Central Bank of Nigeria Communique No 108 of the Monetary Policy
Committee Meeting of Monday and Tuesday 25th and 26th July 2016
The Monetary Policy Committee met on 25th and 26th July 2016 against the backdrop of
fragile global and domestic economic and financial conditions. The Committee
evaluated the global and domestic macroeconomic and financial developments in the
first six months of 2016 and the outlook for the rest of the year. In attendance were 8
members.
International Economic Developments
The Committee noted the continued sluggish growth in global output, being
underpinned by weak demand and slowing productivity. In addition to existing risks,
rising debt levels in the Emerging Market Economies (EMEs), volatile financial markets
and the vote of the United Kingdom to exit the European Union “BREXIT” have
lessened the prospects for a more prosperous global economy in 2016. Consequently,
the International Monetary Fund (IMF), in July 2016, further downgraded its baseline
forecast for global growth to 3.1 per cent from 3.2 in April. The Organisation of
Economic Cooperation and Development (OECD) forecast for global output in 2016 is
even less optimistic at 3.0 per cent. Slower global growth prospects is traced to weak
trade, sluggish investment, protracted weak aggregate demand and low commodity

prices; which have translated to output declines in the Emerging Market and Developing
Economies (EMDEs). The Brexit vote has created widespread uncertainty and elevated
volatility in the global financial markets.

The United States (US) economy grew by 0.8 per cent in Q1 of 2016, though, much
lower than the 1.4 per cent growth recorded in the last quarter of 2015. The tapered
growth was attributed to the goods sector which continues to struggle under the weight
of declining factory activity; the hitherto resilient service sector is now losing steam while
trade remains under pressure from a strong dollar and weak domestic demand.

The Japan economy grew at an annualized rate of 1.7 per cent in Q1 of 2016, a
reversal of the negative growth recorded in Q4 of 2015. The Bank of Japan (BoJ) at its
15th-16th July meeting of the Monetary Policy Committee, maintained its monthly asset
purchase at ¥6.7 trillion (US$63.93 billion), leaving the policy rate also unchanged at
negative 0.1 per cent.

The Euro Area grew by 0.6 per cent in first quarter, 2016, up from 0.3 per cent,
recorded in fourth quarter of 2015. Downside risks to the growth outlook have, however,
risen following the Brexit vote. The Governing Council of the European Central Bank
(ECB), at its meeting of July 21st, 2016, retained its key interest rates on the main
refinancing operations, the marginal lending facility and the deposit facility at 0.00, 0.25
and -0.40 per cent, respectively, with the expectation that they would remain at present

or lower levels for an extended period of time. The ECB also sustained its monthly asset
purchases of €80 billion (US$87.91) until March 2017, with possibility of extension.

In anticipation of and to mitigate the impact of the Brexit vote, the Bank of England
(BoE) voted to continue its ₤375 billion (US$495 billion) monthly assets purchase
program, financed through the issuance of reserves and possible increase in the
quantum should the need arise. The Bank also retained its policy rate at 0.5 per cent,
with a commitment to stimulate inflationary growth towards its 2.0 per cent long run
path. The Bank also hinted at a possible further easing of monetary policy in August,
2016.

Major EMDEs continued to face declining capital inflows, rising financing costs and
geo-political tensions, all of which pose constrain to growth. Depressed commodity
prices continued to tilt the balance of risk towards the downside, thus, dampening
prospects for near term economic and financial recovery in the EMDEs. Consequently,
the IMF (WEO July 2016 Update) downgraded the 2016 growth forecast for this group
of countries to 4.1 from 4.3 per cent in the April projection.

In July, oil and other commodity prices rallied against the backdrop of better-thanexpected economic data on China in the second quarter, sustained attacks on oil
production facilities in Nigeria, and continued unrest in Libya. Nonetheless, global
inflation remained subdued despite widespread easing of monetary policy. In the
advanced economies, recent developments such as BREXIT has increased the

uncertainty surrounding the future of the Euro zone thus further weakening demand and
suppressing inflation. Consequently, while the stance of monetary policy in most
advanced economies is expected to remain accomodative through fiscal 2016 in the
EMDEs, it is expected to remain mixed, reflecting diversity and multiplicity of shocks
confronting them.

Domestic Economic and Financial Developments
Output
The Nigerian economy is still saddled with the effects of the shocks of the first quarter of
2016; which led to a contraction in output arising from energy shortages, high electricity
tariffs, price hikes, scarcity of foreign exchange and depressed consumer demand,
among others. Whereas the influence and persistence of some of the factors waned in
the second quarter, it is unlikely that the economy rebounded strongly in the quarter as
setbacks in the energy sector continued owing mainly to vandalism of oil installations. In
addition, the implementation of the 2016 budget in the second quarter remained slower
than expected in the second quarter. The Committee noted that most of the conditions
undermining domestic output growth were outside the direct purview of monetary policy.
It nonetheless, hopes that the deregulation in the downstream petroleum sector and the
liberalization of the foreign exchange market would help bring about the much needed
relief to the economy.
Data from the National Bureau of Statistics (NBS) indicate that domestic output in the
first quarter of 2016 contracted by 0.36 per cent, the first negative growth in many

years. This represented a decline of 2.47 percentage points in output from the 2.11 per
cent reported in the fourth 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 virtually all sectors of the economy, with the non-oil sector recording a
decline of about 0.18 per cent, compared with the 3.14 per cent expansion in the
preceding quarter. Agriculture and Trade were the only sectors with positive growth at
0.68 per cent and 0.40 per cent, respectively, Industry, Construction and Services
contracted by 0.93, 0.26 and 0.08 percentage point, respectively.

Prices
The Committee noted a further rise in year-on-year headline inflation to 16.48 per cent
in June 2016, from 15.58 per cent in May; 13.72 per cent in April, 12.77 per cent in
March and 11.38 per cent in February 2016. The increase in headline inflation in June
reflected increases in both food and core components of inflation. Core inflation rose
sharply for the fourth time in a row to 16.22 per cent in June, from 15.05 per cent in
May; 13.35 per cent in April; 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 15.30 per cent in June, from 14.86
per cent in May; 13.19 per cent in April; 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 was largely a reflection of structural factors, including high cost of
electricity, high transport cost, high cost of inputs, low industrial activities as well as
higher prices of both domestic and imported food products.

The MPC expressed strong support for the urgent diversification of the economy away
from oil to manufacturing, agriculture and services; and called on all stakeholders to
increase investment in growth stimulating and high employment elasticity sectors of the
economy in order to lift the economy out of its current phase.
Monetary, Credit and Financial Markets Developments
Broad money supply (M2) grew by 8.26 per cent in June, 2016, a 4.80 percentage
points increase from 3.46 per cent in May compared with the 0.54 per cent contraction
in June 2015. When annualized, M2 grew by 16.52 per cent in June 2016 against the
provisional growth benchmark of 10.98 per cent for 2016. Net domestic credit (NDC)
grew by 12.52 per cent in the same period and annualized at 25.04 per cent. At this
rate, the growth rate of NDC exceeded the provisional benchmark of 17.94 per cent for
2016. There was no change in the level of banking sector net credit to government in
June, contrasting the 31.45 per cent growth in May. Credit to the private sector grew by
14.45 per cent in June 2016, which annualizes to a growth of 28.90 per cent,
outperforming the benchmark growth of 13.38 per cent for the year. The MPC
expressed cautious satisfaction over the improved performance of credit to the private
sector and urged the Bank to ensure that the tempo is sustained inorder to stimulate
recovery of output growth.
The MPC noted that the level of money market interest rates largely reflected the
liquidity situation in the banking system during the review period. Average inter-bank
call rate, which stood at 20.0 per cent on 17th June 2016, closed at 50.0 per cent on
July 15, 2016. The increase was attributed in part; to the newly introduced foreign

exchange framework and the mop up of naira liquidity due to increased sale of foreign
exchange by the CBN during the period. Generally, the period under review witnessed a
decline in volume of activity in the inter-bank market owing to injections by FAAC and
maturity of some CBN securities.
The MPC also noted the decline in the indices of the equities segment of the capital
market. The All-Share Index (ASI) declined by 6.55 per cent from 29,597.79 on June 30,
2016, to 27,659.44 on July 22, 2016. Similarly, Market Capitalization (MC) declined by
6.26 per cent from N10.17 trillion to N9.50 trillion during the same period. Relative to
end-December 2015, the indices fell by 3.43 per cent and 3.55 per cent, respectively.
Globally, however, the equities markets remained generally bearish, in the aftermath of
the Brexit vote.

