CENTRAL BANK OF NIGERIA
MONETARY
MONETARY
POLICY REVIEW
POLICY REVIEW
MONETARY
POLICY REVIEW
FEBRUARY 2019
FEBRUARY 2019
FEBRUARY 2019
Monetary Policy Department
Monetary Policy Department
Monetary Policy Department
Central Bank of Nigeria
33 Tafawa Balewa Way
Central Business District
P.M.B. 0187, Garki,
Abuja
Phone: +234 (0)9 462 36011
Website: www.cbn.gov.ng
E-mail:
ISSN: 2141-6281
©2019 Central Bank of Nigeria
Mandate
§Ensure monetary and price stability
§Issue legal tender currency in Nigeria
§Maintain external reserves to safeguard the international
value of the legal tender currency
§Promote a sound financial system in Nigeria
§Act as banker and provide economic and financial
advice to the Federal Government
Vision
“Be the model Central Bank delivering Price and
Financial System Stability and promoting
Sustainable Economic Development"
Mission Statement
“To be proactive in providing a stable framework for the economic
development of Nigeria through effective, efficient and
transparent implementation of monetary and exchange
rate policy and management of the financial sector"
Core Values

· Meritocracy
· Leadership
· Learning
· Customer - Focus
Central Bank of Nigeria
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CONTENTS
Page
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Table of Contents
Statement by the Governor

vii
Chapter 1


1.0


Overview
Chapter 2


..
..
..

2.0
Output in the Domestic Economy


2.1
Domestic Economic Activities ..


2.2
Sectoral Analysis


2.2.1
Agriculture


2.2.1.2 Agricultural Policies and Institutional Support ..

2.2.2
Industry


2.2.2.1 Industrial Production ..
..
..
..

2.2.2.2 Industrial Policy and Institutional Support
..

2.2.3 Construction ..


2.2.4
Trade ..


2.2.5
Services Sector


2.2.6
Oil Sector


Chapter 3
..
..


3.0
Price Developments ..


3.1
Trend in Inflation


3.1.1 Headline Inflation


3.1.2
Food Inflation ..


3.1.3
Core Inflation ..


3.1.4
Seasonally-Adjusted Inflation ..
..
..
..

3.2
Key Factors that Influenced Domestic Prices ..
..
..

3.2.1 Demand-side Factors


3.2.2. Supply-side Factors


3.2.3 Moderating Factors


Chapter 4


4.0
Monetary Policy and Liquidity Management..
..
..

4.1
Decisions of The Monetary Policy Committee (MPC) ..
..

4.1.1
July 2018 MPC Meeting


4.1.2
September 2018 MPC Meeting
..
..
..

4.1.3
November 2018 MPC Meeting
..
..
..

4.2.
Instruments of Liquidity Management ..
..
..
..

4.2.1
Monetary Policy Rate (MPR) ..
..
..
..

4.2.2
Open Market Operations (OMO)
..
..
..

4.2.3
Reserve Requirements ..


4.2.4
Standing Facilities


4.2.5
Foreign Exchange Intervention
..
..
..

4.3
Developments in the Monetary Aggregates ..
..
..

4.3.1
Broad Money (M2)..


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.3.2
Narrow Money (M1)


4.3.3
Net Foreign Assets (NFA)..


4.4
Net Domestic Assets (NDA).. ..


4.4.1
Credit to the Government (Cg)
..
..
..

4.4.2
Credit to the Private Sector (Cp)
..
..
..

4.4.3
Reserve Money (RM) ..


Chapter 5


5.0
Developments in the Financial Markets..
..
..
..

5.1
The Money Market


5.1.1
Short-term Interest Rate Developments
..
..

5.2
Foreign Exchange Market


5.2.1
Average Exchange Rates


5.2.2
End-Period (Month) Exchange Rates ..
..
..

5.2.3
Nominal and Real Effective Exchange Rates ..
..

5.2.4
Foreign Exchange Flows through the CBN
..
..

5.2.5
Foreign Exchange Flow through the Economy
..

5.3
Capital Market


5.3.1
Equities Market


5.3.2
Market Turnover


5.3.3
Sectoral Contribution to Equity Market Capitalization..

5.3.4
The Warren Buffett Valuation Metric and Nigeria's


Equities Market


5.3.5
Bond Market ..


5.3.5.1 FGN Eurobond ..


5.3.5.2 State/Local Government Bonds
..
..

5.3.5.3 Corporate Bonds


5.3.5.4 Overall Analysis of the Nigerian Capital Market

5.4
Global Financial Market Developments
..
..
..

5.4.1
Money Market and Central Bank Policy Rates
..

5.4.2
Global Capital Market


5.4.3
Commodities ..


5.4.4 Global Foreign Exchange Market
..
..
..

Chapter 6


6.0
Economic Outlook..


6.1
Overview


6.2
Outlook for Global Output


6.3
Downside Risks to Global Outlook


6.4
Global Inflation Outlook..


Appendices


1.0
Background


2.0.
The Overall Outlook and Risks to the Domestic Economy
..

3.0.
The Considerations of the Committee
..
..
..

4.0
The Committee's Decisions


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List of Tables
Table 3.1:
Inflation Rates, July – Dec 2018
..
..
..

Table 3.2:
Major Components of Headline Inflation (Y-on-Y),


July–December 2018 ..


Table 3.3:
Major Components of Headline Inflation (M-on-M),


July - December 2018 ..


Table 3.4:
Major Components of Food Inflation (Y-on-Y),


July - December 2018 ..


Table 3.5
Major Components of Food Inflation (M-on-M),


July- December 2018.. ..


Table 3.6
Major Components of Core Inflation (Y-on-Y)


July - December 2018 ..


Table 3.7
Major Components of Core Inflation (M-on-M)


July - December. 2018 ..


Table 3.8:
Actual and Seasonally Adjusted Headline Inflation


July – December 2018 ..


Table 4.1:
OMO Bills Auction (July – December, 2018) (N'billion)..

Table 4.2:
CBN Standing Lending Facility (January 2017 –


December 2018) (N'billion)


Table 4.3:
CBN Standing Deposit Facility (January 2017 –


December 2018) (N'billion)


Table 4.4:
Foreign Exchange Supply by the CBN (US$ Million)
..

Table 4.5:
Monetary Aggregates Outcomes (Growth in % except


otherwise stated)


Table 5.1:
Weighted Average Monthly Money Market Interest Rates


(July - December 2018)..


Table 5.2:
Average Monthly Spot Exchange Rates (Jan – Dec 2018)


(N/US$)


Table 5.3
End-Month Exchange Rates (Jan – Dec 2018) (N/US$)

Table 5.4
Nominal and Real Effective Exchange Rates Indices


(Jul 2017 – Dec 2018) ..


Table 5.5:
Monthly Foreign Exchange Flows through the CBN


(July 2017 – December 2018) ..
..
..
..

Table 5.6:
Monthly Foreign Exchange Flows through the Economy


(January 2017 – December 2018) (US$ Million)
..

Table 5.7:
NSE All-Share Index (ASI) and Market Capitalization (MC)
(December 2017 – December 2018) ..
..
..

Table 5.8:
Policy Rates of Selected Countries June – December 2018 58
Table 5.9:
Selected International Stock Market Indices as at


December 31, 2018


Table 5.10:
Exchange Rates of Selected Countries (value in currency


units to US$)8 ..


Table 6.1
Global Output and Inflation Outlook..
..
..

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List of Figures
Figure 2.1:
Real GDP Growth (%) 2017 Q1 – 2018 Q4

..

Figure 2.2:
Non-oil Sector Performance 2017Q1-2018Q4 ..
..

Figure 2.3
Performance of the Oil Sector 2017Q1-2018Q4
..

Figure 2.4:
Agricultural Sector Contribution by Activity, 2017Q1-


2018Q4


Figure 2.5:
Industrial Sector's Contribution by Activity, 2017Q1-2018Q4 11
Figure 2.6:
Services Sub-Sector Contribution, 2017Q1-2018Q4
..

Figure 2.7:
Quarterly Oil Production (2017Q1-2018Q4).. ..
..

Figure 2.8:
Monthly Bonny Light Price, July – December 2018
..

Figure 3.1:
Headline, Core and Food Inflation Rates (July– Dec 2018)


in per cent


Figure 3.2:
Major Components of Headline Inflation (Y-on-Y),


Jul – Dec 2018. ..


figure 3.3:
Major Components of Headline Inflation (M-on-M),


July – December 2018


Figure 3.4:
Major Components of Food Inflation (Y-on-Y),


January – June 2018


Figure 3.5:
Major Components of Food Inflation (M-on-M),


July - December 2018 ..


Figure 3.6:
Major Components of Core Inflation (Y-on-Y)


July - December 2018 ..


Figure 3.7:
Major Components of Core Inflation (M-on-M)


January – June 2018 ..


Figure 3.8:
Actual and Seasonally Adjusted Headline Inflation


July – December 2018 ..


Figure 4.1:
OMO Bills Auction (July - December, 2018)
..
..

Figure 4.2:
Standing Lending Facility (July - December, 2018)..

Figure 4.3:
Standing Deposit Facility (July - December, 2018)
..

Figure 4.4:
Total FX Supply (including Forward Sales) (July -


December, 2018)..


Figure 4.5
Money Supply (M1), (M2) and (M3) (July –


December, 2018)..


Figure 4.6
Growth in Money Supply (M1), (M2) and (M3)


(July - December, 2018))


Figure 4.7:
Net Domestic Asset (NDA) (July – December, 2018) ..

Figure 4.8:
NDA, NDC and Other Assets (Net) – (July – December,


Figure 4.9:
Domestic Credit to Private Sector (July – December, 2018) 39
Figure 5.1:
Weighted Average Monthly Money Market Interest Rates


(July - December 2018)


Figure 5.2:
Daily Interbank Call Rate (July– December 2018)
..

Figure 5.3:
Daily Open Buy Back Rate (July– December 2018)
..

Figure 5.4:
Daily Naira/US Dollar Exchange Rate


(July - December 2018)


Figure 5.5:
Nominal and Real Effective Exchange Rates Indices


(July 2017 – December 2018)..
..
..
..

Figure 5.6:
Monthly Foreign Exchange Flows through the CBN


(Jul 2017 – Dec 2018) ..


Figure 5.7
Monthly Foreign Exchange Flows through the Economy


(Jan 2017 – Dec 2018) (US$ Million)
..
..
..

Figure 5.8:
NSE ASI and MC (December 2017– December 2018) ..

Figure 5.9:
NSE ASI and MC (June 2018 – December 2018)
..

Figure 5.10
NSE Market Capitalisation by Sector as at End-June 2018

Figure 5.11
NSE Market Capitalisation by Sector as at


End-December 2018 ..


Figure 5.12
Warren Buffett Valuation of Nigerian Equities Market..

Figure 5.13
10-Year U.S. Dollar-denominated Bond Yield for Nigeria


(Dec 29, 2017 – Dec 31, 2018) ..
..
..
..

Figure 5.14
FGN Bonds Yield Curves: end-Dec. 2017 vs. end-Jun. 2018 vs.


end-Oct. 2018 ..


Figure 5.15:
Structure of the Nigerian Capital Market (December, 2018) 57
List of Boxes
Box 3.1
Minimum Wage and Inflation in Nigeria: Implications for


Monetary Policy..


Box 4.1
Introducing The M3 Monetary Aggregate In Nigeria ..

