices cannot also be avoided. I would hope
that the process of completely deregulating the downstream fuel
sector would be completed in the near future.

Notwithstanding official non-recognition of the parallel market,
difficulty of access to FOREX at the ‘official window’ and
uncertainty about the framework for exchange rate management
have combined to see the adoption of the parallel market
exchange rate as the basis for pricing. It is thus not surprising that
the rising cost of imported inputs contributes to rising inflation.
Noting
that
informal
estimates
indicate
that
household
consumption spending and investment spending by firms
contracted by almost 1.5percent and 3percent respectively in Q12016, it is clear that negative demand side shocks have
moderated the extent of rising prices. The foregoing thus rules out
the response of raising interest rates to dampen demand. As I
suggest above and re-emphasize, it is not about demand.
Furthermore, raising interest rates, by reducing investment, will
worsen supply side pressures already facing the economy.

Having ruled out an interest rate response to rising prices, what to
do with respect to output contraction? In the normal course of
events, negative output growth, as recorded in Q1-2016, would
warrant considering monetary easing, to reduce the cost of
borrowing and thus stimulate investment. These however, are not
normal
circumstances.
Notwithstanding
bank
liquidity,
at
46.3percent, remaining at relatively high levels, the appetite for
lending is greatly diminished in the face of very sharp rise in nonperforming loans - now officially recognized. Diminution in the
appetite for lending is demonstrated by figures that show growth
in gross credit, adjusted for inflation, shrank by almost 14percent in
the year since April 2015. Lenders are, unsurprisingly, pre-occupied
with measures to manage and reduce the vulnerabilities of their
risk asset portfolio. Lower rates unlikely to ease access to credit.

Beyond credit, a reduction in the MPR will further worsen the
current policy misalignment. As I have argued before now, the
policy response to falling commodity prices has resulted in an
unsustainable policy mix that combines twin deficits (fiscal and
current account) with a fixed exchange rate. In this context,
reducing MPR will worsen the inconsistencies. At the most basic
level, with MPR now below the rate of inflation, inflation-adjusted
rates are already negative. The adverse implications of negative
‘real’ rates for ‘financialisation’ and investment in productive
assets are obvious. Any reduction in the policy rate worsens this
position. In addition, negative real rates will encourage asset
substitution against the Naira thus put further pressure on
exchange rates.

In my view, the decision of MPC to approve movement from the
fixed exchange rate regime that has occasioned great harm to
our economy is a necessary first step towards restoring credibility,
cohesion and internal consistency to policy. Even as we wait for
Bank Management to determine the operational details of the
‘new’ regime, its implications for rebuilding confidence in the
economy and its management cannot be understated.

It is clear to me that flexibility in exchange rate management will
weaken the Naira. This weakness will doubtless have beneficial
fiscal impact. At the Federal level, depending on the definition of
flexibility, the new regime may address the concerns of
multilateral lenders on which financing at least half the deficit in
the Federal Government’s budget enactment depends. For the
States and Local Governments, a weaker exchange rate may
provide additional financial resources that ease the constraint,
which has resulted in accumulation of Civil Servant salary arrears.
In light of the above, I joined colleagues in voting to hold all
monetary policy parameters unchanged whilst approving that
Bank Management abandon the present fixed exchange rate
regime and allow greater flexibility in the determination of
exchange rate.

7.0
UCHE, CHIBUIKE U
The present precarious state of the Nigerian economy has clearly
exposed the limitations of monetary policy. With inflation in double
digit territory and still rising, the era of positive interest rates has
now become an illusion. This has grave implications for the
development of both our industrial sector and banking system. It is
for instance not surprising that the stability of our banking system is
increasingly being threatened and that our country’s industrial
productivity is now on the decline. Statistics available to MPC
show that the Nigerian economy now has few obstacles on its
way to slipping into a recession.