External Sector Developments
The MPC noted the actions taken by the Bank as part of the implementation of the
flexible foreign exchange regime decided at its meeting in May which was designed to
improve liquidity and stabilize the foreign exchange market. The Bank introduced a
flexible exchange rate regime in the inter-bank market; introduced a Naira-settled OTCFMDQ-OTC trading platform, adopted two-way quote trading platform at the inter-bank
foreign exchange market and appointed foreign exchange primary dealers.
However, the average naira exchange rate weakened at the inter-bank segment of the
foreign exchange market during the review period following the liberalization of the
market. The exchange rate at the interbank market opened at N197.00/US$ and closed
at N292.90/US$, with a daily average of N244.95/US$ between May 25 and July 19,

2016. The initial weakness was attributable to the normal market reaction to a new
regulatory reform. The MPC reaffirmed its commitment to its statutory mandate of
achieving a stable naira exchange rate.

The MPC’s Considerations
The MPC recognized the weak macroeconomic environment, as reflected particularly in
increasing inflationary pressure and contraction in real output growth. In view of this, the
MPC underscored the imperative of coordinated action, anchored by fiscal policy, to
initiate recovery at the earliest time. Members called on the Federal Government to
fast-track the implementation of the 2016 budget in order to stimulate economic activity
to bridge the output gap and create employment. In the same vein, the MPC expressed
concern over the non-payment of salaries in some states and urged express action in
that direction to help stimulate aggregate demand. On its part, and as a complementary
measure, the MPC restated its commitment to measures and deployment of relevant
instruments within its purview to complement fiscal policy with a view to restarting
growth. The Committee also enjoined deposit money banks (DMBs) to partner with
Government and the Bank in this direction, by redirecting credit from low employment
generating sectors to those capable of supporting growth, reducing unemployment and
improving citizen standards of living.

Members agreed that the economy was passing through a difficult phase, dealing with
critical supply gaps and underscored the imperative of carefully navigating the policy
space in order to engender growth and ensure price stability. The MPC therefore,

summarized the two policy options it was confronted with as restarting growth or fighting
inflation. The MPC was particularly concerned that headline inflation spiked significantly
in June 2016, approaching twice the size of the upper limit of the policy reference band.
The Committee noted that inflation had risen significantly, eroding real purchasing
power of fixed income earners and dragging growth. The MPC was further concerned
that while the situation called for obvious tightening of the monetary policy stance, the
recession confronting the economy and the prospects of negative growth to year-end
needed to be factored into the policy parameters.
The arguments in favour of growth were anchored on the premise that the current
inflationary episode was largely structural. In particular, members noted the prominent
role of cost factors arising from reform of the energy sector, leading to higher domestic
fuel prices and electricity tariffs and prolonged foreign exchange shortages arising from
falling oil prices leading to higher inputs costs, domestic fuel shortages, increased
transportation costs, security challenges, reform of the foreign exchange market
reflected in high exchange rate pass-through to domestic prices of imports.
Consequently, the current episode of inflation, being largely non-monetary but largely
structural, tightening at this point would only serve to worsen prospects for growth
recovery as the Bank had in June 2016, withdrawn substantial domestic liquidity
through the foreign exchange market upon introduction of the flexible foreign exchange
market regime. Members however, noted the negative effect of inflation on consumption
and investment decisions and its defining impact on the efficiency of resource allocation
and investment.

The MPC further noted the prolonged non-payment of salaries, a development which
has affected aggregate demand and worsened growth prospects. It also noted that at
the May MPC meeting, members weighed the risks of the balance of probabilities
against growth and voted to hold, allowing fiscal policy some space to stimulate output
with injections, but this has been long in coming.
The MPC in putting forward for tightening considered the high inflationary trend which
has culminated into negative real interest rates in the economy; noting that this was
discouraging to savings. Members also noted that the negative real interest rates did
not support the recent flexible foreign exchange market as foreign investors attitude had
remained lukewarm, showing unwillingness in bringing in new capital under the
circumstance. Members further noted that there existed a substantial amount of
international capital in negative yielding investments globally and Nigeria stood a
chance of attracting such investments with sound macroeconomic policies.
Consequently, members were of the view that an upward adjustment in interest rates
would strongly signal not only the Bank‟s commitment to price stability but also its desire
to gradually achieve positive real interest rates. Such a decision, it was argued, gives
impetus for improving the liquidity of the foreign exchange market and the urgent need
to deepen the market to ensure self-sustainability. Members were of the opinion that
this would boost manufacturing and industrial output, thereby stimulating growth which
is desired at this time.

The Committee’s Decisions

The MPC, recognizing that the Bank lacked the instruments required to directly
jumpstart growth, and being mindful not to calibrate its instruments in such a manner as
to undermine its primary mandate and financial system stability, in assessment of the
relevant issues, was of the view that the balance of risks remains tilted against price
stability. Consequently, five (5) members voted to raise the Monetary Policy Rate while
three (3) voted to hold.

In summary, the MPC voted to:
(i) Increase the MPR by 200 basis points from 12.00 to 14 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

Thank you for listening.

Godwin I. Emefiele
Governor, Central Bank of Nigeria
26th July 2016

PERSONAL STATEMENTS BY MEMBERS OF THE MONETARY POLICY
COMMITTEE

1.0
ADELABU, ADEBAYO
The lingering challenges in both the global and domestic economies have not shown
signs of waning, rather new issues seem to be unfolding which, invariably, have
complicated the fragility of the macroeconomic conditions. A number of new issues in
the global economy such as the shocking Brexit vote, the rising wave of terrorism
particularly in the US and Europe, the wobbling recovery as well as the volatile financial
markets conditions in the Euro zone, and the palpable uncertainty regarding the
forthcoming general election in the US are part of unanticipated developments that have
impacted on domestic macroeconomic conditions. Within the domestic economy, issues
such as the adjustment in the exchange rate, negative shock to oil output arising from
resurgence of militancy in the Niger Delta areas, prolonged lag effects of adjustment in
fuel and electricity tariffs are all parts of the major phenomenon that have pushed key
macroeconomic indicators out of the comfort zone. Key macroeconomic indicators have
therefore not only displayed lackluster performance but the challenge of stagflation is
now real, more than ever before. Apart from the twin challenges of output contraction
and inflation, the pressure in the FX market has not eased even when the exchange
rate has shown sharp adjustment. Against the perspective of these multi-dimensional
challenges therefore, it is exceedingly clear that monetary policy cannot address all of
the issues simultaneously thus requiring optimal-mix of policies.

I have argued severally in my previous statements on the imperative of far reaching
structural reforms in our quest to provide a stable macroeconomic environment, and I
would like to stress that emerging issues on daily basis continue to reinforce my
conviction. The main challenges confronting the macroeconomy at this period could be
broadly dimensioned along four lines: contraction in output; rising price level; exchange
rate pressure; and high lending rate. I am of the view that the underlying drivers of all
these issues reside largely in the real side of the economy rather than the monetary
side. With regard to inflation for instance, it is well known that there is a partial
suppression in aggregate demand on the backlash of default in wages and salaries by
many sub-national governments, thus the likelihood of inflation being driven by excess
demand is out of place. Available statistics revealed that the increase in headline
inflation in the first half of the year was largely driven by imported food inflation which
increased by 20.0 percent in June 2016. A most worrisome dimension is that imported
food price, unlike other items, did not only show an uptick on year-on-year basis but the
upward trend was also observed on month-on-month basis, suggesting a low likelihood
of moderation in the near term. It is equally disturbing to note that the items that
accounted for the significant uptick in imported food inflation during the period included
rice, bread, cake, frozen fish, and edible oils. The reason for the upward adjustment in
the prices of these items was mainly due to exchange rate pass-through as commodity
prices are easing in the global market.
With the adoption of the flexible exchange rate model at the last meeting, it is
envisaged that real equilibrium would soon be attained in the FX markets and thereby
minimize incessant adjustments in domestic price on the heels of swings in the