Box 5.1
The Nigeria – China Currency Swap And Policy Implications 62
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STATEMENT BY THE GOVERNOR
M
onetary policy design and implementation during the second half of 2018
was confronted with global uncertainties arising from rising trade tensions,
build-up of financial vulnerabilities and policy uncertainties arising from
continuing monetary policy normalisation by the Federal Reserve; resurgence of
global inflationary pressures, continuous capital flow reversal and moderate
currency depreciations, especially in the emerging market and developing
economies. Also, the strengthening of the US dollar, subdued global growth outlook
and fiscal fragilities were additional challenges. These were compounded on the
domestic front by fragile economic recovery; resurgence of inflationary pressures,
disruptions to the food supply chain in major food producing states from terrorist
activities; high cost of energy; pre-election spending and concerns about the
liquidity impact of the 2018 expansionary Federal Government budget, amongst
others. Nevertheless, the economy sustained its growth path, growing by 2.4 per
cent in the fourth quarter of 2018 up from 1.81 per cent in the preceding quarter, and
driven largely by the performance of the non-oil sector. Headline inflation rate
resurged, rising from 11.14 per cent in July to 11.44 per cent in December 2018.
The perennial incidence of banking system liquidity surfeit in the presence of weak
flow of credit to the real economy persisted in the review period. The money market
remained active, with market rates fluctuating, in response to liquidity conditions in
the banking system. The Nigerian stock market witnessed a decline, as the All-Share
Index (ASI) decreasd by 18.0 per cent in the review period, showing the possibility of
continued weaknesses in the real economy. Capital outflow intensified but was
somewhat contained towards the end of the review period as the Bank maintained
a steady pace of intervention in the market to strengthen the value of the naira. This
was complemented with increased foreign exchange sales to BDCs to improve
supply and rein-in speculative activities in the foreign exchange market. The Bank
further encouraged more direct transactions between the naira and the yuan,
under the bilateral currency swap between the Bank and People's Bank of China.
In view of the foregoing and based on careful considerations of the need to further
support growth and investment in the economy within the limits of its price stability
mandate, the Bank maintained its tight monetary policy stance throughout the
review period. Thus, the Monetary Policy Rate (MPR) was retained at 14.0 per cent
along with the asymmetric corridor of +200/-500 basis points, Cash Reserve Ratio
(CRR) of 22.5 and Liquidity Ratio (LR) of 30.0 per cent. These were complemented
with additional measures in the foreign exchange market to sustain stability and
confidence in the market.
ix
Outlook for the domestic economy over the short-to-medium-term indicates that
inflation would maintain a moderate uptick. The moderate rise would be due to the
liquidity impact of the 2019 election spending, disruption of supply and distribution
chains by insecurity in major parts of food producing belts of the country, as well as
moderate exchange rate pass-through to inflation due to weakening oil prices.
Nonetheless, monetary policy will continue to remain proactive, dynamic and
supportive of financial stability in the pursuit of price stability conducive to
sustainable economic growth in the coming year.
GODWIN I. EMEFIELE
Governor, Central Bank of Nigeria
February 2019
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CHAPTER ONE
1.0
OVERVIEW
n the second half of 2018, monetary
policy continued to be shaped by
key developments in the global and
domestic
economic
and
financial
environments. On the global front, the
key challenges included: rising trade
tensions
and
policy
uncertainties,
difficult BREXIT negotiations, build-up of
financial vulnerabilities and currency
depreciations.
These
were
accentuated
by
rising
cost
of
borrowing,
continued
capital
flow
reversals, fiscal fragilities and increased
debt burden especially in the emerging
market and developing economies.
Other considerations were: the recent
episodes of large-scale flooding in
major
areas
across
the
globe,
resurgence
of
global
inflationary
pressures,
continued
geo-political
tensions
as
well
as
increasingly
depressed aggregate demand in some
countries. Notwithstanding the Bank’s
effort to stabilize the exchange rate,
the combination of factors including
disruptions to the food supply chain
from insurgency and herder-farmers
crisis in some parts of the country;
impact of flooding on agricultural
output and other economic activities
as well as the appreciation of the US
dollar against other major currencies
exerted some pressure on domestic
prices. Consequently, headline inflation
rose from 11.14 per cent in July to 11.44
per cent in December 2018, driven
largely by food inflation.
The recovery of the Nigerian economy
strengthened
despite
the
modest
slowdown in the first half. The improved
performance
was
due
largely
to
sustained policy stability, reflected in
the
continued
supply
of
foreign
exchange to the various segments of
the market. Other factors were: the
sustained peace in the Niger Delta
region which enabled improved oil
production
and
exports;
relatively
higher crude oil prices; the continued
implementation of the 2018 Federal
Government budget; improved energy
supply;
enhanced
transportation
infrastructure
as
shown
in
the
reactivation of the railway system; as
well as intensified implementation of
the Economic Recovery and Growth
Plan (ERGP). Consequently, data from
the National Bureau of Statistics (NBS)
showed
that
real
Gross
Domestic
Product (GDP) strengthened further to
2.38 per cent (year-on-year) in the
fourth quarter of 2018 from 1.81 and
2.11 per cent in the preceding quarter
and the corresponding period of 2017,
respectively. The growth was mainly
attributed to the non-oil sector, which
rose by 2.70 per cent in the fourth
quarter representing an increase of 0.38
percentage point compared with 2.32
per cent in the preceding quarter. The
performance was also higher by 1.25
percentage points compared with the
growth
of
1.45
per
cent
in
the
corresponding quarter of 2017. Growth
of the non-oil sector was driven by the
performance
of
Services
(3.71%),
Industry (2.60%), Agriculture (2.46%),
Construction (2.05%) and Trade (1.02%).
The performance of the non-oil sector
indicated further strengthening of all
I
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the sub-sectors, with construction subsector being the most significant; partly
attributable to capital releases by the
Federal Government during the period.
During the review period also, stability in
the foreign exchange market was
sustained by activities in the various
segments, particularly the Investors and
Exporters foreign exchange window.
The success recorded by the restriction
of 41 items from access to official
foreign exchange sources became
increasingly
apparent
in
the
real
economy,
following
increased
domestic production of those items. In
order
to
further
strengthen
the
outcome, the policy was expanded to
include fertilizer in the list of excluded
items.
In
addition,
special
foreign
exchange intervention sales to BDCs
were introduced to address demand
pressure in the segment. The Bank also
continued its heterodox approach to
monetary policy in place of adjusting
the
monetary
policy
rate.
These
included: the bilateral currency swap
between the Central Bank of Nigeria
and the People’s Bank of China;
intensification
of
the
policy
on
repatriation of export proceeds and the
return of unutilized foreign exchange
sourced from CBN auctions. Others
were: the use of Bank Verification
Number (BVN) in BDC transactions; sale
of foreign exchange by the Bank and
International Money Transfer Operators
(IMTOs) to BDCs; as well as special
foreign exchange auctions to targeted
sectors and small scale importers. These
measures were able to calm the
market and guard against the reemergence of speculative pressures.
The
Nigerian
financial
markets
experienced episodes of large capital
outflows, reflecting developments in
the global and domestic financial and
economic
environments.
Primary
among the global developments were:
the continued trade tensions between
the US and its key trading partners,
particularly,
China;
progressive
normalization of monetary policy by the
US and the beginning of normalization
in the euro area; as well as the
increasingly difficult negotiations over
BREXIT between the United Kingdom
and the European Union. In addition,
the weakening of oil prices threatened
to reverse the tepid recovery amongst
major oil exporters as the rapid outflow
of capital to US dollar denominated
assets re-introduced exchange rate
pressures.
Accordingly, the Bank in the second
half of 2018, continued to conduct
monetary policy by deploying various
instruments in order to achieve its
objectives
of
price
and
macroeconomic
stability.
These
instruments were: the Monetary Policy
Rate (MPR), the Cash Reserve Ratio
(CRR), Liquidity Ratio, Open Market
Operations
(OMO)
and
Discount
Window Operations. These instruments
were
complemented
by
periodic
interventions in the foreign exchange
market
to
address
shortages
and
speculative activities. The MPR was
maintained at 14.0 per cent in the
review
period,
along
with
the
asymmetric corridor of +200 and -500
basis points around the policy rate. The
Liquidity Ratio and the Cash Reserve
Ratio (CRR) were also retained at 30.00
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and 22.50 per cent, respectively, over
the period.
The primary tool used for liquidity
management in the second half of

remained
Open
Market
Operations
(OMO).
There
was
an
increase in OMO sales in the period
under review, amounting to N12,709.91
billion compared with N9,743.76 billion
and N7,472.21 billion recorded in the
first half of 2018 and the corresponding
period
of
2017,
respectively.
This
represented an increase of 30.44 per
cent and 70.10 per cent in the
preceding
and
the
corresponding
periods of 2018 and 2017, respectively.
The
increased
OMO
sales
was
attributed to higher frequency of OMO
auctions
and
the
introduction
of
special OMO auctions, as well as rollover of maturing bills. As in the
preceding half year, the increase was
also
due
to
incidences
of
DMBs
discounting OMO bills before maturity in
the secondary market, thus expanding
the monetary base and leading to
growth in money supply. In the review
period,
the
major
monetary
aggregates performed above their
indicative targets.
The money market remained active
during the review period, with rates
fluctuating
in
response
to
liquidity
conditions in the banking system. The
fluctuations
in
market
rates
were
traceable
to:
Federation
Account
Allocation
Committee
(FAAC)
disbursements; maturing CBN bills and
other government securities; and OMO
auctions.
Consequently,
the
MPC
maintained its tight monetary policy
stance throughout the period.
Activities in the Nigerian capital market
were mostly bearish in the second half
of 2018. The development reflected the
flight to safety and quality by investors
as yields on US dollar-denominated
assets improved coupled with rising
domestic sovereign risk arising from the
February 2019 general elections, which
resulted in persistent sell-off and profit
taking activities. The dwindling price of
crude oil, slowing accretion to external
reserves, and increasing domestic and
foreign debt stock, amongst others,
contributed significantly to dampen
investor sentiments in the review period.
As a result, the All-Share Index (ASI)
decreased
by
17.89
per
cent
to
31,430.50 at end-December 2018 from
38,278.55 at end-June 2018. It also
decreased
by
17.81
per
cent
compared
with
38,243.19
at
endDecember 2017.
Activities in the bonds market in the
second half of 2018 was dominated by
Federal Government of Nigeria (FGN)
securities. Some minor activity was
recorded
in
the
sub-national
government
and
corporate
bonds
segments of the market, with the latter
recording the least share by market
volume.
The
10-year
dollardenominated bond yields for Nigeria
increased by 21 basis points to 6.11 per
cent at end-December 2018, from 5.90
per cent at end-June 2018. When
compared with 4.47 per cent at endDecember 2017, it increased by 164
basis points. The increase reflected the
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perception of rising sovereign risk by
foreign investors.
Headline inflation trended moderately
upwards in the second half of 2018,
remaining above the Bank’s 6-9 per
cent indicative band. The uptick was
largely attributed to: increase in food
prices, mainly from adverse weather
conditions in some parts of the country;
increased spending towards the 2019
general elections and capital flow
reversals. Staff estimates suggest that
headline
inflation
(year-on-year)
is
projected to increase to between 11.60
and 12.11 per cent during the first half
of 2019. Upside risks to these estimates
are the residual impact of the 2018
flooding
on
agricultural
output,
insecurity in parts of the food producing
belt of the country, pass-through of
exchange
rate
depreciation
to
domestic
prices
due
to
likely
weakening of oil prices, increased
spending towards the 2019 general
elections
and
infrastructure-related
challenges.
The outlook for growth is premised on
the performance of the economy thus
far. According to the National Bureau
of Statistics (NBS), real GDP in the fourth
quarter of 2018 strengthened to 2.38
per cent (year-on-year) from 1.81 and
2.11 per cent in the preceding quarter
and the corresponding period of 2017,
respectively. The development was
mainly traceable to the non-oil sector,
which grew by 2.70 per cent in the
fourth quarter compared with 2.32 and
1.45 per cent in the preceding quarter
and the corresponding period of 2017.
Overall, the economy expanded by
1.93 per cent in 2018 from 0.82 per cent
in 2017. The outlook for 2019 remains
broadly positive. With output growth
estimated at 1.9 per cent in 2018, the
IMF and the World Bank projected the
Nigerian economy to grow in 2019 by
2.0 and 2.2 per cent, respectively.
Similarly, the CBN has projected 2019
output growth at 2.28 per cent. The
outlook is anchored on expected
improvements in oil production and
prices, continuing reforms in the foreign
exchange market and prospects of
improved
agricultural
output.
In
addition, increased non-oil revenue
anchored
on
the
ongoing
diversification
of
the
economy
is
expected to improve the fiscal space,
and support the implementation of the
Economic Recovery and Growth Plan
(ERGP).
The thrust of monetary policy in 2019 will
be dictated by the need to support the
fragile
economic
recovery,
and
manage expectations to ensure that
the downside risks to growth and upside
risks to inflation are well contained.


CBN Monetary Policy Review

CHAPTER 2
2.0
OUTPUT
IN
THE
DOMESTIC
ECONOMY
n the second half of 2018, the
recovery of the Nigerian economy
strengthened despite the modest
slowdown in the first half. The improved
performance
was
due
largely
to
sustained policy and political stability,
reflected in the continued supply of
foreign
exchange
to
the
various
segments of the market. Other factors
were: the sustained peace in the Niger
Delta region which enabled improved
oil production and exports; relatively
higher crude oil prices; the continued
implementation of the 2018 Federal
Government budget; improved energy
supply;
enhanced
transportation
infrastructure
as
shown
in
the
reactivation of the railway system; as
well as intensified implementation of
the Economic Recovery and Growth
Plan (ERGP).
Consequently,
real
Gross
Domestic
Product (GDP) grew by 1.81 per cent
(year-on-year) in the third quarter of
2018 up from 1.17 and 1.50 per cent in
the corresponding period of 2017 and
the preceding quarter, respectively.
The growth was mainly attributed to the
non-oil sector, which grew by 2.32 per
cent in real terms during the review
period, representing an increase of 0.27
percentage point compared with 2.05
per cent in the preceding quarter. The
performance was also higher by 3.08
percentage points compared with the
contraction of 0.76 per cent in the
corresponding quarter of 2017. Growth
of the non-oil sector was driven by the
performance
of
Services
(3.60%),
Industry (1.95%), Agriculture (1.91%),
Trade (0.98%) and Construction (0.54%).
The performance of the non-oil sector
indicated the sustained recovery of all
its sub-sectors, following the recovery of
the trade sub-sector from negative
growth in the preceding period. In
contrast to this performance, the oil
sector contracted in the third quarter of
2018 by 2.91 per cent, a moderation
from the contraction of 3.95 per cent in
the
preceding
quarter.
When
compared with the growth of 23.03 per
cent in the corresponding period of
2017, the sector contracted significantly
by 25.94 percentage points, reflecting
the production challenges during the
period.

In the fourth quarter of 2018, real Gross
Domestic Product (GDP) strengthened
further by 2.38 per cent (year-on-year)
from 1.81 and 2.11 per cent in the
preceding
quarter
and
the
corresponding
period
of
2017,
respectively. The growth was mainly
attributed to the non-oil sector, which
expanded
by
2.70
per
cent,
representing
an
increase
of
0.38
percentage point compared with 2.32
per cent in the preceding quarter. The
performance was also higher by 1.25
percentage points compared with the
growth
of
1.45
per
cent
in
the
corresponding quarter of 2017. The
major drivers of the growth were
traceable
to
the
performance
of
Services
(3.71%),
Industry
(2.60%),
Agriculture
(2.46%),
Construction
(2.05%) and Trade (1.02%). During the
quarter, the performance of the non-oil
I
CBN Monetary Policy Review

sector indicated further strengthening
of
all
its
sub-sectors,
with
the
construction sub-sector being the most
significant.
The
sub-sector’s
performance was partly attributable to
improved
capital
releases
by
the
Federal Government during the period.
However, the contraction of the oil
sector continued in the fourth quarter
of 2018 by 1.62 per cent compared
with 2.91 per cent in the preceding
quarter. When compared with the
growth of 11.20 per cent in the
corresponding period of 2017, the
sector contracted by 12.82 percentage
points.