Tightening monetary policy at the current stage will however hurt
both the banks and the country’s industrial development. There is
also no clear evidence that this will materially stem the inflation
that is now trending upwards with no visible sign of being
contained. Given the import dependent nature of our economy
and the rapid depreciation of the Naira in the parallel market, the
official exchange rate of the Naira which has for a long time
hovered around $1 to N199.00 is increasingly becoming
meaningless. In my view, it is obvious that market prices in Nigeria
are now determined by the parallel market exchange rates for
the Naira.
The implication of the above is that the arbitrage opportunities
being created by the widening gap between the parallel market
and official exchange rates of the Naira are simply being
exploited for personal gains. Such corrupt practices can only
further undermine the integrity of our foreign exchange rate
management system. The recent repricing of petroleum prices
based on an artificial exchange rate that is above the official
exchange rate further makes nonsense of the current insistence
on an overvalued official exchange rate. Also, our diminishing
foreign reserves can only fuel speculation about the future of the
Naira thus further depreciating the value of the currency.
Since the formulation and implementation of exchange rate
policies are by law within the jurisdiction of the CBN Board of
Directors, I strongly recommend that the CBN management
should rethink its exchange rate determination mechanism in
order to bring it closer to market realities. It is also important that
the entire exchange rate management and allocation process
should be made more transparent.
It is however important to make it explicit that the above
recommendation will in no way provide the magic wand for
solving the complex economic problems of Nigeria. At the root of
this entire economic crisis lies the inability of the country to diversify
its economy away from its dependence on oil rents. The falling oil
prices and the current challenges in the oil producing areas of the
country have clearly exposed the thoughtlessness of our perennial
overdependence on oil rents.
While monetary policy can assist in getting the country out of its
current economic malaise, the buck clearly lies with the fiscal
authorities. Although the current war against corruption and the
implementation of the Treasury Single Account have been bold
steps in the right direction, very little progress has been made with
respect to diversifying our economy away from its dependence
on oil rents. Admittedly, doing this would not be easy especially
given the fact that valuable oil rents were wasted in the past four
decades to the detriment of the infrastructural development of
the country. The consequence is that all the key infrastructural
facilities that support economic development which among
others include: education, transportation, electricity and security
are all in tatters.
Given the cost dynamics of our currently limited national income,
the need to restructure our over bloated, and some would say,
corrupt and inept civil service is now urgent. A situation where
more than half of our national budget is spent on maintaining the
civil service is unacceptable and unsustainable. The current spate
of borrowings by both the states and the federal government is
also
unsustainable.
Loans
and
‘investments’
that
cannot
demonstrate a clear path for generating future income streams
for their retirement should be discouraged. Perhaps the most
ridiculous of these kinds of fiscal recklessness in the current
widespread borrowing by state governments to pay civil service
salaries and the continued unfettered access speculative foreign
portfolio flows have to the Nigerian economy. One sometimes
wonders where the income streams that would be used to repay
such loans would come from in the future.
I hereby conclude by reiterating the fact that given our present
troubling economic realities, I am not convinced that our
conventional monetary policy tools can provide us much room for
maneuvre at the present time. I will however strongly recommend
that the Central Bank should come up with a more realistic
exchange rate for the Naira. As it stands now, the parallel
exchange rate for the Naira has already been imputed into
market prices in Nigeria. The current insistence on maintaining the
current official exchange rate of the Naira is therefore not
beneficial to either the Nigerian government or the Nigerian
people. Further delay in the above direction can only help to
further fuel speculation and exacerbate the depreciation pressure
on the Naira. It is however important to reemphasize that without
the diversification of the economy, any relief the repricing of the
Naira would bring can only be temporary.
Aside from the above recommendations, I hereby vote as follows
with respect to the use of our conventional monetary policy
tools:(i) to retain the MPR at 12.00 per cent; (ii) to retain the CRR at
22.50 per cent; (iii) to retain the Liquidity Ratio at 30.00 per cent;
and (iv) to retain the Asymmetric Window at +200 and -500 basis
points around the MPR.
8.0
YAHAYA, SHEHU
The Global Economy
Little has changed in the global economy since the last MPC.