exchange rate. In as much as this is a realistic projection, it is however, necessary to
recognize that sustainability of the exchange rate, among others, is a function of terms
of trade of a country‟s export commodities in the international market. The price of crude
oil, the country‟s main export, has been severely hit by negative shock since mid-2014
while the prospects of improvement in the medium term is highly diminished in light of
several factors like the slow recovery in the global economy and persistence of supply
glut. Besides, developments in the global financial markets also pose considerable risks
to the medium path of the domestic currency. With Brexit and the attendant softening of
pound sterling, portfolio investors, particularly in the Euro zone, now place much
premium on security rather than returns, which has naturally shifted investors‟ sentiment
to dollar denominated assets. In addition, the evolving monetary policy stance of the US
Federal Reserves would much likely weigh on the currencies of emerging economies.
The singular reason why the Federal Open Market Committee (FOMC) did not hike its
policy rate at the last meeting in June was because inflation was still running below the
target of 2 percent as labor market had sufficiently strengthened. In the view of the
Committee, the underlying currents for the softness in consumer price were transitory in
nature and expected to dissipate soonest. The point here is that it is logical to expect
that the FOMC would soon hike interest rate with implication of further strengthening of
the US dollar against most currencies particularly currencies of emerging market
economies. In the light of all these issues, attempt to strengthening naira by increasing
policy rate with a view to attracting capital flow could be a desirable option, but the most
enduring option to reducing addressing inflation, in my view, is to reduce the passthrough effect of exchange rate on domestic prices.

A reliable way forward, therefore, to minimizing the impact of exchange rate passthrough on domestic prices is to drastically reduce the weight of imported food in the
average consumer‟s basket. In essence, my view is that further tightening of monetary
policy stance may not achieve the best result over the medium to long term. This
informs my concerns on the need to stimulate activities in the real sector particularly in
agricultural value chain that could enhance domestic production of staples such as rice,
corns, meats and dairy products. Large scale farming in these products supported by
government incentives is one of the right strategic direction. On its part, the Bank should
rejuvenate its various development financing schemes, most especially the NIRSAL.
Structural reforms measures that enhances production would not only address the price
concern but it would equally address the contraction in output.
Another dimension of the current challenge is the contraction in output which emanates
from both non-oil and oil sectors. Apart from the regular issues like infrastructural
constraint on the manufacturing sector, the decline in oil-GDP, in particular has price
and output dimensions. Oil production hovered around 1.5mbd against the production
quota of 2.2mbd during the first half of the year, resulting in a net production loss of
about 32 percent as a result of the resurgence of militancy in the Niger Delta. The point
here is that the underlying drivers of the current recession goes beyond monetary
factors, as there are significant issues that must be addressed by all stakeholders
including the security agencies in order to produce an enduring solution.
In as much as most of the factors fuelling the current downward trend in output is
outside the scope of monetary policy, issues bothering on appropriate monetary policy

stance in a period of recession cannot be completely ruled out. One of the essential
elements of a sound macroeconomic policy, including monetary policy, is the need to be
countercyclical with the business cycle. This was amply demonstrated by notable
central banks like the Fed and ECB in the wake of the recent global economic and
financial crisises. While I will subscribe to the fact that the issue of stagflation in our
peculiar circumstance may not afford the monetary authority the latitude to significantly
ease monetary policy stance, I will equally averse to raising interest rate at this period
as such is synonymous to procyclical monetary policy with potential effect of
accelerating recessionary process. Increase in policy rates, on the basis of inflation
concerns, poses further upside risk to the stability of the banking system, among others.
The NPLs of the banking system have increased considerably in the last one year on
the backlash of slowdown of activities in virtually all sectors of the economy. Increase in
policy rates will, therefore, have either of these two impacts on the banking system; the
banks would most likely transfer the cost to the customers with implication of
heightening the level of NPLs or the banks could absorb the cost but cut down on the
level of lending. Either of these outcomes, therefore, is not desirable at this point in
time.
In my opinion therefore, the challenge may look a bit complicated but the most enduring
solution lies in working with necessary stakeholders to remove the binding structural
constraints in the real sector of the economy. From the monetary side, the most
desirable way to support the process of recovery is through easing of monetary policy
stance, but in the light of concern for inflation as well as rising pressure on the
exchange rate, I am of the view that the MPR should be reviewed upward .

Consequently, I vote for an increase of 200 basis point in the MPR to 14 percent while
CRR remains 22.5 percent and Liquidity ratio at 30%. Asymmetric window at +200/-500
basis point around the MPR is also recommended.

2.0
ALADE, SARAH O
This is the first MPC meeting since the historic Brexit vote which has added additional
risks to global economic growth. The big concern is whether a retreat from financial risk
due to Brexit will disturb the existing fault lines in the world economy, notably in China
and southern Europe, although the Bank of England have put in place some monetary
policy intervention measures to cushion these effects. These developments, coupled
with domestic economic environment have increased risks to the Nigerian economy. Oil
prices remain low, even as militant activities in the Niger Delta are affecting output,
putting undue pressure on the fiscal and external sectors and adversely affecting the
domestic economy. Headline inflation remains elevated at 16.48 percent in June up
from 15.58 percent recorded in May, a further drift from the single digit goal of the
Central Bank. The growth for the second quarter of 2016 remains subdued even for the
rest of the year. These developments call for balanced monetary policy measures to
fight inflation and attract foreign investments to cushion the loss in foreign earnings from
oil. I will therefore support an increase in monetary policy rate.

Global economic growth continue to be sluggish: Weak demand and slowing
productivity coupled with the vote of the United Kingdom to exit the European Union
“BREXIT” is undermining global growth for 2016. In addition, the Brexit vote has created
widespread uncertainty and elevated volatility in the global financial markets. The
International Monetary Fund‟s (IMF) World Economic Outlook (WEO) for July 2016
downgraded its baseline forecast for global growth to 3.1 percent from 3.2 percent in the
April version. In the Emerging Market and Developing economies, weak aggregate

demand and low commodity prices have translated to output decline and resulting in
difficult economic and business environment. Depressed commodity prices continued
to pose downside risk to growth in emerging markets, especially on commodity
exporting countries, thus, dampening prospects for near term economic and financial
recovery in those economies.

The shocks experienced during the first quarter of the year are still affecting
Gross Domestic Product (GDP) growth negatively: Contraction in output which
started in the first quarter due to energy shortages, high electricity tariffs, fuel price
hikes, scarcity of foreign exchange and depressed consumer demand continued to
determine growth outcomes in the second quarter. In addition, the implementation of the
2016 budget in the second quarter remained slower than expected affecting the speed
of economic activities at a time when fiscal policy is needed to complement the efforts of
monetary policy to spur growth. First quarter GDP growth stood at -0.36 percent
compared to a 2.11 percent expansion in the previous period and way below forecasts
of 1.7 percent growth. It is the first contraction since the second quarter of 2004 as the
non-oil sector contracted, mainly due to a slowdown in the services sectors as a result
of a weakening naira, while lower oil prices keep dragging the oil sector down. GDP
Annual Growth Rate in Nigeria averaged 4.12 percent from 1982 to 2016, reaching an
all-time high of 19.17 percent in the fourth quarter of 2004 and a record low of -7.81
percent in the fourth quarter of 1983. The resuscitation of economic growth will require
the cooperation and collaboration of monetary and fiscal policy and delicate balancing
of both global events and domestic risks in the coming months. In addition, policy

measures targeted as expanding the revenue base such as improving tax
administration and broadening the tax base should be pursued vigorously to help lift
depressing consumer demand and increase growth. While an increase in tax rate might
not ordinarily be the best at this time, the fact that is declining calls for additional
measures to increase government revenues and spending to lift the economy out of the
current crisis. In addition, efforts should be made in the area of concessional borrowing
to finance infrastructure development and spur employment which will help increase
aggregate demand.