Figure 2.1
Real GDP Growth (%) 2017 Q1 – 2018 Q4

Q1-2017
Q2-2017
Q3-2017
Q4-2017
Q1-2018
Q2-2018
Q3-2018
Q4-2018
Per cent

Source: NBS
2.1
DOMESTIC
ECONOMIC
ACTIVITIES
In the second half of 2018, real GDP
growth was driven mainly by the
activities
in
the
non-oil
sector,
complimented by the oil sector. The
non-oil real GDP in the third quarter
grew by 2.32 per cent, an increase of
3.08
percentage
points
over
the
contraction of 0.76 per cent in the
corresponding quarter of 2017. It was
also 0.28 percentage point higher than
the growth of 2.05 per cent in the
preceding
quarter
of
2018.
The
activities of the non-oil sector that
drove this performance were: utilities
(13.44%),
Information
and
Communication
(12.09%)
and
transportation (11.95%). Other drivers
were Forestry (3.72%), Solid minerals
(3.58%), other services (2.86%), Arts,
Entertainment & Recreation (2.83%)
and Livestock (2.56%). These compare
with their growth rates of 7.84, -4.48, -
6.23, 3.95, 0.92, 1.72, 0.44 and 2.52 per
cent, respectively, in the corresponding
period of 2017. Thus, the performance
of most activities in the sector was
robust during the review period.
The oil sector, on the other hand,
contracted by 2.91 per cent in the third
quarter
of
2018,
indicating
a
moderation of the sector’s contraction
from 3.95 per cent in the preceding
quarter. Compared with the growth of
23.03 per cent in the corresponding
period of 2017, the sector contracted
substantially
by
25.94
percentage
points. This trend was reflected in the
performance of oil production during
the period. Crude oil production in the
third quarter was estimated at an
average of 1.94 million barrels per day
(mbpd), an improvement of 0.10 mbpd
over 1.84 mbpd in the preceding
quarter. This was 0.1 mbpd lower than
the daily production average of 2.02
mbpd recorded in the third quarter of
CBN Monetary Policy Review

2017. The trend towards oil production
recovery
largely
moderated
the
contraction witnessed in the oil sector.
In the fourth quarter of 2018, non-oil real
GDP grew further by 2.70 per cent, an
increase of 0.38 percentage point from
2.32 per cent growth in the third
quarter. The performance was also 1.25
percentage point higher than the
growth
of
1.45
per
cent
in
the
corresponding quarter of 2017. The
activities of the non-oil sector that
drove this performance were: solid
minerals
(17.68%);
Information
and
Communications
(13.20%)
and
transportation (9.48%). Other drivers
were: Arts, Entertainment & Recreation
(4.18%);
Crop
Production
(2.48%);
Livestock (2.35%); and Manufacturing
(2.35%). These compare with their
growth rates of -9.18, -1.46, 16.57, 3.54,
4.58,
0.19
and
0.14
per
cent,
respectively,
in
the
corresponding
period of 2017. Thus, the performance
of
most
activities
in
the
sector
continued to be robust during the
fourth quarter.
The oil sector, however, contracted by
1.62 per cent, indicating a moderation
from 2.91 per cent in the third quarter of
2018. Compared with the growth of
11.20 per cent in the corresponding
period of 2017, the sector contracted
by 12.82 percentage points. In the
fourth quarter of 2018, oil production
moderated to an average of 1.91
mbpd compared with 1.95 mbpd and
1.94 mbpd in the corresponding period
of 2017 and the preceding quarter,
respectively. The trend towards oil
production recovery largely moderated
the contraction witnessed in the oil
sector.

Figure 2.2:
Non-oil Sector Performance 2017Q1-2018Q4

2017Q1
2017Q2
2017Q3
2017Q4
2018Q1
2018Q2
2018Q3
2018Q4
Per cent
Agriculture
Industry
Construction
Trade
Services
Source: NBS
Figure 2.3
Performance of the Oil Sector 2017Q1-2018Q4

Q1-2017
Q2-2017
Q3-2017
Q4-2017
Q1-2018
Q2-2018
Q3-2018
Q4-2018
Per cent
Source: NBS
2.2
Sectoral Analysis
This
section
reviews
sectoral
performance of the economy taking
into
consideration
key
policy
and
institutional factors that contributed to
domestic output in the review period.

2.2.1 Agriculture

Real agricultural GDP grew by 1.91 per
cent in the third quarter of 2018,
representing a decrease compared
with 3.06 per cent in the corresponding
period of 2017. The outcome was,
CBN Monetary Policy Review

however, higher than the growth of
1.19 per cent in the preceding quarter.
The decrease in agricultural output was
traceable to moderation in activities in
forestry and crop production which
grew by 3.72 and 1.87 per cent,
respectively, compared with 3.95 and
3.19 per cent in the corresponding
period of 2017. Conversely, activities in
livestock and fishing increased by 2.56
and 0.84 per cent compared with their
respective growth rates of 2.52 and -
2.84 per cent, in the corresponding
quarter.
In spite of the decline in agricultural
output in the third quarter, the overall
contribution of the sector to real GDP
increased marginally to 29.25 per cent,
compared with 29.22 per cent in the
corresponding period of 2017 and 22.86
per cent in the preceding quarter of
2018 (Figure2.2).
In the fourth quarter, real agricultural
output expanded by 2.46 per cent,
representing an increase compared
with 1.91 per cent in the third quarter of
2018. The outcome was, however,
lower compared with the growth of
4.23 per cent in the corresponding
quarter of 2017. The decrease in
agricultural output was traceable to
moderation
in
activities
in
crop
production, fishing and forestry which
grew by 2.48, 1.73 and 1.97 per cent,
respectively, compared with 4.58, 2.83
and 4.05 per cent in the corresponding
period of 2017. Conversely, activities in
livestock increased by 2.35 per cent
compared with 0.19 per cent, in the
corresponding quarter of 2017.
The overall contribution of the sector to
real GDP increased marginally to 26.15
per cent, compared with 26.13 per
cent in the corresponding period of
2017 but a decline compared with
29.25 per cent in the preceding quarter
of 2018 (Figure2.2).

Figure 2.4
Agricultural Sector Contribution by Activity,
2017Q1-2018Q4

Per cent
Crop Production
Livestock
Forestry
Fishing

Source: NBS
2.2.1.2 Agricultural
Policies
and
Institutional Support
The agricultural sector continued to
be supported by a number of policies
and institutional reforms in the second
half of 2018. These included:
i.
The Agricultural Credit Guarantee
Scheme (ACGS)
In the second half of 2018, a total of
20,192 loans valued at ₦2.62 billion
were guaranteed under the scheme
compared with 10,420 loans valued at
₦1.75 billion in the first half. This
indicated decreases of 93.8 and 49.7
per cent, respectively, in the number
and value of loans guaranteed. Also,
12,395 loans valued at ₦2.43 billion
were repaid, representing declines of
CBN Monetary Policy Review

31.1 and 20.3 per cent, respectively,
from 17,977 loans valued at ₦3.05 billion
repaid in the first half of 2018. This
showed that the patronage of the
scheme waned in the review period.
N200 Billion Commercial Agriculture
Credit Scheme (CACS)
Under the scheme, the sum of ₦40.36
billion was disbursed to 24 projects in
the second half of 2018 compared with
₦39.34 billion disbursed to 16 projects in
the first half of the year. A total of
₦37.72 billion was repaid in the review
period, compared with ₦17.01 billion in
the first half of 2018.

Agri-Business/Small
and
Medium
Enterprises
Investment
Scheme
(AGSMEIS)
This scheme was introduced to ensure
access
to
finance
for
Small
and
Medium Enterprises (SMEs) leveraging
the equity contribution of commercial
banks. It has both debt and equity
components. A total of 162 projects
accessed N343.23 million from the
Scheme during the second half of 2018.
The cumulative disbursement as at endDecember 2018 was ₦414.92 million. No
repayments have been made to date
as the loans are yet to fall due.

Micro, Small and Medium Enterprises
Development Fund (MSMEDF)
In the second half of 2018, the
disbursement under the scheme fell by
66.2 per cent to ₦1.61 billion compared
with ₦4.77 billion disbursed to 14,492
projects in the first half of the year.
Repayments
during
the
period,
however, rose by 7.2 per cent to ₦3.73
billion compared with ₦3.48 billion in
the first half of 2018.

Anchor Borrowers’ Programme (ABP)
During the review period, ₦82.59 billion
was disbursed to 490,481 farmers in all
36 states of the Federation and the
Federal
Capital
Territory
(FCT),
compared with ₦36.37 billion disbursed
to 155,732 farmers in the first half of the
year.
The
scheme
supported
the
cultivation of cassava, cotton, maize,
rice,
soya
beans,
wheat,
sesame,
sorghum, tomato, cocoa, castor seed
and the production of fish and poultry.
Repayments in the review period stood
at ₦3.39 billion.
Paddy Aggregation Scheme (PAS)
Disbursements
under
the
scheme
amounted to ₦5.0 billion for one (1)
project in the second half of 2018. This
disbursement was 17.1 per cent higher
than ₦4.25 billion released to three (3)
projects in the first half of the year. In
the review period, ₦18.63 billion was
repaid compared with ₦13.37 billion in
the first half of 2018.
Non-oil
Export
Stimulation
Facility
(NESF)
Under this facility, two (2) projects were
financed with ₦6.45 billion in the review
period, compared with ₦19.04 billion for
the same number of projects in the first
half of 2018. There were no repayments
in the review period.
Federal Government of Nigeria (FGN)
Special Presidential Fertilizer Initiative
(PFI)
In the review period, ₦10.0 billion was
released under the initiative to one (1)
CBN Monetary Policy Review

project.
There
have
been
no
repayments under the initiative as
payments had not fallen due.

Export Development Facility (EDF)
The EDF was introduced in 2018 with the
aim of improving exporters’ access to
finance
for
the
expansion
and
diversification of non-oil exports. The
facility is managed by the Nigerian
Export-Import Bank (NEXIM). In the
review
period,
₦10.17
billion
was
extended to 18 projects. Repayments
under
the
facility
were
yet
to
commence.
2.2.2 Industry

2.2.2.1 Industrial Production
The
industrial
sector
returned
to
growth during the review period. In the
third quarter of 2018, the contraction of
the industrial sector moderated to 0.59
per cent from 1.56 per cent in the
preceding quarter, in contrast to the
growth
of
9.19
per
cent
in
the
corresponding period of 2017. The
contraction of the sector was driven by
crude petroleum and natural gas which
fell by 2.91 per cent compared with
23.03 and -3.95 per cent in the
corresponding period of 2017 and the
preceding quarter, respectively. The
contraction of the sector was, however,
moderated
by
Solid
minerals
and
manufacturing which grew by 3.58 and
1.92 per cent during the period. This
compares with their respective growth
rates of 0.92 and -2.85 per cent in the
corresponding period of 2017, and 2.86
and 0.68 in the preceding quarter. As a
result, the share of industry in overall
GDP fell to 18.38 per cent from 18.82
per cent in the corresponding period of
2017.
In the fourth quarter of 2018, output of
the industrial sector returned to growth
by 0.71 per cent from a contraction of
0.59 per cent in the preceding quarter.
The
development
represented
a
decline compared with the growth of
4.72 per cent in the corresponding
period of 2017. The growth of the sector
was driven largely by Solid minerals
which grew significantly by 17.68 per
cent compared with 3.58 and -9.18 per
cent in the preceding quarter and the
corresponding
period
of
2017,
respectively.
This
was
followed
by
manufacturing which grew by 2.35 per
cent from 1.92 and 0.14 per cent in the
preceding quarter and corresponding
the period of 2017, respectively. Crude
petroleum and natural gas, however,
contracted
by
1.62
per
cent,
a
moderation compared with -2.91 per
cent in the preceding quarter, but a
decline compared with the growth of
11.20 per cent in the corresponding
period of 2017. As a result, the share of
industry
in
overall
GDP
increased
marginally to 16.09 per cent from 16.05
per cent in the corresponding period of
2017.

CBN Monetary Policy Review

Figure 2.5
Industrial Sector’s Contribution by Activity,
2017Q1-2018Q4

Q1-2017
Q2-2017
Q3-2017
Q4-2017
Q1-2018
Q2-2018
Q3-2018
Q4-2018
Per cent
Crude Petroleum & Natural Gas
Solid Minerals
Manufacturing
Source: NBS
2.2.2.2 Industrial Policy and Institutional
Support
The
performance
of
the
sector
during the period was supported by
the continuation of a number of
reforms
and
incentives.
These
included:
N300
Billion
Power
and
Airline
Intervention Fund (PAIF)
During the review period, ₦3.25 billion
was disbursed to Ashaka Cement
Limited, while ₦13.35 billion was repaid.

Nigerian
Electricity
Market
Stabilization Facility (N213 billion)
In the second half of 2018, the sum of
₦24.34 billion was disbursed to 31
market participants comprising 1 (one)
distribution
company
(DisCo),

(eighteen)
generating
companies
(GenCos),

(six)
gas
companies
(GasCos) and 6 (six) service providers.
Within the same period, ₦8.68 billion
was repaid.

Real Sector Support Facility (RSSF)
In
the
review
period,
the
Bank
introduced two additional windows
under the Real Sector Support Facility
(RSSF). These were: the Differentiated
Cash Reserves Requirement (DCRR),
and
the
Corporate
Bonds
(CP)
windows, aimed at increasing access
to long-term credit to the real sector.
The
facilities
target
manufacturing,
agriculture
and
other
sectors
considered employment and growth
stimulating. Emphasis was on projects
with high backward integration and
import substitution prospects.

Under the RSSF, total disbursement in
the review period was ₦44.24 billion,
comprising ₦6.15 billion for the DCRR
projects and ₦38.09 billion for projects
under
the
regular
window.
This
represents an 85.03 per cent increase
over the disbursement of ₦23.91 billion
in the first half of the year. Repayment
under the facility stood at ₦4.95 billion
in the review period.

Textile
Sector
Intervention
Facility
(TSIF)
Under the facility, ₦10.29 billion was
disbursed to 2 projects in the review
period compared with ₦19.1 billion in
the first half of 2018. Repayments in the
review period totalled ₦178.45 million.

Nigeria
Bulk
Electricity
Trading
Payment Assurance Facility (NBETPAF)
During the review period, ₦176.78 billion
was
disbursed
to
NBET
Plc.
Cumulatively, the amount disbursed
under the programme stood at ₦534.10
CBN Monetary Policy Review

billion as at end-December, 2018 with
no
repayments
due
under
the
intervention.
Small
and
Medium
Enterprises
Restructuring and Refinancing Facility
(SMERRF)
Disbursement under the scheme was
discontinued following its replacement
with the Real Sector Support Facility in
December 2014. However, repayments
during the review period amounted to
₦12.60 billion.

2.2.3 Construction
In the third quarter of 2018, growth in
the construction sector moderated to
0.54 per cent from 7.66 per cent in the
preceding quarter. It was, however, an
improvement
compared
with
a
contraction of 0.46 per cent in the
corresponding period of 2017. The
share of construction in overall GDP fell
to 3.01 per cent from 3.05 per cent in
the corresponding period of 2017.
During the fourth quarter of 2018,
growth
of
the
construction
sector
strengthened to 2.05 per cent from 0.54
per cent in the preceding quarter. It
was, however, a moderation when
compared with the growth of 4.14 per
cent in the corresponding period of
2017. The share of construction in
overall GDP fell marginally to 3.48 per
cent
from
3.49
per
cent
in
the
corresponding period of 2017.