There is some slowing down in the growth rate of China; Growth
rates in the US during the first quarter of the year are lower than in
Q1; unemployment rose slightly and price levels dipped a little-
making it unlikely that the Fed will raise rates imminently. UK
growth is slightly lower than expected. Growth picked up a bit in
the Eurozone, unemployment was flat, while prices were in
negative territory. Venezuela, an oil producing economy suffering
from the effects of the fallen oil prices, is experiencing a sharp
contraction in GDP of 10%, alongside hyperinflation (140%), a
negative real interest rate, rising unemployment and surging debt.
This is a demonstration of the serious challenges that oil-producing
countries can suffer if the right response to price falls are not well
managed.
One important development relates to the modest recovery in oil
prices, with Brent spot prices at around $47 per barrel. It is not
clear though, whether this upward trend can be maintained,
given the rising global output and the excess supply. Apart from
oil, most other global prices are fairly stable
The domestic economy
The Nigerian economy is currently confronted with significant
challenges. GDP contracted by 0.36% in Q1 2016. Crude
petroleum,
manufacturing,
construction
all
experienced
a
decline. The agricultural sector experienced a positive growth
rate, particularly crop production and livestock, but not enough to
completely counteract the decline in the other sectors.
Unemployment also rose to 12.1%.
This is coming at a time when headline inflation for April, year on
year, has also shot up to 13.72 compared to 12.77 in March, which
was itself a high. Price increases were driven by both food (farm
produce and processed food) and core (largely fuel and
electricity costs). Given the substantial reduction in oil and gas
output due to the terrorist activities, which is preventing the
country from taking advantage of the current upswing in oil
prices, as well as the repercussions on electricity, it looks highly
likely that GDP will fall again in the next quarter and plunge the
country into a deflation. Prices are also likely to remain elevated in
the near future. External reserves have fallen by about 2% in the
last month.
The financial system remains strong, with DMBs generally above
prudential guidelines with respect to capital adequacy and
liquidity. Return on equity and on assets is also adequate.
Nevertheless, in response to the current economic environment,
they are experiencing an upward trend in NPLs and some
challenges with respect to profitability. Value and number of new
credits are also falling.
One of the major challenges facing the economy is the
exchange rate issue. Net forex flows have been negative for the
year so far; foreign reserves have been falling. While the official
exchange rate has been stable, par force, the Naira exchange
rate at the unofficial market has been under considerable
pressure. There is evidence of significant unmet demand for
foreign exchange which has an obvious effect on manufacturing
output, among others. There is also strong pressure for rent seeking
behavior by those with access to forex at the official rate. The
need to address this problem squarely is becoming more urgent. It
is continuing to have an unsettling effect on both the commodity
and capital markets.
Conclusion and Vote
The combination of negative growth rates and inflationary
pressures obviously complicates policy making, especially when
there is a strong likelihood that these trends will continue in the
near future. Nevertheless, it seems fairly clear that the rise in prices
is mainly due to cost push factors as earlier indicated. Tighter
monetary policy is therefore unlikely to stem the inflationary
pressures at this time. Whereas, such an approach is more likely to
have a further dampening effect on growth, with more serious
economic and political consequences. It is also likely to
complicate the challenges facing the financial sector, especially
the DMBs
As far as the Naira exchange rate is concerned, there is clearly a
strong case for introducing greater flexibility, within the context of
a medium development strategy. Nevertheless, it must be
emphasized that such flexibility must be carefully managed,
considering the extant circumstances of declining net forex flows
and foreign reserves and must be well aligned with fiscal measures
in order to avoid excessive pressure on the value of the Naira.
I therefore vote to retain the current monetary stance with respect
to the MPR, the corridor, CRR and liquidity ratio.