Headline inflation elevated even as foreign exchange supply remain limited.
Headline inflation further increased to 16.48 percent in June 2016, from 15.58 percent
recorded in May. The increase in headline inflation in June reflected increases in both
food and core components of inflation. Core inflation rose sharply for the fourth time in a
row to 16.22 per cent in June, from 15.05 per cent in May and 13.35 per cent in April.
Food inflation also rose to 15.30 per cent in June, from 14.86 per cent in May and 13.19
per cent in April. The rising inflationary pressure was largely a reflection of structural
factors, including high electricity tariff, high transport cost as a result of higher fuel
prices, high cost of inputs, low industrial activities as well as higher prices of both
domestic and imported food products. The persistent upsurge in inflation calls for
monetary policy intervention. High inflation causes lenders to demand higher fixed
interest rate on borrowing. It also hurts the poor since it erodes their purchasing power.
High inflation is harmful to growth and Central Bank at this time can only support growth
by keeping inflation low since it cannot increase aggregate demand by lowering interest

rate. Thus fighting increasing inflation pressure by increasing MPR will also help to
attract foreign inflows into the country to cushion the lost revenue from both lower oil
prices and lower output.

The recently adopted foreign exchange regime is bringing more transparency into
the foreign exchange market. After a period of restriction in the foreign exchange
market, a new market driven approach was adopted in June, 2016. This has brought the
needed transparency, price discovery and greater participation in the market. In
addition, the new framework is attracting inflows into the market, increasing supply and
ensuring continuation of economic activities, although more should be done to further
increase supply. In addition, the decision to increase the monetary policy rate will
further help encourage foreign inflows to curb capital outflow and provide liquidity to the
interbank market. At this time, monetary policy should be focused on restoring
confidence in the domestic economy and increasing supply of foreign exchange to
attract inflows, therefore an increase in MPR is in the right direction.

Against this background, I support a rate increase to help bring inflation gradually
under control and bring interest rate to a less negative territory. Decreasing rate at this
time will make interest rate more negative which is bad for savers and for investment at
a time when the nation needs all the investment it can get to support growth. However,
increasing Monetary Policy Rate rapidly to make interest rate positive will ground
economic activities. The increase in rate coupled with the new liberalized foreign

exchange policy will lead to stable currency as foreign inflow increases and inflation
moderate.
I therefore support an increase in Monetary Policy Rate by 200 basis points, to 14
percent, the retention of Private Sector Cash Reserve Requirement (CRR) at 22.5
percent, retention of the Liquidity Ratio at 30.00 per cent; and retention of the
Asymmetric Window at +200 and -500 basis points around the MPR to help attract
capital inflow and resuscitate the economy.

3.0
BALAMI, DAHIRU HASSAN
At the global level, the IMF downgraded its 2016 economic growth projection to 3.1per
cent from 3.4 per cent due to high level of uncertainty which include some of the
following vulnerabilities and risks: the British vote to leave the EU; the continuous fall in
crude oil and other commodity prices; the divergence of monetary policy between the
USA and other major economies of the world; and the slowing down of the Chinese
economy, all of which have had impacts on the Nigerian economy. There is the need for
the G20 to deliberately enact policies that would stimulate growth at the global level. It
should however, be noted that manufacturing and industrial development are the key
drivers of growth and economic transformation for any economy at the global level.
At the domestic level, the Nigerian economy is currently in recession with the twin
problem of negative growth indices and rising inflation. It has been observed that for
two consecutive quarters, the growth rate has declined Q1 at -0.36% and Q2 at -1.8%
while inflation has risen from 15.58 per cent in May to 16.48 per cent in June. The
nation is also caught up in economic crisis with pressure on its foreign exchange market
and slow growth in the economy, with the private sector being crowded out. Also, subnational governments are unable to pay salaries which affects the consumption
expenditure. The critical questions then are: How do we stimulate growth of output in
the face of high lending rate and inflation? Will an increase in interest rate reduce
inflation? Will it encourage households to save? Do we control inflation and leave
growth or the other way round? How do we stimulate private investment? Do we shift
resources to higher productive sectors of the economy? In agriculture for instance,
should the government direct social funds to farmers through providing improved

seedlings, water pumps and fertilisers etc.? In the light of the questions raised above,
growth can be encouraged through diversification of the economy. However, there are a
lot of constraints due to the reasons earlier discussed in my personal statement of May
2016. These include lack of adequate infrastructural facilities like energy; poor roads
network; insecurity; low level of household income; and the lag in the implementation of
the 2016 budget which was expected to be expansionary.
At the theoretical level, any economy in recession would require both expansionary
fiscal and monetary policies to move the economy forward. At the Monetary policy level,
it requires raising the level of money supply and reducing interest rates to attract more
investors. At the fiscal level, the government is expected to raise public expenditure and
reduce the level of taxes to raise the disposable income of both households and firms. A
lot has been done on the monetary side, particularly to encourage the banking industry
to lend to the real sectors of the economy. However, with rising non-performing loans,
not much has been achieved in stimulating growth. Hence, the CBN has had to
intervene several times in various sectors of the economy, like the Anchor Growers
Programme, to encourage the growth of the agricultural sector where Nigeria has
comparative advantage if properly planned. Similar interventions have been done to the
small and medium scale enterprise sectors of the economy. For growth to take place,
proactive and creative planning is needed.
Another important aspect of monetary policy objective is price stability. Currently,
inflation rate of 16.5% is much outside the CBN band of 6 - 9%. However, inflation in
Nigeria is partly not a monetary phenomenon, but due to structural reforms in the

economy. These include removal of energy subsidies; foreign exchange depreciation;
rising cost of transportation; poor electricity and infrastructural facilities. The point here
is that the CBN as a regulatory body, should be seen promoting financial system
stability, hence the need for taming inflation and sending signals to the fiscal side to
pursue growth vigorously. Impact analysis of earlier monetary policies should be made
available to the government to complement the fiscal side. In view of monetary policies
put in place in May 2016, there is need to allow time for the CRR, liquidity ratio and
symmetric corridor to hold while the MPR be varied by 200 point basis to promote the
inflow of FDI. These would gradually reduce inflation in the economy. For treasury bills,
the banks are quoting 18.5%, then why do we have to leave policy rate at 12%? It
should be noted that the policy of setting MPR at 12% is ineffective because it is too far
from the current inflation rate of 16.5%. Again, we cannot leave the control of current
level of liquidity to the banks because the DMB‟s are not using it appropriately. On the
basis of the above analysis, l vote to:
(I)
Retaining the CRR at 22.5%.
(II)
Raising MPR by 200 basis points from 12% to 14%.
(III)
Retaining the liquidity ratio at 30%.
(IV)
Retaining the asymmetric corridor at +200/-500 point basis.

4.0
BARAU, SULEIMAN
Background
The drag on key macroeconomic indicators since the beginning of the year is still very
much at play. It has been complicated by new shocks like the Brexit vote, and rising
wave of global terrorism and ascendancy of militancy in the domestic environment. A
key outcome of the last meeting in May 2016, was the deployment of a flexible
exchange rate model, which, to a large extent, has reduced the high rate of depletion of
the external reserves but it is glaring that the pressure in the FX market is still
reasonably high given the significant depreciation in the exchange rate even when
some slowdown could still be observed on external reserves.
Besides, other major issues include the acceleration in domestic price level and sliding
output, with statistics pointing to the likelihood of the economy being in recession at the
end of the year. However, this should not be interpreted as a complete bad news
because the underlying cause is pretty clear and monetary policy measures will always
be proactive in response. The contraction in output was principally a result of
unprecedented shocks on both the demand and supply sides. The sharp adjustment in
the exchange rate impacted production negatively, while the fall in public revenue
arising from the slump in oil price has equally eroded consumption with many
subnational governments unable to pay wages and salaries on regular basis. Structural
issues including productivity declines from negative spillover in the global environment,
exchange rate adjustment, increase in electricity tariffs, and supply deficit from conflict
ravaged north eastern part of the country, has accelerated inflation.