2.2.4
Trade
The trade sector grew by 0.98 per cent
in the third quarter of 2018, up from
contractions of 1.74 and 2.14 per cent
in the corresponding period of 2017
and
the
preceding
quarter,
respectively. The share of trade in
overall GDP fell to 15.80 per cent from
15.93 per cent in the corresponding
period of 2017.

In the fourth quarter of 2018, the trade
sector grew further by 1.02 per cent
from 0.98 per cent in the preceding
quarter and the growth of 2.07 per cent
in the corresponding period of 2017,
respectively. The share of trade in
overall GDP fell to 16.50 per cent from
16.72 per cent in the corresponding
period of 2017.

2.2.5 Services Sector
The Service sector grew by 3.60 per
cent compared with a growth of 4.19
per cent in the preceding quarter of
2018 and a contraction of 2.95 per cent
in the corresponding period of 2017.
The expansion in the sector was driven
by utilities (13.44%), information and
communication
(12.09%),
transport
(11.95%), other services (2.86%), arts,
entertainment & recreation (2.83%),
accommodation and food services
(2.66%) and administrative and support
services (2.02%). The growth of the
Services
sector
was,
however,
moderated by activities in Finance &
Insurance, and Real Estate sub-sectors,
which contracted by 4.81 and 2.68 per
cent, respectively. The share of the
sector in overall GDP rose to 33.56 per
cent in the third quarter compared with
32.98 per cent in the corresponding
period of 2017.
CBN Monetary Policy Review

During the fourth quarter of 2018, the
Services sector expanded further by
3.71 per cent from 3.60 and -0.55 per
cent in the preceding quarter and
corresponding
period
of
2017,
respectively. The expansion in the
sector was driven by information and
communications
(13.20%),
transport
(9.48%),
arts,
entertainment
&
recreation
(4.18%),
and
accommodation and food services
(2.05%). The growth of the Services
sector was, however, still moderated by
activities in Real Estate sub-sectors,
which contracted by 3.85 per cent. The
share of the sector in overall GDP rose
to 37.79 per cent in the fourth quarter
compared with 37.31 per cent in the
corresponding period of 2017.

Figure 2.6
Services Sub-Sector Contribution, 2017Q12018Q4

Per cent
Q1-2017
Q2-2017
Q3-2017
Q4-2017
Q1-2018
Q2-2018
Q3-2018
Q4-2018
Source: NBS
2.2.6 Oil Sector
The performance of the oil sector was
largely sustained during the review
period.
This
was
attributable
to
relatively stable prices of crude oil and
continued peace in the Niger Delta
region. As a result, crude oil production
was estimated at an average of 1.94
mbpd in the third quarter of 2018,
which was 0.10 million barrels higher
than
the
revised
daily
average
production of 1.84 mbpd recorded in
the second quarter of 2018 ((NBS, 2017).
The outcome was; however, lower by
0.08 mbpd compared with 2.02 mbpd
in the corresponding quarter of 2017. In
the
fourth
quarter
of
2018,
oil
production moderated to an average
of 1.91 mbpd compared with 1.95
mbpd
and
1.94
mbpd
in
the
corresponding period of 2017 and in
the preceding quarter, respectively.
During the review period, crude oil
prices
fluctuated
due
mainly
to
ongoing policy uncertainties especially
the re-imposition of sanction on Iranian
oil export by the US government and
Saudi Arabia’s stance on increased
supply. These were moderated by the
Organization of the Petroleum Exporting
Countries (OPEC)’s assurance of a
continued production ceiling beyond
December 2018. Accordingly, the price
of Nigeria’s reference crude, the Bonny
Light 370API, fell from US$75.68/barrel in
July 2018 to US$73.64/barrel in August
2018,
before
rising
steadily
to
US$80.50/barrel and US$82.50/barrel in
September
and
October
2018,
respectively. However, the price of
Bonny
Light
declined
steadily
to
US$66.01/barrel and US$58.16/barrel in
November
and
December,
2018.
Overall, the average price of Bonny
Light of US$72.74/barrel during the
review period was an increase over
US$71.45/barrel in the first half of 2018,
and
still
above
the
Federal
CBN Monetary Policy Review

Government’s 2018 budget benchmark
price of US$51.0/barrel.
Figure 2.7
Quarterly Oil Production (2017Q1-2018Q4)

Q1-2017 Q2-2017 Q3-2017 Q4-2017 Q1-2018 Q2-2018 Q3-2018 Q4-2018
Million Barrels Per Day

Source: NBS
Figure 2.8
Monthly Bonny Light Price, July – December 2018

Source: CBN


CBN Monetary Policy Review

CHAPTER 3

3.0
PRICE DEVELOPMENTS
ollowing the moderation in the first
half
of
the
year,
inflationary
pressures resurfaced during the
review period despite the sustained
tight monetary policy stance of the
Bank. All measures of inflation, except
core inflation, maintained an upward
trend throughout the review period,
with headline inflation remaining above
the upper limit of the Bank’s 6 - 9 per
cent benchmark. In general, domestic
price
development
reflected
the
effects of supply and demand factors.
Supply side factors included structural
constraints and the flow of liquidity to
the economy. The structural factors
include: poor weather conditions which
led to the flooding of farmlands; and
continued insecurity across most of the
farming
communities
fuelled
by
insurgency,
armed
banditry
and
farmer-herders
conflicts
which
constrained
supply
of
agricultural
products, leading to higher prices.
These were, however, moderated by
stability in the naira exchange rate. The
stability of the exchange rate was
sustained
by
existing
and
new
measures to boost capital inflow and
improve liquidity in the market. The
existing measures included activities at
the Investors’ & Exporters’ window, the
use of Bank Verification Number (BVN)
for BDC transactions, and sale of
foreign exchange to BDCs by the Bank
and inflow through International Money
Transfer Operators (IMTOs) by banks.
The
additional
measures
were:
introduction
of
special
foreign
exchange intervention sales to BDCs
and inclusion of fertilizer to the list of 41
items excluded from accessing foreign
exchange at the interbank window.
The robust level of external reserves,
following the recovery of crude oil
prices further supported the stability in
the foreign exchange market in the
review period. In addition, the Bank
also sustained the repatriation of export
proceeds as well as return of unutilized
foreign exchange sourced from CBN
auctions.
The demand-side factors were the
primary drivers of price resurgence in
the
review
period.
The
increased
demand for money market securities
led to expansion in money supply,
which fed into domestic prices. On
account of this and coupled with
prevailing uncertainties in the market,
the Inter-Bank Call and Open Buy Back
(OBB) rates fluctuated widely for most
of
the
period
and
below
the
benchmark policy rate. The major
sources of liquidity in the review period
were:
CBN
interventions,
the
implementation
of

budget,
maturing
CBN
and
Open
Market
Operations (OMO) bills, Joint Ventures
Cash (JVC) calls, and increased FAAC
distribution.
3.1
Trend in Inflation
The Consumer Price Indices (CPI) for
headline, core and food measures rose
from 263.4, 248.2 and 282.2 in July 2018,
respectively, to 274.6, 256.7 and 296.4,
in December 2018. Accordingly, food
F
CBN Monetary Policy Review

inflation (year-on-year) rose by 0.71
percentage point from 12.85 per cent
in July to 13.56 per cent in December
2018. However, core inflation declined
by 0.41 percentage point from 10.18
per cent in July 2018 to 9.77 per cent in
December 2018. As a result, headline
inflation increased by 0.30 percentage
point from 11.14 per cent in July to
11.44 per cent at end-December 2018.

Table 3.1:
Inflation Rates, July – Dec 2018
CPI
Y-on-Y 12MMA CPI
Y-on-Y 12MMA CPI
Y-on-Y 12MMA
Jul 2018 263.42

Aug 2018 266.18

Sep 2018 268.41

Oct 2018 270.39

Nov 2018 272.56

Dec 2018 274.57

Headline Inflation
Core Inflation
Food Inflation
Source: Nigerian National Bureau of Statistics
data base
Figure 3.1:
Headline, Core and Food Inflation Rates (July–
Dec 2018) in per cent
Source: NBS
3.1.1 Headline Inflation
The major components of headline
inflation during the second half of the
year reflected an upward movement in
domestic
prices.
Food
and
nonalcoholic
beverages
remained
the
major driver, rising from 6.97 per cent in
July to 7.38 per cent in December 2018.
This was followed by housing, water,
electricity, gas and other fuels, which
increased from 1.28 per cent to 1.29 per
cent over the same period. Overall,
headline inflation rose from 11.14 per
cent in July to 11.44 per cent in
December 2018.
The upward trend in headline inflation
was mainly due to supply-side factors
notably:
poor
weather
conditions
leading to flooding of farmlands; and
the continued insecurity across most of
the farming communities fuelled by
insurgency,
armed
banditry
and
farmer-herders
conflicts.
Other
contributory factors were the increase
in
fiscal
activities
resulting
from
increased FAAC disbursements to the
three
tiers
of
government.
The
developments in prices were, however,
moderated by the stability in the
foreign exchange market in response to
the Bank’s sustained policy intervention.


CBN Monetary Policy Review

Table 3.2:
Major Components of Headline Inflation (Y-on-Y),
July–December 2018
Headline
Food & NonAlcoholic
Bev.
Alcoholic
Bev.
Tobacco &
Kola
Clothing &
footwear
Housing,
Water,
Elect.Gas &
Other Fuel
Furnishings,
Household
Equip &HH
Maint.
Health
Transport
Education
Jul 2018

Aug 2018

Sep 2018

Oct 2018

Nov 2018

Dec 2018

Change btw
Jul & Dec.


Figure 3.2:
Major Components of Headline Inflation (Y-on-Y),
Jul – Dec 2018.


On a month-on-month basis, headline
inflation declined from 1.13 per cent in
July to 0.74 per cent in December 2018.
This decline was traceable to the fall in
the prices of food and non-alcoholic
beverages, from 0.77 per cent in July
2018 to 0.45 per cent in December
2018.
Similarly,
housing,
water,
electricity, gas & other fuel fell from 0.12
per cent in July to 0.09 per cent in
December 2018 (Table 3.3 and Figure
3.5). The decline in the month-onmonth headline inflation as opposed to
the
rising
year-on-year
measure,
suggests that year-on-year headline
inflation may moderate in the short to
medium term.

Table 3.3:
Major Components of Headline Inflation (M-onM), July - December 2018
Headline
Food & NonAlcoholic
Bev.
Alcoholic
Bev.
Tobacco &
Kola
Clothing &
footwear
Housing,
Water,
Elect.Gas &
Other Fuel
Furnishings,
Household
Equip &HH
Maint.
Health
Transport
Education
Jul 2018

Aug 2018

Sep 2018

Oct 2018

Nov 2018

Dec 2018

Change btw
Jul & Dec.


Source: NBS

Figure 3.3:
Major Components of Headline Inflation (M-onM), July – December 2018

Jul 2018 Aug
Sep
Oct
Nov
Dec
Per cent
Headline
Food & Non-Alcoholic B
Alcoholic Bev. Tobacco
Housing, Water, Elect.G
Fuel
Furnishings, Household
Maint.
Health
Transport
d

Source: NBS

3.1.2 Food Inflation
Food inflation (year-on-year) trended
upwards from 12.85 per cent in July to
13.56 per cent in December 2018, an
increase of 0.71 percentage point. The
major source of the increase was the
CBN Monetary Policy Review

0.76 percentage point rise in the price
of farm produce from 6.53 to 7.29 per
cent.
Processed
food,
however,
declined by 0.05 percentage point
from 6.32 per cent in July to 6.27 per
cent in December 2018. The higher
price of farm produce was accounted
for by the increase of 0.15, 0.14 and
0.04 percentage point in the prices of
potatoes & other tubers, vegetables,
and
fruits,
respectively.
The
unfavourable weather conditions and
festive period spending towards the
end of the year also contributed to the
uptick in food inflation.

Table 3.4:
Major Components of Food Inflation (Y-on-Y), July
- December 2018
FOOD
Processed
Food
Meat
Fish &
Sea Food
Milk,Chee
se &
Eggs
Oil & Fats
Farm
Produce
Fruits
Vegat
ables
Yam
Potatoes
& other
tubers
Jul'18

Aug'18

Sep'18

Oct'18

Nov'18

Dec'18

change
btw Jul &
Dec 2018

Source: NBS

Figure 3.4
Major Components of Food Inflation
(Y-on-Y), January – June 2018
Source: NBS
In contrast to the year-on-year trend,
food inflation, declined on a month-onmonth basis by 0.59 percentage point
from 1.40 per cent in July to 0.81 per
cent in December 2018. This was driven
by the processed food component
which declined by 0.69 percentage
point from 0.64 per cent in July 2018 to -
0.05 per cent in December 2018. On
the other hand, the price of farm
produce rose by 0.10 percentage point
from 0.77 per cent in July to 0.86 per
cent in December 2018. The key drivers
of the latter were rice agric sold loose
and rice local sold loose which rose by
0.11
and
0.09
percentage
point,
respectively.
Table 3.5
Major Components of Food Inflation (M-on-M),
July- December 2018
FOOD
Processed
Food
Meat
Fish &
Sea Food
Milk,Chee
se &
Eggs
Oil & Fats
Farm
Produce
Fruits
Vegat
ables
Yam
Potatoes
& other
tubers
Jul'18

Aug'18

Sep'18

Oct'18

Nov'18

Dec'18

change
btw Jul &
Dec 2018

Source: NBS

Figure 3.5
Major Components of Food Inflation (M-on-M),
July - December 2018
Source: NBS
CBN Monetary Policy Review

3.1.3 Core Inflation
Core inflation (year-on-year) trended
downwards from 10.98 per cent in July
2018 to 9.77 per cent in December
2018, a decline of 0.14 percentage
point.
The
development
reflected
decreases in: clothing and footwear
(0.21 percentage point),
furnishing,
household
equipment
and
maintenance (0.18 percentage point),
transportation (0.09 percentage point),
and
restaurant
and
hotels
(0.02
percentage point). The drop in the
prices of clothing & footwear and
household
equipment
and
maintenance was attributable to the
continued stability in energy prices as
well as weak aggregate demand.