9.0 EMEFIELE, I. GODWIN, GOVERNOR OF THE CENTRAL
BANK OF NIGERIA AND CHAIRMAN, MONETARY
POLICY COMMITTEE

The fragile performance of the global economic which
protracted throughout 2015 prevailed into 2016 as outlook and
growth prospects continued to dim. Consequently, forecast of
world output growth for 2016 was downgraded by 0.2
percentage point from 3.4 percent in the January 2016 vintage of
the IMF World Economic Outlook to 3.2 percent in the April
release. With this, medium-term global outlook remains cautiously
modest especially vis-à-vis the 2015 growth of 3.1 percent. The
tepid global growth continued to reflect weakening demand,
rising uncertainties (due to both economic and non-economic
factors), immanent volatilities in the global financial markets, and
enormous vulnerabilities especially among key emerging markets
and developing economies.
Growth prospects in advance economies have also weakened,
albeit
differentially,
resulting
in
a
0.2
percentage
point
downgrade of 2016 growth forecast to 1.9 percent same as the
2015 outcome. This unexpected fragility is due to weakening
fundamentals. In the US, economic recovery remained cautious
as growth slowed to 0.5 percent 2016Q1 from 1.4 percent in
2015Q4 reflecting the effect of slowing exports and contracting
domestic demand. As a result, the forecast for 2016 has been
reduced from 2.6 percent to 2.4 percent. In the euro, modest
rebound
is
expected
to
continue
in
the
near-term
as
strengthening domestic demand outstrips weakening exports.
Though growth doubled to 0.6 percent in 2016Q1 from 0.3
percent in 2015Q4, the forecast for 2016 was revised downward
by 0.2 percentage point to 1.5 percent which is lower than the 1.6
percent recorded in 2015.
Protracted fragile global economy and relentless waves of
economic and financial uncertainties are having toxic effects on
the growth prospects of most commodity exporting emerging
markets and developing countries – with the exception of China
and some emerging Asian countries which seem relatively
impervious to the prevailing global shocks. Consequently,
average 2016 growth forecast for emerging markets and
developing
economies
was
revised
downward
by
0.2
percentage points, in the April 2016 vintage of the IMF WEO, to
4.1 percent; a marginal increase from the 4.0 percent growth
recorded in 2015. The poor outlook in these countries is
underpinned by falling commodity and energy prices, capital
flow reversals, financial markets fragilities, fiscal imbalances and
weak global trade. For the sub-Saharan, economic activities and
prospects is less than expected due largely to the same factors.
Declining output growth, rising inflation, weakening currency and
mounting unemployment remain a uniform feature in these
countries which is complicated by a tapering near-term outlook.
In Nigeria, recent data from the National Bureau of Statistics
shows that economic activities tightened in 2016Q1 as the
domestic economy grew by -0.36 percent. This is significantly less
than the 2.1 percent recorded in 2015Q4 and the 4.0 percent
growth rate in the corresponding quarter of 2015. Analysis
indicates that the outcome was due to contractions in both the
oil and non-oil sectors which grew by -1.89 percent and -0.18
percent, respectively; with the non-oil sector contributing about
89.7 percent to aggregate GDP. The contraction suffered during
the quarter was due essentially to severe and adverse shocks in
the energy sector as price hikes and poor availability basically
fettered the consumption of power and fuel in the country. The
effect of the energy crisis on the economy was enflamed by low
crude oil prices, ebbing net capital flows, foreign exchange
scarcity, weak domestic demand and plunging domestic
investments. The uncertainty surrounding the belated ratification
of the 2016 budget also affected private sector investment
decisions detrimentally and further harmed the already fragile
supply capacity of the economy. I note that while the shocks to
the economy had a bit of demand elements, they were
principally structural and supply-sided; hence, beyond the
immediate jurisdiction of monetary policy.
Consumer Price Index Report of the NBS for April 2016 indicated a
sustained rise in the year-on-year rate of domestic inflation. From
a rate of 9.6 percent in January, inflation, which at 11.4 percent
breached the single-digit frontier in February, remained doubledigit in March and April at 12.8 percent and 13.7 percent,
respectively. A breakdown of the inflation dynamics indicates
that the underlying pressure derives largely from the lingering
effects of unfavourable energy prices and exchange rate passthrough, which was aggravated by debilitated harvests (due to
devastating blights that affected some farm produce) and other
structural
misalignments
that
underpin
domestic
supply
constraints.