A simultaneous rise in inflation and contraction in output would naturally pose serious
challenge to any monetary authority, but I am of the view that restoring confidence in
the macroeconomic environment should be critical. The policy rate (MPR) was
increased by 100 basis points in March against the background of creeping inflation but
my view is that the challenge in the macroeconomic environment demands further
tightening through upward adjustment in the policy rate. Perhaps, the most compelling
case against the status quo ante is the emergence of unanticipated shocks which have
caused inflation to overshoot forecast as well as putting additional pressure on external
reserves. In the light of this, my vote is to increase the Monetary Policy Rate with a
view to addressing inflation concerns as well as enhancing the competiveness of the
economy for foreign capital required to shore up the external reserves.
Pressure Points
Global Environment:
There are a number of significant negative developments in the global environment with
potential spillover to the domestic economy. One of such key developments is the exit
of Britain (Brexit) from the European Union via the outcome of the referendum in June.
Although events are still unfolding, evidence so far reveals amplification of downside
risks in the global financial markets with potential spillover to both the real and financial
sectors of the domestic economy. Preliminary data shows that the pound sterling has
shed about 15 percent, while the credit rating of UK has been downgraded from triple to
double “A”s. Pound Sterling denominated assets continued to shed weight on the heel
of anxiety by investors who are moving out to a more secured haven. Naturally, the

likely destination of most of these investments is the US with implication of further
strengthening of the dollar against most currencies particularly emerging economies‟
currencies. This could possibly accentuate the risk of depreciation of the Naira against
the US dollar and heighten the pressure in the foreign exchange market. Besides, given
that most primary commodities exported by emerging market economies, crude oil
inclusive, are quoted in US dollar, an appreciating dollar should result in softening of
prices of these commodities. The implication of such development on the domestic
economy particularly on the fiscal sector is fairly obvious.
Another challenge of worrisome dimension brought about by Brexit is the increase in the
level of uncertainty in the global output as the IMF has undertaken a third downward
revision of 2016 global growth. Global growth in 2016 is now projected at 3.1 per cent
compared to 3.4 and 3.2 percent in October 2015 and April 2016, respectively. Although
the downward adjustment from the latest revision is restricted mostly to Euro economies
but when cognizance is taken that the leading emerging economies like China are still
contending with growth challenges under its rebalancing model, then the prospects of
increase in exports for most developing economies is highly diminished.
The increase in global terrorist activities, especially in the US and Europe have
profound macroeconomic implications. These activities divert attention of leaders in
large global economies with likely severe consequence on allocation of resources for
real economic activities. Secondly, most of these activities are concentrated in the Euro
zone and in view of the fact that the zone is yet to fully recover from recession since the
2008/9 global financial crisis, even after series of quantitative easing by the ECB, the

current spate of terrorism challenges confronting the zone would only aggravate the
slide into recession.
The last issue in the global environment is the evolving monetary policy stance of
systematically important global central banks like the Bank of England (BOE) and the
US Federal Reserves (FOMC). Both the BOE and the FOMC kept their rates
unchanged at their last meeting in June and July, respectively, which, naturally, is a
good news to emerging economies. The reason for keeping the rate unchanged was
similar in the two countries but a deeper appreciation of issues should make emerging
economies treat the news with caution. In the US, for example, the labor market has
strengthened and economic activities were expanding at moderate pace. The only
reason why the Fund‟s rate was kept unchanged was inflation running below the long
run target of 2 percent as a result of transitory factor of earlier decline in energy price.
As the effect of transitory factor dissipates, uptick in inflation should be expected with
the FOMC responding with rate hike. The implication of such development on the
domestic economy is obvious but more importantly, the Naira may slide further against
the US dollar.

Domestic Environment
Pressure on Exchange Rate: The adoption of a flexible rate model at the last meeting
represented a giant stride in aligning the exchange rate framework to the realities of the
operating environment. The model has considerably enabled the exchange rate to

absorb much of the pressure in the market but it appears the pressure is yet to abate as
external reserves is still slowing down. It is worrisome that demand pressure in the FX
market continued to increase at a period when the real side of the economy is
contracting, suggesting that some speculative forces could still be at play. Among
others, the likely drivers of the excess demand is the difference in rate between the
interbank and parallel market rates which is still relatively high although some form of
narrowing has been achieved. Additional risk to the pressure in the FX market is the
lingering liquidity surfeit in the banking sector.
Slowing Output: The GDP contracted by 0.36 percent at the end of first quarter after
persistent slowdown since the latter half of 2014. The key forces at play are yet to ease.
The insurgency in the North East, and the militancy in the Niger Delta have impacted
negatively on economic activities of those areas. From, the demand side, though there
was bailout programme for some states, a considerable number are still owing on
wages and salaries thereby reducing consumption and depressing aggregate demand.
The softening output portends a lot of adverse consequences. Among others, given the
recourse to borrowing to finance budget due to falling fiscal revenue, a softening GDP,
therefore, would accentuate the contraction of fiscal space.
Rising Domestic Price: The domestic price level continued its upward trend in June as
headline inflation accelerated to 16.48 percent, the highest level since 1994. The
pressure on domestic price level emanated from both core and food components with
an increase of 15.30 and 16.22 percent, respectively, suggesting that both monetary
and non-monetary factors are at play. The medium term path is still challenged by

significant upside risks including the lag effect of upward adjustment in energy prices,
recent increase in electricity tariff, and rising prices of imported food items on account of
depreciation of domestic currency.
High Lending Rates: The challenge to growth is further impeded by the subsisting high
lending rate regime. The prime lending rate rose to 16.78 percent in June while the
Maximum lending rate increased to 26.93 percent in the same month. A commissioned
study on the viability of small scale agro-allied business in Nigeria in 2015 revealed an
Internal Rate of Return (IRR) of between 21 to 43 percent for the various agriculture
sectors. With the current lending rate, most of the sectors would definitely drop out of
the viability zone. Besides, the current monetary policy rate regime has revealed the
inefficiency of resource allocation inherent in oligopolistic banking structure such as
ours. It is difficult to understand that while the lending rate increased between May and
June 2016, there was a reduction in consolidated deposit rate. The consolidated deposit
rate fell to 3.26 percent in June, culminating to wide spread of 23.67 percent between
savings and lending rates. The wide spread in rate would not only inhibit maturity
transformation role of banks but the negative real interest rate on savings deposit could
reduce incentive to save and thereby threaten banking system stability.
Way Forward
To reduce the risk inherent in the macroeconomic environment, the following measures
may become necessary.

Address the Rising Inflation: The persistent rise in inflation deserves attention.
Although the significant drivers of the current inflationary trend could be ascribed to
shocks and structural challenges, nevertheless the demand for money needs to be well
managed to avert stagflation. The current policy rate may appear fairly high but in the
light of the conventional Taylor‟s rule, the central bank‟s policy rate must be increased
whenever inflation exceeds the target rate regardless of whether the source of the
pressure is from decline in productivity or increase in aggregate demand. The current
inflation rate is 16.4 percent against the bank‟s inflation target of 9 percent, suggesting
the need to adjust the policy rate upward. Argument for upward adjustment is further
reinforced by the fact that the current level of inflation has taken the real policy rate to
negative territory, which is an indicator of loose monetary condition. It is equally
significant to mention that the decision to hold the MPR at the last meeting was in the
hope that it would elicit reversal of the declining growth trend. However, the result was a
rise in inflation and decline in growth, confirming the thesis that though inflation could be
beneficial but it is harmful to growth if it exceeds certain threshold.
Stabilize the Foreign Exchange Market: The perception of economic agents about the
medium term path of key economic variables is very crucial to reversing recession and
restoring growth on sustainable basis. One of such variables is the exchange rate. It is
appreciated that the currencies of most emerging economies particularly oil exporting
countries, are facing pressure but the effect seems much more on Nigeria. Available
statistics reveal that Naira depreciated by about 34 percent in July 2016 on year-onyear basis while the South Africa rand depreciated by about 16 percent during the
period. When examined on month-on-month basis, however, Naira still depreciated by

about 6 percent while South Africa rand appreciated by about 4 percent. This shows
that the switch to a flexible exchange rate model at the last meeting, though a logical
step, has not completely eliminated the pressure in the FX market. The model, could
only work on one side of the equilibrium path- the demand side, as the supply side is yet
to be addressed. At a time when accretion to external reserves through oil proceeds is
threatened from both the price and output sides, the only available leeway is capital
account. Global capital flow is generally influenced by both push and pull factors. A
significant push factor is already at work in the aftermath of the exit of Britain (Brexit)
from the EU but the domestic economy needs to strengthen the pull factors. As such, it
may be in order to put in place measures that can enhance the attraction of some of
these capitals into the domestic economy. Thus, beside the need to address inflation
concerns, another reason to increase the policy rate is the need to improve the
competitiveness of the domestic economy for foreign capital and thereby shore up the
external reserves.
Support the Real Sector: Given the lingering infrastructural challenge coupled with the
need to raise the policy rate in order to curtail inflationary pressure, the vulnerable
sectors of the economy particularly agriculture and manufacturing may be worse hit in
terms of flow of credit. Credit to the core private sector grew by 12.63 percent at the end
of the first half, annualized to 25.26 percent, which is below the optimum requirement at
a time of softness in critical sectors. As a result, it may be in order for the Bank to
intensify its various development finance scheme, like the Nigerian Incentive based Risk
Sharing System for Agriculture Lending (NIRSAL), the CAC, and the Anchor Borrowers
Programme.