Table 3.6
Major Components of Core Inflation (Y-on-Y) July -
December 2018
core
Processe
d Food
NonAlcoholic
Beverages
Alcoholic
Bev.
Tobacco &
Kola
Clothing &
footwear
Housing,Wate
r, Elect.Gas &
Other Fuel
Furnishings,
Household
Equip &HH
Maint.
Health
Transport
Communic
ation
Recreation
& culture Education
Restauran
t & Hotels
Miscellaneo
us Goods &
Services
Jul'18

Aug'18

Sep'18

Oct'18

Nov'18

Dec'18

change
btw Jul &
Dec 2018

Source: NBS

Figure 3.6
Major Components of Core Inflation
(Y-on-Y) July - December 2018

Jan

Feb

Mar

Apr

May

Jun

Per cent
Core
Processed Food
Non-Alcoholic Beverages
Alcoholic Bev. Tobacco &
Kola
Clothing & footwear
Housing,Water, Elect.Gas
& Other Fuel
Furnishings, Household
Equip &HH Maint.
Health
Transport
Communication
Recreation & culture
Education
Restaurant & Hotels
Misc Goods & Services
Source: NBS
On a month-on-month basis, core
inflation,
also
decreased
by
0.31
percentage point from 0.81 per cent in
July to 0.50 per cent in December 2018.
Housing, water, electricity, gas & other
fuel remained the major driver of the
fall in core inflation, from 0.17 per cent
in July to 0.13 per cent in December
2018. This was followed by furnishing,
household equipment & maintenance
which fell by 0.02 percentage point.

Table 3.7
Major Components of Core Inflation
(M-on-M) July - December. 2018
core
Processe
d Food
NonAlcoholic
Beverages
Alcoholic
Bev.
Tobacco &
Kola
Clothing &
footwear
Housing,Wate
r, Elect.Gas &
Other Fuel
Furnishings,
Household
Equip &HH
Maint.
Health
Transport
Communic
ation
Recreation
& culture Education
Restauran
t & Hotels
Miscellaneo
us Goods &
Services
Jul'18

Aug'18

Sep'18

Oct'18

Nov'18

Dec'18

change
btw Jul &
Dec 2018


Source: NBS

Figure 3.7
Major Components of Core Inflation (M-on-M)
January – June 2018
Source: NBS

Jan

Feb

Mar

Apr

May

Jun

Per cent
Core
Processed Food
Non-Alcoholic Beverages
Alcoholic Bev. Tobacco &
Kola
Clothing & footwear
Housing,Water, Elect.Gas
& Other Fuel
Furnishings, Household
Equip &HH Maint.
Health
Transport
Communication
Recreation & culture
Education
Restaurant & Hotels
CBN Monetary Policy Review

3.1.4 Seasonally-Adjusted Inflation
In the review period, actual and
seasonally-adjusted headline inflation
trended
upwards,
reversing
the
downward trend witnessed in the first
half of 2018 (Table 3.8 and Figure 3.10).
Actual
headline
inflation
trended
generally
above
the
seasonallyadjusted measure during the second
half of 2018. The overall upward trend in
headline inflation and its seasonallyadjusted measure can be attributed to
the increased spending associated with
end-of-year
festivities
and
the
forthcoming general elections, rising
food
prices
due
to
unfavourable
weather conditions in some parts of the
country as well as the disruptive impact
of insecurity on the production and
distribution systems of the economy,
despite
the
tight
monetary
policy
stance of the Bank.
Table 3.8
Actual and Seasonally Adjusted Headline
Inflation July – December 2018
Date
Inflation
Seasonally
Adjusted
Inflation
Jul-18
11.14
10.88
Aug-18
11.23
11.02
Sep-18
11.28
11.15
Oct-18
11.26
11.24
Nov-18
11.28
11.25
Dec-18
11.44
11.49


Figure 3.8
Actual and Seasonally Adjusted Headline
Inflation July – December 2018

Source: NBS
3.2
Key
Factors
that
Influenced
Domestic Prices
Inflationary trend during the period
was primarily driven by cost-push,
demand-pull and some moderating
factors. Inflation rose slightly during the
period owing to the net effect of these
forces.
The
key
factors
included:
unfavourable weather conditions in
some parts of the country leading to
poor harvests; continued liquidity surfeit
in the banking system; and increased
FAAC
disbursements
arising
from
improved foreign exchange receipts.
Others
were:
the
repayment
of
outstanding
contractors
debts
and
salary arrears by governments; the
impact of festive and other seasonal
activities; persistent clashes between
herdsmen and farmers in some parts of
the
country;
and
production
and
distribution
challenges

due
to
insurgency
in
the
North-east.
The
moderating factors were: stability in the
exchange rate, energy prices, and
CBN Monetary Policy Review

sustained tight monetary policy stance
of the Bank.

3.2.1 Demand-side Factors
On the demand side, the increase in
headline inflation was traceable to
sustained liquidity surfeit in the banking
system as well as liquidity in the wider
economy. The major sources of liquidity
in
the
review
period
were:
CBN
interventions, the implementation of the

Federal
Government
budget,
maturing CBN and OMO bills, Joint
Ventures
Cash
(JVC)
calls,
the
repayment of outstanding contractor
debts
and
salary
arrears
by
governments; and increased FAAC
disbursements
owing
to
higher
oil
receipts. Overall, these factors drove
domestic price developments during
the review period.

3.2.2. Supply-side Factors
In the review period, a number of
supply side factors drove inflationary
pressure. These were: unfavourable
weather conditions leading to poor
harvests; persistent clashes between
herdsmen and farmers in some parts of
the country; armed banditry; and
production and distribution challenges
due to insurgency in the North-east. The
increased
political
and
policy
uncertainties in the run-up to the 2019
general election affected investment
and
production
decisions
thereby
influencing expectations. The net effect
of these factors was to constrain output
and supply, thereby putting upward
pressure on domestic prices.
3.2.3 Moderating Factors
The moderating factors were the
supply and demand forces during the
period
that
calmed
the
upward
pressure
on
prices.
These
were:
sustained stability in the exchange rate,
stable
energy
prices,
and
the
continued tight monetary policy stance
of the Bank.


CBN Monetary Policy Review

BOX 3.1 MINIMUM WAGE AND INFLATION IN NIGERIA: IMPLICATIONS FOR
MONETARY POLICY
Historically, wages in Nigeria are bargained between Government and labour but
are not regularly reviewed. Consequently, workers continue to clamour for review
of wages in line with domestic economic developments, working conditions and
global trends. This is usually premised on welfare considerations taking cognisance
of the erosion in the purchasing power of money and currency depreciation. These
forces are even more severe in an import dependent economy, which is more
susceptible to the adverse effects of imported inflation.

The clamour for a minimum wage is to ensure that the welfare consideration of the
least paid worker in an economy is not undermined. The argument is that with
inflation, fixed wages buy less goods and services over time. As such, since those
on minimum wage are the least paid, they are the most hit by inflation.
Consequently, there is a need to always update the wages of the least paid to
ensure that they maintain a minimum level of welfare, commensurate with the
welfare and developmental agenda of the government as well as those of the
international community. Additionally, increasing the minimum wage, would lead
to productivity and efficiency gains, in essence advancing the efficiency wage
argument. It is against this background that there has been persistent clamour for
the review of the national minimum wage in Nigeria.

The minimum wage in Nigeria, is determined by the government and is guided by
the National Minimum Wage (Amendment) Act 2011 which is binding on the both
the private and public sectors at the Local, State and Federal Government levels.
The minimum wage is typically negotiated with workers’ representatives/unions and
by the employers of labour in the economy, notably the government and the
private sector. The first structured monthly minimum wage in Nigeria was set in 1981
at N125.00; it was later increased to N250.00 in 1989/90. The administration of Gen.
Abdulsalami Abubakar approved an increase of the monthly minimum wage to
N3,000.00 in 1998. In 2000/01, there was an increase to N5,500.00 for state workers
and N7,500.00 for federal and oil sector workers. In 2010, the monthly minimum
wage was increased again to N18,000.00 through a tripartite structure that was
signed into law; with part of the provisions being that the minimum wage should be
reviewed every 5 years. A tripartite committee was set up again in 2017 for the
review of the national minimum wage which according to the provisions of the law
had been due for a review since 2015. On November 6, 2018, the Federal
Government approved a monthly minimum wage of N30, 000.00.

The Table below summarises the relationship between inflation rate and the
national minimum wage in Nigeria.
CBN Monetary Policy Review

Year
Minimum Wage (N)
Inflation Rate (%)

17.40

3.6

3,000
11.9

5,500 and 7,500
16.49

18,000
11.82

30000
11.44
Although the welfare argument has been proffered as a justifiable reason for the
implementation of successive reviews of the minimum wage, contrary views have
also been advanced that in general, minimum wages may reduce rather than
enhance the welfare of citizens.


The proponents of this view argue that increase in the minimum wage initially
increases the wages of the beneficiaries; which then triggers wage comparison
across board, resulting in comparative reviews in general wage levels. This practice
generates a shift across board in unit labour cost, and adjustment in factor mix, in
line with the productive sector’s cost minimisation objective. The resultant factor
substitution (i.e. labour/capital substitution) may or may not result in increased
productivity as the net substitution effect is dependent on the stage of the business
cycle, the existing policy environment as well as inflation expectations. The spillover effect of the minimum wage increases affects the unemployment rate,
productivity and inflation. If increases in minimum wage results in higher
unemployment, this reduces the bargaining power of unions and becomes
deflationary, which may mitigate inflation and inflationary expectations.
Alternatively, if the increased minimum wage induces a significant improvement in
productivity, it will lead to increased capacity utilisation and aggregate production
and a fall in prices and inflation expectations, particularly when an economy is
operating far from its full employment capacity. However, if the economy is
operating near its full employment capacity, an increase in minimum wage will
result in higher unemployment and inflation, as well as decreased output. The
significant increase in production costs will outweigh the productivity gain from
increased wages and deflationary impact of higher unemployment, resulting in a
new equilibrium characterised by lower output and higher prices.
The implication of minimum wage adjustments for monetary policy would
significantly depend on the stage of the economy on the business cycle and the
output gap. A negative output gap in an economy that is slowly emerging from
recession indicates that the economy could still absorb the effect of moderate
increases in the minimum wage without adverse inflationary consequences. This
CBN Monetary Policy Review

was clearly the case with Nigeria during the 2018 national minimum wage review.
However, the demand for minimum wage review in an economy with a positive
output gap, would likely generate inflationary pressures. In addition, the inflationary
effects of minimum wage reviews would depend on how it is funded as some
funding sources are potentially inflationary.


CBN Monetary Policy Review

CHAPTER 4
4.0
MONETARY
POLICY
AND
LIQUIDITY MANAGEMENT
he design and implementation of
monetary policy in the second half
of

was
shaped
by
developments in global and domestic
economic and financial environments.
On the global front, rising trade tensions
and policy uncertainties, difficult BREXIT
negotiations,
build-up
in
financial
vulnerabilities
and
currency
depreciations,
remained
the
key
developments in the review period.
These were accentuated by rising cost
of borrowing, continuous capital flow
reversal, fiscal fragilities and increased
debt burden especially in the emerging
market and developing economies.
Others included: the recent episodes of
large-scale flooding in major areas
across the globe, resurgence of global
inflationary pressures, continued geopolitical tensions as well as increasingly
depressed aggregate demand in some
countries.

On
the
domestic
front,
key
developments that shaped monetary
policy in the review period were: the
fragile economic recovery; disruptions
to the food supply chain due to
insurgency and herdsmen-farmers crisis
in some parts of the country; impact of
flooding on agricultural output and
other economic activities; rebuilding of
inflationary pressures; liquidity surfeit in
the
banking
system;
pre-election
spending; and the liquidity impact of
the

expansionary
Federal
Government budget. Others included:
low fiscal buffers; rising public debt; the
high level of non-performing loans in
the banking system; reduced portfolio
inflows; low domestic credit and weak
intermediation
by
Deposit
Money
Banks. The Bank’s goal to support the
fragile
economic
recovery
without
compromising its primary mandate of
ensuring price and financial system
stability, informed the direction of
monetary policy in the review period.

4.1
Decisions
of
The
Monetary
Policy Committee (MPC)
During the second half of 2018,
decisions
of
the
Monetary
Policy
Committee (MPC) were influenced by
key developments in the global and
domestic
economic
and
financial
environments. The global factors were:
rising trade tensions, uncertainties in
BREXIT negotiations, and concerns over
North Korea’s commitment to the
denuclearisation
of
the
Korean
Peninsula. Others were: the build-up of
financial
vulnerabilities
and
policy
uncertainties; rising energy prices and
costs of borrowing in the Emerging
Markets and Developing Economies;
sustained
recovery
in
global
commodity prices, as well as recent
episodes of large-scale flooding in
major areas across the globe which
could pose some threat to growth.
Furthermore,
other
considerations
included: the resurgence of global
inflationary
pressures,
continuous
capital flow reversal and moderate
currency depreciations, especially in
the emerging markets as well as a
strengthening US dollar and subdued
T
CBN Monetary Policy Review

global economic growth outlook. Also,
the gradual erosion of rule-based
multilateral
trading
system,
fiscal
fragilities and increased debt burden,
continued geo-political tensions as well
as increasingly depressed aggregate
demand in some countries, helped to
shape the nature of policy choices.
The key developments in the domestic
economy
were:
the
still
fragile
economic recovery; worsening farmerherdsmen conflicts in some parts of the
country; disruptions to the food supply
chain in major food producing States
due to the combined effects of poor
infrastructure and high cost of energy;
and
uncertainties
surrounding
the
external demand for Nigeria’s oil. Other
concerns
were:
the
rebuilding
of
inflationary
pressures;
pre-election
spending; concerns about the liquidity
impact
of
the

expansionary
Federal Government budget as well as
increased FAAC distributions. Others
included: low fiscal buffers despite
rising
oil
prices;
continued
nonpayment
of
workers’
salaries
and
pensions in some States; weakening
demand
and
consumer
spending,
build-up in contractor debt, as well as
impact of flooding on agricultural
output and other economic activities.
In addition, rising sovereign debts,
anticipated review of the national
minimum wage; the rising levels of nonperforming loans in the banking system;
reduced portfolio inflows; low domestic
credit and weak intermediation by
Deposit Money Banks were noticeable.
These developments and the need to
achieve the Bank’s mandate of price
stability
conducive
to
sustainable
economic
growth
were
the
key
considerations that informed monetary
policy decisions in the review period.
4.1.1 July 2018 MPC Meeting
At its 23rd and 24th July, 2018 meeting,
the
Monetary
Policy
Committee
reviewed developments in the global
and domestic economic and financial
environments, as well as the outlook for
the rest of the year.