Accordingly,
both
the
food
and
the
core
components of inflation rose, respectively, from 12.7 percent and
12.2 percent in March to 13.2 percent and 13.4 percent in April. I
note that the drivers of the current inflationary are broadly
structural and supply-side factors. Nonetheless, the monetary
policy committee remains committed to deploying all tools within
its armoury to check the long-run trend of future inflation.
On monetary and credit conditions, available data indicated
that broad money supply (M2) grew by 3.5 percent in April 2016
vis-à-vis the December 2015 level. This implied an annualized
growth rate of 10.5 percent compared with the provisional
growth benchmark of 10.9 percent set for 2016. Over the same
period, net domestic credit (NDC) grew by 7.9 percent; an
annualized growth of 23.6 percent. At this rate, the annualized
growth rate of NDC exceeded the provisional benchmark of 17.9
percent for 2016. The development in NDC reflected the
significant 35.9 percent expansion in credit to government during
the month which implies an annualized growth of 107.9 percent.
Credit to the private sector, however, grew by 3.5 percent in April
2016, which at an annualized rate of 10.6 percent lagged behind
the programmed target of 13.3 percent. I once again note that
this austere outcome reflected the continued apathy of the
banking system to adequately provide the essential lifeline to the
core private sector to stimulate and re-inflate the economy.
In the money market, the chronic liquidity surfeit especially in the
banking system translated to recurring low interest rates. The
liquidity profile of the financial markets during the review period
was escalated by the distribution of the FAAC allocation and the
maturity of some securities, which consequently doused interbank
transactions. Correspondingly, inter-bank call rate, which stood at
4.5 percent on 21 March 2016, recorded an average of 2.0
percent between 25 March and 14 April 2016. At the capital
market, available data signalled a further rebound in equity
transactions since the last MPC. Starting at 25,899.91 points on 24
March 2016, the All-Share Index of the Nigerian Stock Exchange
rose by 3.3 percent to 26,763.86 points as at 18 May 2016. Over
the same period, Market Capitalisation showed a 3.1 percent
increase from ₦8.9 trillion to ₦9.2 trillion. In spite of this, the indices
shrank by 6.6 percent and 6.7 percent, respectively, relative to
their values as at end-December 2015.
During the review period, the daily average exchange rate of the
Naira to the US dollar at the interbank market remained steady
around ₦197.00/US$. The sustained firmness of the naira at the
foreign exchange market is attributable to the CBN’s effort at
safeguarding the value of the domestic currency using a
combination of alternative policy measures. In view of the
prolonged demand pressure at the market in the face of thinning
supply and its effect on our gross official reserves, I note the
expediency of reforming the foreign exchange market to
accommodate more flexibility in its dynamics. This has become
imperative due to the elevated focus on autonomous and
interbank foreign exchange transactions that heralded the
deregulation of PMS pricing and the attendant extra pressure it
puts forth on the exchange rate. The market reform is likewise
necessary to boost foreign exchange supply and dampen the
encumbrances on reserves. Available data on gross official
reserves indicated a 4.6 percent decline in the 30-day moving
average position from US$27.9 billion as at end-March 2016 to
US$26.6 billion on 20 May 2016.
In general, I note the sliding fortunes of the Nigerian economy as
harsh impulses continue to batter the domestic economy. Yearto-date, the economy has been hit by extensive shockwaves
particularly from the energy markets as the price of power and
PMS soar while the availably remained constrained. The energy
crisis resulting from the effects of widespread inadequacy of
energy supply thinned economic activities severely in the first
quarter and led to a contracting economic growth and rising
inflation. This situation, which is reinforced by the fall in crude oil
prices, further exposed the cracks in the structural fabric of the
Nigerian economy. In addition to the problem of stagflation, we
observed a concomitant prevalence of excess liquidity in the
banking system, low credit to the productive private sector,
surging
exchange
market
pressure,
inadequate
foreign
exchange supply, structural vulnerabilities and a constrained
fiscal space.