Strong Sectorial Policies: Stabilization of the macroeconomic environment is
imperative in reversing the slide to recession but it is important to appreciate the fact
that the relationship between stable macroeconomic environment and growth is not
symmetry. Instability in the macroeconomic environment would hurt growth but restoring
stability does not translate to automatic restoration of growth. This is even more
important for developing economies such as ours with a lot of bottlenecks in the
production process. At this point in time, there is a compelling need for government to
spend in order to halt the slide to recession while at the same time cautiously guides
against unproductive consumption that could exert further pressure on price level. It is
therefore critical for government to prioritize spending to critical sectors that could
promote non-inflationary growth. It is noteworthy to mention some recent initiatives of
government, particularly in the transport sector despite the dwindling revenue. The
proposed launch of Abuja-Kaduna rail line as well as Lagos-East bound line are good
examples of such projects. Other critical sectors like the power sector need to come
with robust policies that must be faithfully implemented in order to promote spending
that could stimulate growth without necessarily increasing the risk to inflation.
Protection of Oil and Gas Installations: I mentioned this issue in my last statement in
May 2016, but it is quite disheartening that the condition has not improved but rather
deteriorating with the recent bombing of some key oil installations. We have not
benefited from the rally in oil price since April. Instead, our production level had dropped
to 2.2million to 1.6million per day. We must implore all initiatives to stop this
haemorrhage in order to take advantage of the current rally in oil price and by extension
halt the declining fiscal revenue.

Decisions
In view of the need to restore stability in the macroeconomic environment and most
especially to stem the rising inflation and equally make the domestic economy
competitive for foreign capital, I propose that the MPR be increased by 200 basis points,
while retaining other measures.

5.0
SALAMI, ADEDOYIN
The Monetary Policy Committee (MPC) meeting in May 2016 had issues around
exchange rate management as its overriding challenge. At the end of that session I
was clear in my mind that with GDP data for Q1-2016, released in the run-up to that
meeting, already showing a contraction and the outlook for both activity growth and
inflation indicating a worsening in both parameters, our meeting in July would have to
provide clarity as to the priority between inflation and growth.

At the end of deliberations, I voted with a minority of colleagues in favour of the
proposal to leave policy rates unchanged.

Additional data published since the meeting in May simply confirmed my feeling that the
primary issue at this meeting is for the MPC to indicate its preference for policy attention
between growth and inflation. The most recent revision of the 2016 forecast for Nigeria
published by International Monetary Fund (IMF) just ahead of this meeting foresees
output of the economy in Nigeria contracting by 1.8 percent this year. The National
Bureau of Statistics (NBS), on the sanguine assumption that Nigeria attains daily
average oil production of 1.7mn barrels for 2016, expects GDP to contract by 1.3
percent this year. On available information concerning the current state of oil-export
production, this assumption looks optimistic.

It is perhaps noteworthy that the forecasts from both the IMF and the NBS show a
marked worsening of the economic environment. While the IMF‟s January 2016 forecast

for Nigeria has swung from 4.2 percent annual growth to contraction of 1.8 percent in
updated forecasts published in July, the NBS‟ forecast similarly swings from its January
forecast of 3.8 percent growth to a conservative estimate of 1.3percent contraction!
Allowing for the 0.4percent contraction in Q1-2016, the most optimistic forecasts for
growth suggest a minimum average contraction of approximately 1.6percent in each of
the remaining 3 quarters of the year.

For inflation, data published (by the NBS) for June shows Aggregate prices rising at
16.5 percent when compared with the same month last year. Both Core and Food
inflation also rose by 10.9 percent and 11.67 percent respectively. These figures
represent a worsening of inflation when compared with the similar data for the previous
month. The trend in inflation is however not fully captured by the year-on-year figures.
The month-on-month data however shows a sharp improvement in the rate of
aggregate price increase from 2.8 percent in May 2016 to 1.7percent in June 2016.
Core inflation and the rate of increase in food prices similarly showed a marked
reduction – rising slower, at 1.8 percent and 1.4 percent respectively when compared
with 2.7percent and 2.6 percent the previous month.

It is also noteworthy that the rate of change of the month-on-month data has been quite
volatile in 2016. In other words, whilst prices doubtless continue to rise, it is not
conclusive that inflationary conditions are worsening. Indeed, forecasts for inflation
provided by Bank Staff show a deceleration in the rate of aggregate price increase to
15.95percent in August before increasing to 16.83percent, year-end. Forecasts for

month-on-month inflation show a deceleration to October before rising in the final two
months of the year.

In my judgment, raising the MPR is inappropriate at this time. To begin with, the primary
causes of rising prices are not driven from the demand-side – indeed, credit conditions
are quite tight. Year-to-date has seen credit increase by just 1.3percent. This compares
with price rise of almost 12percent between December 2015 and June 2016. It is clear
that rising inflation is the result of reform in Energy Costs and the Naira‟s weakness.

Whilst it is tempting to conclude that at the very least the Naira‟s weakness might be
halted by raising the MPR, I am not convinced this will happen. The fundamental
challenge facing the Naira is the negative shock in Nigeria‟s Terms of Trade caused by
sharply lower oil prices. This has been worsened by ineffectual policy responses,
leading to a loss of policy credibility with the resultant inability to provide supply stimuli
needed to revive the economy. In my view it is unduly optimistic to expect international
investors to be attracted to Nigeria until policy credibility and consistency is not only
restored but also successfully maintained. Indeed, initial implementation of the
supposed flexibility in exchange rate determination simply saw movement from a „hard‟
peg at N197/US$1 to a “soft” peg in the range N282-284/US$. This, in my view, sent a
needlessly negative signal from which we now appear to be belatedly back-tracking.

The „market‟ rates for Naira are in my view an over-adjustment given the fundamentals
of the economy. I have seen estimates that suggest a Purchasing Power Parity (PPP)

rate of N315/US$ at the time of this meeting. In all markets, the Naira has weakened
beyond this level and shows no sign of appreciation anytime soon. The difference within
markets is what can only be described as the cost of FOREX Market illiquidity with a
further premium for policy uncertainty. At this point, it may be that the most credible
option open to the Central Bank for improving FOREX liquidity is to specifically borrow
USD for the purpose.

If, as I contend, upward movement in the Policy rate fails to attract the size of FOREX
flows immediately required, the case for raising rates also fails. In my view higher
interest rates also worsen the financial stability problems already evident in the banking
sector. Data provided by Bank Staff for June 2016, show Non-Performing Loans (NPL)
amounting to 10.71percent of the Banking Industry Loan Book, which is well above its
regulator‟s mandate. My hope remains that the data reflects full disclosure of NPLs.

In charting a path out of the present situation, we could not do worse than to draw on
lessons from the reaction of Central Banks in other jurisdictions on the prioritization
between inflation and GDP Growth. As we have seen time and again in the period of
sub-par growth prevailing since the sub-prime induced financial and economic crisis,
Central Banks have placed priority on growth, even to the extent of using the
instrumentality of unorthodox monetary policy.

The collapse in government revenue in H1-2016 means that the fiscal side will face
enormous challenges to deliver any significant stimulus to the economy, through the

2016 Appropriation Act, as hoped. Indeed the government has already warned that it is
unlikely to fully implement the budget for this year. Raising rates at this point is unlikely
to achieve anything other than to worsen the economic and business circumstances of
Nigeria.