The MPC noted that global growth
momentum
remained
promising
despite
rising
trade
tensions,
uncertainties in BREXIT negotiations and
concerns
over
North
Korea’s
commitment to the denuclearisation of
the Korean Peninsula. Other notable
challenges
were:
currency
depreciations, rising energy prices and
costs of borrowing in the Emerging
Markets and Developing Economies.
Consequently,
global
growth
was
projected at 3.9 per cent in 2018, up
from 3.7 per cent in 2017, largely driven
by the recovery in oil prices, rising asset
prices and long term yields in major
financial markets as well as a rebound
in investment, manufacturing output
and trade.
On the domestic front, data from the
National Bureau of Statistics (NBS)
showed
that
real
Gross
Domestic
Product (GDP) grew by 1.95 per cent in
the first quarter of 2018, compared with
2.11 per cent in the preceding quarter
and a contraction of 0.91 per cent in
the corresponding quarter of 2017. The
Committee noted that the oil sector
was the major source of growth,
contributing 1.26 per cent in Q1 2018
CBN Monetary Policy Review

up from 0.76 per cent in Q4 2017. The
Committee welcomed the positive
outlook to growth of the domestic
economy as the Purchasing Managers
Indices (PMI) for manufacturing, and
non-manufacturing activities rose for
the
fifteenth
and
fourteenth
consecutive months to 57.0 and 57.5
points, respectively, in June 2018.
In terms of prices, the Committee was
satisfied
with
the
continued
deceleration in domestic prices as
headline
inflation
(year-on-year)
trended
downwards
for
the
seventeenth consecutive month to
11.23 per cent in June 2018 from 11.61
per cent in May. Food and Core
inflation also fell to 12.98 and 10.40 per
cent, from 13.45 and 10.71 per cent,
respectively, over the period. The
Committee, however, observed a rise
in the month-on-month inflation rate, to
1.24 per cent in June, from 1.09 per
cent in May 2018, suggesting the
possibility of a rebuilding of inflationary
pressures.
The MPC noted with satisfaction the
relative stability in the financial markets
as reflected in the marginal increase in
the All-Share Index (ASI) by 0.09 per
cent to 38,278.55 on June 29, 2018,
from 38,243.19 at end-December 2017.
Market
Capitalisation
(MC)
also
increased by 1.89 per cent to N13.87
trillion on June 29, 2018, from N13.61
trillion at end-December 2017. The
Committee, however, observed that
ASI and MC fell by 7.24 per cent,
apiece, on June 29, 2018 compared
with the level at end-April 2018 as a
result of the profit taking activities of
investors, and the effect of monetary
policy normalization in the United
States. The MPC noted the continued
improvements in the performance of
deposit money banks and expressed
optimism that the moderation in nonperforming loans in the industry will
continue. The Committee also noted
with satisfaction, the relative stability in
the foreign exchange market as well as
high level of activities, particularly, at
the Investors’ and Exporters’ (I&E)
window.
In
addition,
the
commencement of the currency swap
deal with the People’s Bank of China
(PBoC) and improved availability of
Renminbi to Nigerian investors will ease
pressure
in
the
foreign
exchange
market.
In its considerations, the Committee
noted
with
satisfaction
the
fourth
consecutive quarter of growth in real
GDP and the positive growth outlook in
the domestic economy. The MPC
commended the approval of the 2018
Federal
Government
budget
and
called
for
its
accelerated
implementation to further support the
fragile
growth
recovery.
The
Committee also urged the sustained
implementation
of
the
Economic
Recovery and Growth Plan (ERGP) to
further stimulate output growth. The
MPC was, however, concerned about
the
liquidity
impact
of
the

expansionary
fiscal
budget
and
increasing
Federation
Accounts
Allocation
Committee
(FAAC)
disbursements, owing to rising prices of
crude oil as well as the build-up in
election
related
spending.
The
Committee took note of the sustained
CBN Monetary Policy Review

moderation in inflationary pressures;
especially headline inflation, as well as
stability
in
the
foreign
exchange
market. It, however, expressed concern
on the threat posed by incessant
herdsmen-farmers crisis in some key
food producing states particularly the
negative impact on food supply chains
which could continue to exert upward
pressure on food prices. Overall, the
Committee considered the sustained
positive growth in real GDP over the last
quarter,
stability
in
the
foreign
exchange market and high level of
accretion to external reserves.
In arriving at its decision, the MPC
reviewed the policy options available
at this meeting, notably to raise, ease
or hold policy. The Committee strongly
considered the option of tightening
given that this measure would curtail
the threat of a rise in inflation, even as
the injection from the fiscal authorities
would still provide the economy with
substantial liquidity. Also, tightening
would help stem the tide of capital flow
reversals, rein-in inflationary pressure,
increase real interest rate, build investor
confidence with positive impact on
capital inflows and further stabilize the
country’s exchange rate. On the other
hand,
the
Committee
was
not
unmindful of the risks of raising rate
namely the possibility of weakening
consumption, and increasing the cost
of borrowing in the domestic economy.
In considering the option of loosening,
the MPC assessed its potential positive
effects
in
stimulating
aggregate
demand through lower cost of capital.
The
Committee
also
noted
the
potential risks to loosening in terms of
exacerbating
inflationary
and
exchange rate pressures as well as
returning the real interest rate into
negative territory. The argument for
holding was also considered. On this,
the MPC believed that the risks to the
macroeconomic
and
financial
environment appeared fairly balanced
with respect to improvements in output
growth and inflation outcomes. Holding
policy in the prevailing circumstance
will continue to support growth and
further moderate inflation.
The
MPC
recognised
the
difficult
choices before it as each policy option
had its strengths and weaknesses.
Accordingly, a heterodox approach to
reform
the
market
in
order
to
strengthen the flow of credit would be
appropriate at this time. Consequently
and as part of the decisions, credit
constrained
businesses,
particularly
large corporations are encouraged to
issue commercial paper to meet their
credit needs, as a way of incentivizing
deposit money banks to increase
lending
to
manufacturing
and
agriculture. In addition, a differentiated
dynamic cash reserve requirement
(CRR) regime would be implemented,
to direct cheap long term bank credit
at 9 per cent, with a minimum tenor of
seven
(7)
years
and
two-year
moratorium
to
employment
elastic
sectors of the economy.
In consideration of the foregoing,
therefore, the Committee decided by
a vote of Seven (7) members to retain
the Monetary Policy Rate (MPR) at
14.00 per cent alongside all other
policy parameters. Two (2) members,
CBN Monetary Policy Review

however, voted to increase the MPR by
50 basis points, while one (1) member
voted to increase the MPR by 25 basis
points.
4.1.2 September 2018 MPC Meeting
The September 24 and 25, 2018
meeting
of
the
MPC
evaluated
developments
in
the
global
and
domestic economic environments in
the first eight months and the outlook
for the rest of the year. The MPC noted
the uneven expansion in global output
amidst growing trade tensions, rising oil
prices and debt levels as well as
currency depreciation in most of the
notable
emerging
markets
and
developing
economies
(EMDEs).
Notwithstanding these developments,
there was evidence of resilient financial
markets and output growth in the
advanced economies. Consequently,
growth in the advanced economies
was projected at 2.4 per cent in 2018,
same as in 2017, led by the US which
grew by 4.1 per cent in Q2 2018 and
was projected to grow by 2.9 per cent
in 2018. In the EMDEs, growth was
expected to remain strong at 4.9 per
cent in 2018 compared with 4.7 per
cent in 2017, led by India and China.
On average, growth momentum in the
global economy was on track as
financial
conditions
were
broadly
favourable with limited spill-over of
trade tensions. However, the episodes
of large-scale flooding in major areas
across
the
globe
could
threaten
growth.
On the domestic front, data from the
National Bureau of Statistics (NBS)
showed that real GDP growth declined
to 1.50 per cent in the second quarter
of 2018, from 1.95 per cent in the
preceding quarter, although higher
than 0.72 per cent in the corresponding
quarter of 2017. The decline was
traceable to the contraction in the oil
sector during the second quarter of
2018. The Committee noted, however,
that non-oil real GDP grew by 2.05 per
cent, reflecting the strong performance
of
construction,
services
and
agriculture, which grew by 7.66, 4.19
and 1.19 per cent, respectively. The
performance of the non-oil sector was
supported by the stability in the foreign
exchange
market,
continued
implementation of the 2017 capital
budget and the on-going interventions
of the Bank in the real sector of the
economy.
The
Committee
was
concerned that the economy’s exit
from recession may be under threat as
output slowed in Q2 relative to Q1,
2018. In this regard, the Committee
urged
the
Government
to
take
advantage of the current rising oil
prices
to
rebuild
fiscal
buffers,
strengthen government finances in the
medium term and reverse the current
trend of decline in output growth. The
Committee noted that disruptions to
the food supply chain in major food
producing states due to the combined
effects of poor infrastructure, flooding
and the on-going security challenges
resulted in a rise in food prices,
contributing to the uptick in headline
inflation.
Further analysis of price developments
indicated that headline inflation (yearon-year) inched up to 11.23 per cent in
CBN Monetary Policy Review

August 2018, from 11.14 per cent in July
2018. The Committee observed that
while core inflation declined, the rise in
headline inflation was driven by the
food
component,
indicating
that
supply side factors were driving the
increase.
On financial stability parameters, the
MPC expressed concern at the decline
in major capital market indices. The AllShare Index (ASI) decreased by 14.99
per cent to 32,540.17 on September 21,
2018 from 38,278.55 at end-June 2018.
Similarly, Market Capitalization (MC)
decreased by 14.33 per cent to N11.38
trillion on September 21, 2018 from
N13.87 trillion at end-June 2018. The
Committee
attributed
the
developments
to
continued
profittaking by portfolio investors and capital
reversals as foreign yields had become
increasingly attractive. The Committee
was equally concerned about the rising
level of non-performing loans in the
banking system, traced mainly to the
oil sector and urged the Bank to closely
monitor and address the situation. It
also expressed concern over the weak
intermediation by Deposit Money Banks
and its adverse impact on credit and
investment growth in the private sector.
Available data and forecast of key
macroeconomic indicators showed a
positive outlook for the economy in the
third quarter of 2018. The Committee
expects that sustained implementation
of the 2018 budget, improvements in
the security situation and continued
stability in the foreign exchange market
would stabilize prices and strengthen
economic growth.
In
the
Committee’s
consideration,
modest stability had been achieved in
key
macroeconomic
indicators,
including inflation, exchange rate and
the
external
reserves.
The
MPC,
however, observed that the gains so far
achieved appeared to be under threat
of reversal, following new evidence of
weakening
macroeconomic
fundamentals. The Committee noted
that
inflationary
pressures
were
rebuilding and capital flow reversals
had intensified as shown by the bearish
trend in the equities market even
though the exchange rate remained
stable.
Following the above developments,
the MPC reasoned that the economy
was
still
confronted
with
growth
headwinds and inflationary pressures.
Accordingly, the Committee reiterated
the
need
for
synergy
between
monetary and fiscal policies as a viable
strategy to achieve macroeconomic
stability.
In this regard, the Committee identified
two likely policy options to anchor its
decision
namely:
tightening
or
maintaining
the
status
quo.
The
argument for tightening was that it
would tame inflationary pressures, stem
the reversal in portfolio capital, improve
the
external
reserve
position
and
maintain
stability
in
the
foreign
exchange market. On the flip side, the
MPC felt that raising rates will further
weaken growth as credit will become
more expensive, NPLs will increase
further, leading to a deceleration in
output. The other option of holding all
policy
parameters
constant
will,
CBN Monetary Policy Review

according to the MPC, sustain gradual
improvements in output growth, while
awaiting clearer understanding of the
quantum
and
timing
of
liquidity
injections into the economy before
deciding on possible adjustments.
In light of the above, the MPC decided
by a vote of seven (7) members to
retain the
MPR
at

per cent.
However, three (3) out of these seven
(7) members voted to raise the Cash
Reserve Requirement (CRR) by 150
basis points, indicating their preference
for tightening through the instrument.
The other three (3) members voted to
tighten by raising the MPR by 25 basis
points.
In summary, the MPC voted to: Retain
the MPR at 14 per cent; Retain the
asymmetric corridor of +200/-500 basis
points around the MPR; Retain the CRR
at 22.5 per cent; and Retain the
Liquidity Ratio at 30 per cent.

4.1.3 November 2018 MPC Meeting
The November 21 and 22, 2018
meeting
of
the
Monetary
Policy
Committee
appraised
recent
developments
in
the
global
and
domestic
macroeconomic
and
financial environments, with near term
outlook into the first half of 2019. The
MPC observed a contraction in global
output,
underpinned
largely
by
escalating trade tensions resulting from
widespread uncertainty and waning
investor
confidence.
Consequently,
global
growth
in

was
downgraded to 3.7 per cent from the
earlier estimate of 3.9 per cent. The
outcome reflected the softening of
growth
in
the
major
advanced
economies in the third quarter of 2018.
Growth in the Emerging Markets and
Developing
Economies
(EMDEs)
remained
uneven,
owing
to
a
combination
of
country-specific
factors. Overall, the downside risks to
global
economic
activity
were:
elevated financial and fiscal fragilities
and
policy
uncertainties;
gradual
erosion of the rule-based multilateral
trading
system;
tighter
financial
conditions with underlying threat of
disruptive
portfolio
adjustments,
reflected in increased capital flow
reversals and exchange rate volatilities;
as
well
as
depressed
aggregate
demand
in
some
countries.
The
Committee believed that these factors
in addition to geo-political tensions,
would
chart
the
course
of
developments for the rest of 2018 and
beyond.
On the domestic scene, the MPC
noted the positive outlook for output
growth,
evidenced
by
the
Manufacturing
and
Nonmanufacturing Purchasing Managers
Indices (PMI), which stood at 56.8 and
57.0 points, respectively, in October
2018, indicating expansion for the 19th
and 18th consecutive months. The
development was attributed to the
stability
in
the
foreign
exchange
market, implementation of the 2018
capital budget and the on-going
intervention of the CBN in the real
sector of the economy. However, the
recent incidence of flooding across the
country and the impact of herdsmen
attack on farming communities could
CBN Monetary Policy Review

affect output growth for the rest of the
year. In terms of price developments,
the Committee welcomed the benign
performance of headline inflation of
11.26
per
cent
in
October
2018,
representing a decrease from 11.28 per
cent
in
September
after
two
consecutive
months
of
marginal
increases. The drop in headline inflation
was driven by the food component,
which moderated to 13.28 per cent in
October 2018 from 13.31 per cent in
September. Core inflation, however,
inched up marginally to 9.9 per cent in
October 2018 from 9.8 per cent in the
previous month.
The Committee also assessed the state
of financial system stability, being the
principal channel for monetary policy
transmission. In this regard, the MPC
observed a bearish trend in the equities
segment of the Nigerian capital market
during the period, as the All-Share
Index (ASI) decreased by 8.70 per cent
from 34,848.45 on August 31, 2018 to
32,058.28
on
November
16,
2018.
Similarly, Market Capitalization (MC)
decreased by 8.72 per cent from
N12.72 trillion to N11.70 trillion in the
same period. Relative to the endDecember 2017, the indices decreased
by
19.29
and
16.32
per
cent,
respectively.
These
developments
largely reflected sustained profit taking
activities
by
portfolio
investors
as
foreign
yields
become
increasingly
attractive.