The underlying cause of the current macroeconomic crisis is the
fall in oil prices. Unfortunately, the continued apathy of banks to
lend to the productive sector hindered the ability of the economy
to absorb the resultant shocks. As I noted some time ago, recent
MPC decisions have been mainly accommodative with the aim
of supporting economic expansion. Though the level of banking
system liquidity was accordingly grown, the impact is yet to reach
the real private sector where it is mainly needed. Most of the
released liquidity found its way into the foreign exchange market
where speculative demand continued to be high amidst
dwindling supply. As a result, the impact of the policy decision
was muted while the unrelenting exchange market pressure
buoyed spiralling inflation.
On the fundamental driver of inflation, data on macroeconomic
conditions showed that money supply growth was congruent with
programmed target, while aggregate demand was reducing.
The fall in household spending, private investment, and public
expenditure rationalize the declining domestic demand. Yet
inflation is rising. Theoretically, inflation and output growth are
expected to co-vary positively for conventional monetary policy
to be effective. A situation, as we have observed in Nigeria,
where rising inflation is accompanied by declining growth is
atypical. It connotes that the current inflationary pressure is
neither a monetary phenomenon nor an aggregate demand
phenomenon. Rather it is an aggregate supply phenomenon.
Conventional monetary policy approaches may worsen rather
than ease the problem if applied wrongly in this instance.
All these are of great concern to policy makers. At this point,
however, I believe that the most critical and urgent concern
should be to return the economy on the path of growth. I
reiterate once again that the structural imbalances and the
fundamental misalignment inherent in the Nigerian economy,
which
were
manifested
vividly
in
the
recently
released
macroeconomic indicators, reflects the protractedly weak
aggregate supply problem and the disproportionate vulnerability
of the economy to supply shocks. Nigeria needs to learn from the
lessons of past episodes of low oil prices and the experiences of
comparable emerging Asian countries that are performing
exceptionally well at this time. We should see this as an
opportunity to diversify the economy permanently. To this end,
the CBN will not relent in its efforts at supporting the broad
diversification of the economy and the build-up of our domestic
productive capacity. However, the Bank alone cannot do this.
Traditional monetary policy is simply not equipped to deal with
the kind of problem currently facing the Nigerian economy.
In this light, I warmly acknowledge the importance of the recently
ratified

fiscal
budget
in
easing
macroeconomic
uncertainties that pervades our economy. I also note the
significant weight accorded to capital expenditure in that
budget. I am of the view that a judicious implementation of the
budget would allay some of the infrastructural challenges which
complicate the vulnerabilities of the Nigerian economy. I thus
posit that overcoming the infrastructural problems as well as an
effective industrial and trade policy would considerably correct
much the misalignment seen in the Nigerian economy. I strongly
believe that, in the medium term, this will not only boost
productivity and domestic supply capacity to ensure that jobs
and goods are in abundant supply it would also ease the
exchange market pressure.
On its part, the CBN will sustain and strengthen its development
finance efforts to ensure that affordable credits are directed to
strategic and high impact real sector initiatives. In the near-term,
it is essential to ensure that the effects of previous policies
decision gradually permeate the system and also delay further
policy shocks to avoid system seizures. However, the un-abating
pressure in the foreign exchange market needs to be tamed
permanently. I am aware of the widespread clamour for further
devaluation of the Naira. While pricing may be an issue at the
foreign exchange market, the bigger problem is that of supply
shortages. We need to take actions that will boost foreign
exchange supply and simultaneously eliminate speculative
demand from the market. It is in this regard that the creation and
adoption a more robust framework of exchange pricing and
allocation becomes imperative.
Based on the foregoing, I vote to:
1. Retain the MPR at 12.0 percent;
2. Retain the CRR at 22.5 percent;
3. Retain the asymmetric corridor at +200/–500 basis points;
4. Retain Liquidity Ratio at 30 percent; and
5. Introduce a flexible inter-bank foreign exchange market
structure and to retain a small window for critical transactions.
GODWIN I. EMEFIELE, CON
Governor

May 2016