6.0
UCHE, CHIBUIKE U
With the Nigerian economy now in recession, inflation and bank NPLs in double digit
territory, oil prices tottering and no visible sign that our oil dependent economy is being
diversified, few will dispute the fact that our country currently has no clear path towards
economic recovery. Under the above scenario, as I have argued in the past, it is clear to
me that there is a limit to what monetary policy alone can achieve. While some MPC
members have argued that we should focus on the main mandate of monetary policy,
which is price stability, I am of the view that such a mandate is not an end in itself. This
is because the very essence of price stability is to engender economic growth. Since it
is now prudent to assert that the days of high oil prices are unlikely to return, the only
reasonable path towards encouraging economic growth in Nigeria is to diversify the
economic base of our economy by promoting real sector development. Tightening of
money supply at the present time, will therefore be counterproductive towards achieving
the above objective.
At another level, I also very much doubt whether tightening at the present time will
indeed curtail inflation. This is because evidence available to MPC suggests that
liquidity is not the main causative factor of the current inflationary pressure. Rather such
inflation has in the main been caused by the reforms in the electricity and petroleum
sectors which have resulted in higher prices for the above energy products, which
impact on the input costs to the real sector of our economy. Another important factor
that has contributed to the present inflation is the oil revenue induced scarcity of foreign
exchange which has resulted in both the explicit and implicit devaluation of the Naira.

In the light of the above, I do not see how tightening money supply can help curtail
inflation at the present time. Rather such a policy move can only further exacerbate the
present difficulties being experienced by operators in the real sector of the Nigerian
economy. Tightening, which will definitely lead to increases in lending rates, will
adversely affect our already contracting manufacturing sector and thus drive our
economy further down the recession path. This will not be in the interest of our banking
system which, given its current double digit NPL level, is already in a precarious state.
Throughout the meeting, I also carefully listened to the argument that tightening will help
the country achieve higher interest rates which will positively impact on foreign portfolio
inflows and thus on the value of the Naira. In my humble view, to tighten monetary
policy with the main objective of attracting foreign portfolio flows will be a major policy
error. This is because history teaches us that unless foreign capital inflows are deployed
to the real sectors of our economy, their impact on stabilizing the exchange rate of the
Naira are at best temporary. Given our current precarious economic situation therefore,
I am convinced that it would be an error to continue to allow unhindered inflow of
speculative capital into our economy.
For the avoidance of doubt, I am not fundamentally opposed to the inflow of foreign
capital. All I am saying is that our country should encourage the inflow of foreign direct
investments as opposed to foreign portfolio flows. Although some MPC members have
argued that foreign portfolio flows are normally the precursor of foreign direct
investments, history teaches us that this has thus far not been applicable to Nigeria.
While portfolio flows can sometimes help to sustain the value of our currency, this is not

sustainable in the long run. Without investments in the real sector, which admittedly will
require a clear strategy to diversify our current oil dependent economy, the value of our
currency will continue to slide. Speculators cherish the above dynamics. In fact, some
will argue that speculators are already exploiting the above scenario and reaping
handsome profits to the detriment of both the value of the Naira and our economy.
In conclusion therefore, I believe that monetary policy tightening at the present time will
be an error. Although maintaining status quo, when there is no clear path towards
diversifying the nation‟s economy and making the country less dependent on foreign
goods, may not provide the optimal solution to our complex economic problems, it is by
far the lesser of the two evils. At the very least, this position will give the fiscal
authorities the necessary space for it to adopt policies that will encourage the
diversification of our economy.
Based on the above arguments, I am inclined to vote that status quo be maintained at
the present time. I therefore vote as follows: (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.

7.0
YAHAYA, SHEHU

The Domestic Economy
The dominant challenge facing the Nigerian economy is the fall in GDP experienced in
the first quarter of the year, as well as resurgent inflation. Government revenue is also
low, and the 2016 budget has not yet really taken off. Substantial progress has been
made in the de-regulation of the foreign exchange market, but there are still
uncertainties; policies are still evolving and there is quite a bit of fine-tuning.

Output
The factors that have precipitated the historical decline in GDP are extant, and have
certainly not played out. Crude petroleum output is still suffering from disruptions, and
repairs have not completed on many of the breached pipelines, thereby impacting on
exports and supply to domestic refineries. The destructions of gas pipelines has
disrupted supplies to power plants and therefore reduced electricity output. The
construction sector is reviving and many of the hitherto abandoned projects are coming
back to life. However, very little of the capital resources of the budget have actually
been disbursed. At any rate, much of the revival effect, including the boost to
consumption, will show only in Q3 or Q4 and will not show in the growth figures for Q2
2016. It can only be hoped that the various policy measures deployed in the agricultural
sector can substantially raise crop production and livestock sufficient to make up for
declines in other sectors of the economy and thereby avoid another quarter of negative
growth.

Prices
With respect to price levels, the surging trend of prices continue, with headline inflation,
YOY, at 16.5% in June 2016, up from 15.6% last month. Both core and food prices
combined to drive headline inflation forward. The most significant contributors to the
headline inflation include processed food, farm produce, non-alcoholic beverages,
clothing and footwear, utilities and fuel. In the meantime, there has been a sharp
increase in diesel prices; the deregulation of PMS also implies that the depreciation of
the Naira may trigger an increase in pump prices of PMS, with an additional inflationary
impact on transport costs. It is worth noting though that month on month prices, for all
items, have declined in June as compared to May 2016.

Forex Market
The foreign exchange market has been substantially liberalized and the value of the
Naira is being increasingly determined by the market. Hopefully, this will lead to
additional supply of foreign currency from external investors and other sources, and
some movement in that direction is already being observed. But there is still a wait and
see attitude from many investors who are weighing the still unfolding policies, the
direction of the Naira value and other macro-economic variables in the economy,
including foreign reserves and interest rates. However, it is necessary to do some
intelligent market intervention to ensure that the market pulls in the direction of desired
objectives. An increased intervention capacity from the CBN and a more realistic import

regime and overall fiscal policy are therefore essential for a more effective management
of the foreign exchange market.
The banking system remains overall sound. The difficult macro-economic environment,
particularly the negative growth rates, low government revenues, declines in crude oil
export earnings, construction and the energy sector, combined with the effects of the
implementation of the TSA have placed onerous burdens on the financial sector.
Unsurprisingly, overall capital adequacy ratio, liquidity ratio have experienced some
decline during Q2 2016. But they remain above the prudential thresholds. ROE, ROA
have both improved recently, and are performing at least as well as comparators in
other countries. Profitability is also stable. However, NPLs are rising, given the overall
slow- down of the economy

The Global Economy
World output growth rate is forecast to be lower than previous estimates, to equate the
growth rate in 2015, largely due to the UK vote to leave the EU. US growth rates have
experienced a decline in Q1 2016, while unemployment rose slightly and prices
remained stable. Overall, this makes it improbable that policy rates will be raised in that
country in the near term.
Output growth rate in China continues its gradual slow down. Growth in the Eurozone is
still low, although recovering somewhat, while unemployment remains fairly stable and
prices remain negative. Effect of Brexit may cast a pall over recovery prospects. There
is a slight slow down in UK. Most of the major oil producing developing and emerging
economies are still undergoing some painful re-adjustments.