The
MPC,
however,
believed that this trend would reverse
in the medium term given the current
efforts at further improving investor
confidence and restoring stability in the
foreign exchange market. The MPC
also
observed
improvements
in
financial stability indicators, including
non-performing
loans,
capital
adequacy and liquidity ratios of the
Deposit Money Banks (DMBs). It urged
the Bank to sustain its surveillance over
the Banking industry and take prompt
corrective measures to further improve
stability in the system.
The MPC in its consideration, assessed
the macroeconomic environment in
2018 and noted the modest stability
thus far achieved in domestic prices,
output growth and in the financial
system. The Committee was convinced
that the economy was on the right
path, but some key sectors continued
to experience significant challenges.
The
MPC
also
expressed concern
about the tepid growth outlook, partly
hinged on growing uncertainty in the
global financial markets, the poor
reception of the BREXIT deal by British
politicians,
continuing
trade
war
between the US and her major trading
partners,
as
well
as
the
commencement of US sanctions on
Iran. While the Committee noted the
economy’s
tepid
recovery
from
recession, it called for further efforts to
strengthen aggregate demand.
The MPC welcomed the moderation in
inflation in October 2018, reflected in
declining food prices. It believed that
given the negative output gap due to
prolonged weak aggregate demand
arising
from
salary
arrears
and
contractor
debt,
the
proposed
increase in the national minimum wage
will stimulate output growth.
CBN Monetary Policy Review

In reaching its decision, the MPC
considered the options to loosen,
tighten
or
hold.
The
Committee
continues
to
hold
the
view
that
loosening would encourage the flow of
credit to the real sector, help in
reducing the cost of credit and spur
business and investment spending, thus
reinforcing the CBN’s support for output
growth and economic recovery. It,
however, believed that doing so will
reverse more rapidly, the gains of price
and exchange rate stability so far
achieved. On tightening, the MPC held
the view that it will strengthen the
stability
of
the
foreign
exchange
market due to the dampening effect
on the demand for foreign exchange.
The flip side of this option is that it will
dampen
investment,
depress
aggregate demand, and widen the
output gap. On the option to hold, the
MPC recognized that it had held the
policy rate and other parameters
constant over the last several meetings.
It underscored that holding its policy
position constant was an expression of
confidence in the existing policies and
administrative measures deployed by
the Bank which have resulted in the
moderation in domestic price levels
and stability in the foreign exchange
market.
In light of the above, the MPC decided
by a vote of all eleven (11) members
present to retain the MPR at 14 per
cent; the asymmetric corridor of +200/-
500 basis points around the MPR; the
CRR at 22.5 per cent; and the Liquidity
Ratio at 30 per cent.
4.2.0
Instruments
of
Liquidity
Management
The Bank in the second half of 2018,
continued to conduct monetary policy
using various instruments in order to
achieve its objectives of price and
macroeconomic
stability.
These
instruments were: the Monetary Policy
Rate (MPR), the Cash Reserve Ratio
(CRR), Liquidity Ratio, Open Market
Operations
(OMO)
and
Discount
Window
Operations.
These
were
complemented
by
periodic
interventions in the foreign exchange
market.
4.2.1 Monetary Policy Rate (MPR)
The MPR remained the key instrument
for monetary policy management and
was maintained at 14.0 per cent in the
review period. The asymmetric corridor
around the MPR was also retained at
+200
and
-500
basis
points.
The
retention of the MPR and its asymmetric
corridor signalled confidence in the
various
policies
and
administrative
measures deployed by the Bank which
resulted in the moderation in domestic
price levels and stability in the foreign
exchange market. It also indicated the
Bank’s
commitment
to
a
tight
monetary policy stance.

4.2.2 Open
Market
Operations
(OMO)
The primary tool used for liquidity
management in the second half of

remained
the
Open
Market
Operations
(OMO).
There
was
an
increase in OMO sales in the period
CBN Monetary Policy Review

under review, amounting to N12,709.91
billion compared with N9,743.76 billion
and N7,472.21 billion recorded in the
first half of 2018 and the corresponding
period
of
2017,
respectively.
This
represented an increase of 30.44 per
cent and 70.10 per cent in the
preceding
half
year,
and
the
corresponding
period
of
2017,
respectively (Table 4.1). The increase in
the
volume
of
OMO
sales
was
attributed to increased frequency of
OMO auctions and the introduction of
special OMO auctions, as well as rollover of maturing bills. As in the
preceding half year, the increase was
also
due
to
incidences
of
DMBs
discounting OMO bills before maturity
in
the
secondary
market,
thus
expanding the monetary base and
leading to growth in money supply.
Table 4.1
OMO Bills Auction (July – December, 2018)
(N’billion)
Date

% Change
Jan
700.52 2,132.61
Feb
619.14 845.28
Mar
391.16 1,561.38
Apr
316.09 2,084.46
May
580.08 2,033.42
Jun
1,267.28 1,086.61

st Half
3,874.27
9,743.76
151.50
Jul
1,517.53
1,669.13
Aug
1,104.57
1,529.93
Sep
741.85
1,651.51
Oct
1,179.20
1,743.64
Nov
1,461.13
3,020.28
Dec
1,467.93
3,095.42

nd Half
7,472.21
12,709.91
70.10
Cumulative Figure
11,346.48
22,453.67
97.89
Source: Financial Market Department


Figure 4.1
OMO Bills Auction (July - December, 2018)


4.2.3 Reserve Requirements
To complement the MPR and OMO as
instruments of liquidity management,
the
Bank
deployed
Reserve
Requirements namely: Cash Reserve
and
Liquidity
Ratios
as
macroprudential instruments in the second
half of 2018. The Monetary Policy
Committee
maintained
the
Cash
Reserve Ratio (CRR) at 22.5 per cent of
total deposits during the period under
review, the same as in the preceding
half year, to address the persistent
liquidity surfeit in the banking system.
The liquidity ratio (LR) was also kept
unchanged at 30.0 per cent.

4.2.4 Standing Facilities
The Bank continued to deploy the
standing
facilities
(lending/deposit)
window in the second half of 2018 in
order
to
meet
the
daily
liquidity
requirements of Deposit Money Banks
(DMBs) and the Discount House (DH).
The
asymmetric
corridor
remained
unchanged at +200/-500 basis points
around the MPR during the period
under review.
CBN Monetary Policy Review

The
request
for
Standing
Lending
Facility (SLF), decreased by 33.76 per
cent from N7,027.46 billion in the first to
N4,655.06 billion in the second half of
2018. When compared with N25,664.35
billion in the corresponding period of
2017, the requests for SLF decreased by
81.86 per cent (Table 4.2).
At the Standing Deposit Facility (SDF)
window,
the
volume
of
deposits
decreased marginally by 4.58 per cent
to N10,194.71 billion in the second half
of 2018 from N10,684.38 billion in the first
half of 2018. The deposits, however,
represented a 138.47 per cent increase
relative to N4,275.00 billion in the
corresponding period of 2017 (Table
4.3).
Transactions
at
the
two
windows
resulted in a 51.47 per cent increase in
net deposits of N5,539.65 billion in the
second half of 2018 from N3,657.32
billion in the preceding half year. The
development
reflected
continued
liquidity surfeit in the banking system as
well as increased counter-party risks in
the interbank money market.


Table 4.2
CBN Standing Lending Facility (January 2017 –
December 2018) (N’billion)
Date

% Change
Jan
3,380.57
833.09
Feb
4,478.50
1,020.15
Mar
5,052.56
952.23
Apr
5,746.68
1,145.52
May
4,596.99
1,847.69
Jun
4,211.28
1,228.78

st Half
27,466.58
7,027.46
-74.41%
Jul
3,855.13
441.10
Aug
5,585.51
53.04
Sep
4,377.89
483.40
Oct
5,605.30
864.80
Nov
3,909.09
684.70
Dec
2,331.43
2,128.02
2nd Half
25,664.35
4,655.06
-81.86%
Total
53,130.93

Source: Financial Market Department

Figure 4.2
Standing Lending Facility (July - December, 2018)


CBN Monetary Policy Review

Table 4.3
CBN Standing Deposit Facility (January 2017 –
December 2018) (N’billion)
Date

% Change
Jan
1,855.98
1,919.78

Feb
804.07
1,144.10

Mar
889.35
1,508.75

Apr
593.79
2,952.20

May
665.28
1,527.04

Jun
702.28
1,632.51

1st Half
5,510.75
10,684.38
93.88%
Jul
825.1
1,643.71

Aug
315.24
2,073.10

Sep
411.43
2,070.85

Oct
405.21
1,345.34

Nov
691.97
2,267.19

Dec
1,626.05
794.52

2nd Half
4,275.00
10,194.71
138.47%
Total
9,785.75
20,879.09

Source: Financial Market Department

Figure 4.3
Standing Deposit Facility (July - December, 2018)

4.2.5
Foreign Exchange Intervention
During the second half of 2018,
stability in the foreign exchange market
was sustained by activities in the
various
segments,
particularly
the
Investors
and
Exporters
foreign
exchange
window.
The
success
recorded by the restriction of 41 items
from
access
to
official
foreign
exchange
sources
became
increasingly
apparent
in
the
real
economy,
following
increased
domestic production of those items. In
order
to
further
strengthen
the
outcome, the policy was expanded to
include fertilizer in the list of 41 items. In
addition, special foreign exchange
intervention
sales
to
BDCs
were
introduced
to
address
demand
pressure in the segment. The Bank also
continued its heterodox approach to
foreign exchange management by
implementing
existing
and
new
measures
including:
the
bilateral
currency swap between the CBN and
the
People’s
Bank
of
China;
intensification
of
the
policy
on
repatriation of export proceeds and
the
return
of
unutilized
foreign
exchange sourced from CBN auctions.
Others
were:
the
use
of
Bank
Verification Number (BVN) in BDC
transactions; sale of foreign exchange
by the Bank and International Money
Transfer Operators (IMTOs) to BDCs; as
well
as
special
foreign
exchange
auctions to targeted sectors and small
scale importers. These measures were
able to calm the market and guard
against
the
re-emergence
of
speculative pressures. As a result, total
supply of foreign exchange increased
substantially by 119.87 per cent to
US$20,887.20 million in the second half
of 2018 from US$9,499.92 million in the
first half of the year. The development
represented an increase of 170.89 per
cent when compared with US$7,710.49
million in the corresponding period of
2017 (Table 4.4). The increased supply
of foreign exchange was also due to
improved accretion to foreign reserves
CBN Monetary Policy Review

occasioned by the rise in oil receipts
and the inflow of US$2.8 billion Euro
bond proceeds in the second half of
2018. The external reserves position
improved significantly from US$39.35 at
end-December 2017 to US$42.54 billion
at
end-December
2018.
Notwithstanding the moderate decline
in oil prices toward the end of the
second half of 2018, private inflows
returned to the economy to take
advantage
of
cheaper
naira
denominated assets thus, helping to
support
foreign
exchange
market
stability.

Table 4.4
Foreign Exchange Supply by the CBN (US$
Million)

Date

% Change
Total FX Supply (including
Forward Sales)
Total FX Supply
(including Forward Sales)
Jan
768.76
1,343.12
Feb
876.48
1,237.26
Mar
1,309.44
1,300.93
Apr
1,919.30
1,422.35
May
2,109.93
2,039.51
Jun
1,121.04
2,156.75

st Half
8,104.95
9,499.92
17.21%
Jul
1,207.00
2,966.31
Aug
1,449.49
3,733.66
Sep
1,220.33
3,868.67
Oct
1,315.99
3,481.15
Nov
1,210.99
3,617.03
Dec
1,306.69
3,220.38
2nd Half
7,710.49
20,887.20
119.87%
Source: Financial Market Department


Figure 4.4
Total FX Supply (including Forward Sales) (July -
December, 2018)

Jul
Aug
Sep
Oct
Nov
Dec
US$'Million
Total FX Supply (including Forward Sales)


4.3
Developments in the Monetary
Aggregates
During the review period, the major
monetary
aggregates
performed
above their indicative targets. The
development was as a result of the
expansion in both Net Foreign Assets
(NFA) and Net Domestic Assets (NDA)
of the banking system. The increase in
NDA was as a result of the substantial
growth in credit to government due to
increased deficit financing in the face
of moderately improving government
receipts. The growth in NFA was due to
relatively higher global crude oil prices
as well as proceeds from issuance of
Eurobonds.