Global crude oil output is still characterized by over-supply. OPEC output is also rising.
Overall, prices are holding up, although there was a bit of a decline in the third week of
July.
There are unlikely to be any major challenges from imported inflation to Nigeria, except
of course higher import prices due to the exchange rate depreciation effect. It also
appears that there are unlikely to be threats from higher interest rates in the major
trading partners of Nigeria in the near term

Conclusion and Recommendations
Many of the issues causing the sharp drop in output are also the same as causing the
current inflationary pressures- i.e supply gaps for fuel, diesel, gas, infrastructure, as well
as the effect of exchange rate depreciation on imports and now PMS- it is mainly the
decline in consumption (salaries not paid and construction staff laid off, austerity and
late take-off of the budget) that is undermining growth, but not fuelling inflation. Overall,
the current inflationary pressure is not primarily fuelled by excess liquidity in the system.
Under the circumstances, the challenge is for a policy response that addresses
inflationary pressure as well as contributes to, or at least does not undermine growth.
The MPR, which is one of the main instruments available to help respond to inflationary
pressure, will in this case not be much help, since the inflation is not largely a monetary
phenomenon. Also, it cannot be very effective as an incentive for international portfolio
investors, since there are currently more important macro-environmental factors for
them to consider. Raising it is therefore unlikely to have a significant effect on the
supply of foreign exchange. Yet raising the MPR may undermine efforts to re-generate

growth if DMBs thereby re-price their loans accordingly. Moreover, it may exacerbate
the challenge of rising NPLs in the financial sector and complicate the quest for financial
stability.
Under the circumstances, it may be necessary to tolerate, for a short time, the current
negative MPR rate. Raising the CRR will also not help for similar reasons.
There is much greater scope to address inflationary pressures and contribute to growth
through the foreign exchange market. As the forex market is being liberalized, it is
necessary to ensure that its outcomes are guided to yield the necessary benefits to
society. Efforts therefore need to be stepped up to find ways of augmenting the capacity
of the CBN to intervene in the market, through additional forex resources. For an
economy such as Nigeria, at the current level of development, and given the
uncertainties regarding oil earnings, the time lag between policy and results in the effort
to diversify the economy and add local value, the high level of import dependence, it is
also necessary to manage the import regime through fiscal and other measures. This
must be done to avoid market outcomes that destabilize the foreign exchange market
and to ensure that the market can stabilize, help check inflationary pressures and help
drive growth.
I therefore vote to hold, with respect to MPR, CRR and liquidity ratios. This does not
exclude some tinkering with the corridor around the MPR. Much attention should be
paid to stabilizing the foreign exchange market in order to build on the progress
achieved so far.

8.0
EMEFIELE, I. GODWIN, GOVERNOR OF THE CENTRAL BANK OF NIGERIA AND
CHAIRMAN, MONETARY POLICY COMMITTEE

In the first six months of 2016, the state of the global economy was broadly fragile and
fragmented amidst lacklustre potential growth, weak demand and diminished
productivity in many countries. The tepid global outlook was further complicated by the
June 23 decision of the United Kingdom to exit the European Union. This exacerbated
the uncertainties that pervaded global economic and financial markets, and lowered the
medium-term growth prospects. The IMF, in the July 2016 vintage of the World
Economic Outlook, reduced global growth forecast for 2016 and 2017 by 0.1
percentage point apiece to 3.1 percent and 3.4 percent. Similarly, 2016 growth
prospect in advanced economies was downgraded by 0.1 percentage point to 1.8
percent while medium-term outlook in emerging market and developing economies
remained cautious with a 2016 growth rate of 4.1 percent vis-à-vis 4.0 percent in 2015.
In Nigeria, macroeconomic performance remained weak in the first half of 2016 due to
both economic and non-economic factors. Output growth declined from 2.1 percent in
2015Q4 to -0.4 percent in 2016Q1. This contraction, the first in many years, was due to
the torrents of shockwaves that beleaguered the economy over the past three years.
Aside the debilitating effect of lower oil prices, the economy experienced energy
shocks (scarcities and price hikes), foreign exchange scarcity, weak domestic demand,
late ratification of the 2016 budget, and poor financial markets sentiments. As the
effects of these shocks lingered into 2016Q2, an immediate rebound in that quarter
seems unlikely. Available indicators of economic activities signify an insipid second

quarter performance and the likelihood of a technical recession in 2016H1. I note that
although the non-oil sector is the dominant driver of domestic GDP growth, the
imperative of the oil sector remains fundamental and deep-seated. The non-oil sector
relies heavily on foreign exchange inflows from crude oil, thereby weakening the fabric
of our economy. This is why a broad-based diversification of the economy remains
non-negotiable, incontrovertible and exigent at this time.
The prevailing difficulty of the Nigerian economy is worsened by rising inflationary
trends. From an inflation rate of 9.6 percent in January 2016, domestic prices have
assumed an exponential acceleration with year-on-year headline inflation rising
persistently to 15.6 percent in May 2016 and 16.5 percent in June 2016. These
increases reflected the ascent in both food and core components of inflation. Food
inflation increased steadily from 10.9 percent in January 2016 to 14.9 percent and 15.3
percent in May and June, while core inflation rose abruptly over the same period from
8.8 percent to 15.1 percent and 16.2 percent, respectively. Although, the rising
inflationary pressure was due essentially to aggregate supply factors, analysis revealed
that it was reinforced by monetary factors. The critical supply-side drivers of inflation in
the first half of 2016 include high and rising energy costs, high cost of transport, the
exchange rate pass-through that is reflected in the rising costs of imported food, and
low domestic supply as industrial activities remained lacklustre.
Data on monetary and credit conditions indicates rising domestic liquidity as the
annualised growth of broad money supply (M2) in June 2016, at 16.5 percent,
exceeded the 2016 growth threshold of 10.9 percent. Net domestic credit expanded at

an annualised rate of 25.0 percent vis-à-vis the target of 17.9 percent while private
sector credit, at an annualised rate of 28.9 percent, exceeded its benchmark growth of
13.4 percent. To ensure that the private sector credit is productive it must be
channelled to sectors that can deliver sustainable and inclusive growth rather than to
ventures that will exert unwarranted pressure on the exchange rate and undermine
economic recovery.
In the foreign exchange market, the CBN on 20 June 2016 further liberalised the
interbank segment to eliminate the pressure on foreign reserves, allow market forces,
and correct immanent distortions in the market. Accordingly, the naira-dollar exchange
rate weakened from ₦197.00/US$ to ₦292.90/US$ as at 19 July 2016. This fall
reflected the rush into the market as operators jostled to benefit from the freshly
released hold on the market.
Overall, I note that the Nigerian economy is in an intricate conundrum as actual and
potential output fall while inflationary pressures intensify. During the review period, we
also noticed a faster than desired growth in M2 and a continuing weakening of the
naira. I observe more delicately that the intersecting factor that is worsening both
growth and inflation is supply-sided. Thus, I want to re-echo the urgent need to resolve
the underlying structural imbalances of the Nigerian economy, diversify the economy,
and reduce the dependence on imports for consumption, rather than production. This
will not only remove the undue exchange market pressure, it will also ensure that the
economy has the armour to withstand adverse shocks like the ones we are currently
experiencing.

The choice before the Monetary Policy Committee of the CBN at this time is a very
difficult one. Given the supply constraint nature of the underlying shocks, we are
experiencing both a contracting economy and rising domestic prices. Growth
considerations are germane, as growth will ensure that economic development is
accelerated, while unemployment and poverty are reduced. But how do we achieve this
growth if the needed investments to drive growth are hindered by the distortionary
effects of high inflation. It may be more important at this time to contain inflation so that
illusions in investment decisions are extricated. Economic theory suggests that inflation
is innately undesirable and costly as it creates money illusion, uncertainties, relative
prices distortions, market inefficiency, and perverse wealth transfer from creditors to
debtors. The ramification of this is that at the current level of inflation no meaningful
growth can occur. Our in-house forecasts indicate that, if we do nothing, inflation and
growth outcomes will deteriorate rapidly.
I am strongly of the view that, on the balance of judgment and evidence, the MPC
should take a stand and act now. If we must remove the distortions to efficient market
operations we must use the tools at our disposal to fight inflation promptly while not
losing sight of output growth. By raising interest rate, the MPC will signal its stance to
curb inflation. Tangentially, this hike could moderate exchange market pressures as the
higher yields on domestic instruments attract foreign investors. I acknowledge that a
rate hike may inhibit real sector activities. However, the CBN is perceptive to the health
of the critical sectors of the economy. Accordingly, the Bank will continue to support
growth by broadening its development finance initiatives. We have seen the success of

the anchor borrowers‟ programme in rice: lowering prices and increasing supply. This
will be extended to other agricultural products including tomato and palm oil for which
we have domestic capacity. We will strategically extend the intervention to
manufacturing and industrial sector ventures, while continuing activities with SMEs,
power, etc. It is my utmost belief that this development finance activities in consonance
with an ardent inflation combating will speed-up the rebound of the Nigerian economy.
Based on the foregoing, I vote to:
1. Raise the MPR by 200 basis points to 14.0 percent;
2. Retain the CRR at 22.5 percent;
3. Retain the asymmetric corridor at +200/–500 basis points; and
4. Retain Liquidity Ratio at 30 percent