4.3.1
Broad Money (M2)
Broad Money (M2) grew by 9.13 per
cent to N27,078.83 billion at endDecember 2018 from N24,814.00 billion
at end-June. Compared with the endDecember 2017 level of N24,140.63
billion, M2 increased by 12.17 per cent,
which was above the 2018 indicative
growth target of 10.48 per cent.
CBN Monetary Policy Review

Figure 4.5
Money Supply (M1), (M2) and (M3) (July –
December, 2018)
Jul-18
Aug-18
Sep-18
Oct-18
Nov-18
Dec-18
M3 29,513,533.33 29,704,814.88 30,851,051.87 32,026,500.03 31,859,474.03 33,421,742.17
M2 24,971,101.93 24,859,346.47 25,560,662.33 26,041,903.87 25,467,425.55 27,078,829.11
M1 10,668,002.07 10,448,156.83 10,757,685.14 11,241,391.38 10,688,208.65 11,751,139.21

Naira


Figure 4.6
Growth in Money Supply (M1), (M2) and (M3)
(July - December, 2018)

Jul-18
Aug-18
Sep-18
Oct-18
Nov-18
Dec-18
per cent
M3 Growth
M2 Growth
M1 Growth

4.3.2
Narrow Money (M1)
Narrow Money (M1) increased by 9.81
per cent to N11,751.14 billion at endDecember 2018 from N10,701.11 billion
at end-June 2018. On a year-on-year
basis, M1 grew by 5.15 per cent when
compared with N11,175.57 billion at the
end-December
2017.
This
was,
however, below the indicative growth
target of 7.32 per cent for the year,
implying
that
M1
under-performed
during the review period (Figures 4.4
and 4.5).
4.3.3 Net Foreign Assets (NFA)
Net Foreign Assets (NFA) increased
marginally
by
0.33
per
cent
to
N18,397.82 billion at end-December
2018 from N18,337.53 billion at endJune 2018. Compared with the endDecember 2017 figure of N15,520.76
billion, NFA grew by 18.54 per cent,
above the indicative growth target of
14.50
per
cent.
The
observed
performance of NFA in the review
period was attributed to improved
crude
oil
prices,
receipts
from
Eurobond
issuance,
as
well
as
improved capital inflows occasioned
by the tight monetary policy stance of
the Bank.
4.4
Net Domestic Assets (NDA)
Net Domestic Assets (NDA) increased
by 36.50 per cent to N15,023.93 billion
at
end-December

from
N11,006.30 billion at end-June 2018.
Compared with the end-December
2017 figure of N13,148.82 billion, NDA
grew by 14.26 per cent, which was
marginally above the indicative growth
target of 13.09 per cent for the year.
This was attributable to the significant
growth in credit to the government.

Figure 4.7
Net Domestic Asset (NDA) (July – December,
2018)
Jul-18
Aug-18
Sep-18
Oct-18
Nov-18
Dec-18
Net Domestic Asset

N'Billion


CBN Monetary Policy Review

Figure 4.8
NDA, NDC and Other Assets (Net) – (July –
December, 2018)
Jul-18
Aug-18
Sep-18
Oct-18
Nov-18
Dec-18
Net Domestic Assets

Net Domestic Credit

Other Assets (Net)

N'Billion


4.4.1
Credit to the Government (Cg)
Credit to government (Cg) in the
second half of 2018 grew by 48.12 per
cent to N4,867.58 billion at endDecember 2018 from N3,286.34 billion
at end-June 2018. Compared with the
end-December 2017 level of N3,640.93
billion, Cg grew by 33.69 per cent,
significantly
above
the
indicative
growth benchmark of 17.38 per cent.
The development was attributed to
increased deficit spending by the
government.

4.4.2
Credit to the Private Sector (Cp)
Credit to the private sector (Cp)
increased marginally by 2.00 per cent
to N22,726.58 billion at end-December
2018 from N22,281.87 billion at endJune 2018. Compared with the endDecember 2017 figure of N22,290.66
billion, Cp also rose marginally by 1.96
per cent. This was substantially below
the indicative growth target of 12.39
per
cent
for
2018.
The
weak
performance was partly explained by
the significant growth in credit to
government which crowded out the
private sector.
Figure 4.9
Domestic Credit to Private Sector (July –
December, 2018)
Jul-18
Aug-18
Sep-18
Oct-18
Nov-18
Dec-18
Credit to Private Sector

N'Billion

4.4.3
Reserve Money (RM)
Reserve Money (RM) increased by
12.19 per cent to N7,135.73 billion at
end-December 2018 from N6,360.47
billion at end-June 2018. Compared
with its end-December 2017 level of
N6,484.30 billion, RM increased by 10.05
per cent but was below the indicative
growth benchmark of 21.63 per cent.
The growth in RM was due to growth in
its components, Currency-in-Circulation
(CIC) and bank deposits. In the review
period, CIC grew by 22.57 per cent
from N1,900.67 billion to N2,329.71
billion, while bank deposits expanded
by 7.76 per cent from N4,459.79 billion
to N4,806.02 billion. A summary of the
major
monetary
aggregates
and
provisional
outcome
as
at
endDecember 2018 is presented in Table
4.5.


CBN Monetary Policy Review

Table 4.5
Monetary Aggregates Outcomes (Growth in % except otherwise stated)
Actual
Actual
Actual
Benchmark
H2
H1
H2

M3 (N'b)

M3 (%)

M2 (N'b)

M2 (%)

M1 (N'b)

M1 (%)

RM (N'b)

RM (%)

NDA (N'b)

NDA (%)

NDC (N'b)

NDC (%)

Cg (N'b)

Cg (%)

Cp (N'b)

Cp (%)

NFA (N'b)

NFA (%)

Variables
H2:2018 Deviation
from Benchmark
Change in H2
over H1, 2018


CBN Monetary Policy Review

BOX 4.1: INTRODUCING THE M3 MONETARY AGGREGATE IN NIGERIA
1.0 Introduction
A money supply aggregate generally refers to a measure of a group of safe assets
that can be used to hold financial investments and make payments for goods and
services by businesses and households. Such assets are held in savings and
checking account balances across the banking system and thus provide
information necessary to guide the Central Bank and other institutions in taking vital
policy decisions. The economy’s monetary base is defined as the sum of total
Currency-in-Circulation plus Reserve Balances of deposit money banks held by the
Central Bank plus Currency in bank’s vaults. In adjusting money supply, the Central
Bank expands or contracts this monetary base. Since money supply has overtime
been recognized to affect the behaviour of some macroeconomic aggregates
such as inflation, central banks consistently place reliance on the accurate
measure of money supply which guides their monetary policy. The relationship
between money supply and some macroeconomic variables has been unstable
and the subject of empirical research in many countries.
The concepts of money and money supply have varied as new forms of money
evolve; thus existing measures tend to be reviewed constantly. Before the mid2000s, the standard measures of money supply were Narrow Money M1and Broad
Money M2. After 2006, The United States Federal Reserve Bank adopted a more
encompassing form of Broad Money M3, following which M4 was also defined.
2.0 Components of the Various Definitions of Money Supply
Across the financial system of most jurisdictions, the following measures of money
supply exist:
1) Narrow Money (M0) = The total of all Physical Currency Inside & Outside Banking
System.
2) Narrow Money (M1) = Currency held by the Public + Transactional Deposits at
Deposit Holding Institutions.
3) Broad Money (M2) = M1 + Savings and Time Deposits
4) Broad Money (M3) = M2 + Large and Long-Term Deposits
5) Broad Money (M4) =M3 + Commercial Paper + Treasury Bills
Across various central banks, however, these definitions are modified slightly to suit
local practices and conveniences.

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3.0 Money as defined by Selected Central Banks
The US Federal Reserve Bank (US Fed)
The US Fed used to publish three measures of money supply (M1, M2 and M3) up to
March 2006 when it ceased the publication of M3. The Bank decided to cease
publication of this aggregate after observing that developments in M3 did not
convey any additional information that could not be gleaned from M2. As such,
M3 only had a minor impact on total money supply and thus did not derail
monetary policy in any significant manner.
The Bank of England (BoE)
The BoE uses only two measures of money supply to conduct monetary policy
(Narrow Money, M0 and Broad Money, M4). The BoE defines M0 as cash outside the
Bank of England plus Commercial Bank’s Operational Deposits with the Bank of
England; and M4 as Cash in Circulation (in the public and non-bank firms) plus
private sector retail bank & building society deposits plus private sector wholesale
bank and building society deposits and certificates of deposits.
The European Central Bank (ECB)
The ECB uses three measures of money supply (M1, M2 & M3). The Bank defines M1
as currency in circulation plus overnight deposits; M2 as M1 plus deposits with an
agreed maturity of up to 2 years plus deposits redeemable at a period of notice of
up to three months; and M3 as M2 plus repurchase agreements plus money market
funds shares/units plus debt securities up to two years
The Reserve Bank of India (RBI)
The RBI uses five measures of money supply (M0, M1, M2, M3 & M4). The Bank
defines M0 as currency in circulation plus bankers deposits with RBI plus other
deposits with RBI plus net credit to the government plus RBI credit to the
commercial sector plus RBIs claims on banks plus RBIs net foreign assets plus
government’s currency liabilities to the public less RBI’s net non-monetary liabilities.
M1 is defined as currency with the public plus deposit of the public (demand
deposits with the banking system plus other deposits with RBI. M2 is defined as M1
plus savings deposits with the post office savings banks. M3 is defined as M1 plus
time deposits with the banking system plus net credit to the government plus Bank
credit to the commercial sector plus net foreign exchange assets of the banking
sector plus government’s currency liabilities to the public less net non-monetary
liabilities of the banking sector.
From the above review, it is clear that the type of monetary aggregates utilized
depends on the nature and growth of the banking system, the instruments
CBN Monetary Policy Review

available in the financial market and the money holding behaviour of economic
agents.
4.0 Money Supply at the Central Bank of Nigeria and the Introduction of M3
For the central banks reviewed, the definition of the various measures of money
supply varied, to adequately capture local practices and usage of money. The RBI
appears to adopt the broadest coverage of the four central banks reviewed. The
US Fed had initially migrated to M3 but reverted back to M2 as it did not see any
additional information provided by M3; while the BoE merged M2 and M3 to form a
new aggregate called M4. The ECB on the other hand continues to publish data
on M1, M2 & M3 as it finds all three provide relevant information for monetary
policy.
At the Central Bank of Nigeria, data on M2 in recent times appeared not to be
consistent with the behavior of key macroeconomic indicators such as inflation
and output growth, thus raising considerable concern as to the continued
relevance of M2 as the measure for money supply. There was, therefore the need
to migrate to M3 to improve the efficacy of monetary policy.
Over time, the Central Bank observed development in the secondary market
where Deposit Money Banks (DMBS) engage in discounting OMO bills in their
holdings.
Discounting of these bills to institutional investors, large corporates and high net
worth individuals summarily constitutes the creation of money under the fractional
reserve banking system, and thus has huge implications for the growth of money
supply.
The Bank’s initial reaction was to issue regulatory measures to curb the existence of
such a secondary market due to its distortionary impact on money supply growth. It
was however reasoned that such regulatory measures to curb activities in the
market may end up being viewed as market interference and thus counterproductive as this may indirectly impact financial intermediation, credit delivery to
the real economy and cross border capital flow. Furthermore, the suspected
players in the secondary market are big institutional portfolio investors who are
actively seeking a liquid market to invest their portfolio capital. The practical option
was that the Central Bank decided to embrace the knowledge that such a market
exists and is functionally liquid. The Bank in essence recognized this new class of
money supply as it will have a pronounced fractional/multiplier effect on the
monetary base of the economy.
In doing so, the Central Bank of Nigeria reviewed the volume of the bills issued to
DMBs that had been discounted to accommodate the additional growth and
fractional/multiplier effect of the bills taken off their books. This enabled the CBN to
CBN Monetary Policy Review

determine the new growth rate of monetary aggregates to include these
discounted bills plus the existing measure of M2 thus the additional contribution to
the monetary base and money supply growth yielded M3. Following this
development, the new structure of money supply aggregates in the Bank is given
below:
1) Narrow Money M1= Currency in circulation + Currency held in bank vaults
+ Demand Deposits
2) Broad Money M2= M1 + Quasi money
3) Broad Money M3 = M2 + OMO Bills discounted by DMBs + Treasury bills
discounted by DMBs.


CBN Monetary Policy Review

CHAPTER 5
5.0
DEVELOPMENTS
IN
THE
FINANCIAL MARKETS
n the review period, the Nigerian
financial
markets
experienced
episodes
of
capital
outflow,
reflecting developments in the global
and domestic financial and economic
environments. Primary amongst the
global
developments
were:
the
continued trade tensions between the
US
and
its
key
trading
partners,
particularly,
China;
progressive
normalization of monetary policy by
the
US
and
the
beginning
of
normalization
in
the
euro
area;
increasingly difficult BREXIT negotiations
between the United Kingdom and the
European
Union;
as
well
as
the
existence of pockets of geo-political
tensions
in
the
Middle
East.
The
weakening of crude oil prices also
threatened
to
reverse
the
tepid
recovery amongst major oil exporting
countries. In some emerging market
economies, the rapid outflow of capital
to US dollar denominated assets reintroduced exchange rate pressures,
which modestly passed through to
domestic prices.
Activities
in
the
money
market
strengthened during the review period,
with
market
rates
fluctuating
in
response to liquidity conditions in the
banking system, sometimes breaching
the upper band of the Standing
Facilities Corridor. With the US Federal
Reserve pushing forward with monetary
policy normalization, capital outflow
intensified during the early part of the
review period. This was, however,
contained towards the end of the
period as the CBN maintained a steady
pace of intervention in the foreign
exchange market to boost investor
confidence. In addition, the Bank
increased foreign exchange sales to
BDCs and encouraged more direct
transactions in the naira and the yuan,
through the bilateral currency swap
between the CBN and the People’s
Bank of China. This initiative greatly
eased
foreign
exchange
demand
pressure.
These
developments
notwithstanding, the Nigerian stock
market witnessed a decline in the AllShare Index (ASI) by 17.89 per cent in
the review period, from 38,278.55 at
end-June, 2018 to 31,430.50 at endDecember, 2018.
5.1
The Money Market
The money market remained active
during the review period, with rates
fluctuating in response to liquidity
conditions in the banking system. The
fluctuation
in
market
rates
were
traceable
to:
Federation
Account
Allocation
Committee
(FAAC)
disbursements; maturing CBN bills and
other government securities; and OMO
auctions.
Others
included:
implementation of the 2018 Federal
Government
budget;
ongoing
intervention by the CBN in the real
economy and spending towards the
2019 general elections. The increased
transactions in the Open Buy Back
(OBB) segment of the money market,
compared with the Interbank (IB)
segment, reflected the increased risk
I
CBN Monetary Policy Review

perception in the money market as a
result of the ensuing volatility.
In
consideration
of
these
developments, the MPC maintained a
tight
monetary
policy
stance
throughout the period. Accordingly,
the MPR was maintained at 14.0 per
cent
along
with
the
asymmetric
corridor of +200/-500 basis points, as
well as the Cash Reserve Ratio (CRR) of
22.5 per cent and Liquidity Ratio (LR) of
30.0 per cent.
5.1.1
Short-term
Interest
Rate
Developments
In the second half of 2018, a number
of factors shaped liquidity conditions in
the banking system and hence the
development of short term rates in the
money market. These were: statutory
FAAC disbursements; OMO auctions;
issuance of Nigerian Treasury Bills (NTB);
maturing government securities and
CBN bills as well as the liquidity impact
of
the
implementation
of
the
expansionary 2018 FGN budget. OMO
remained
the
key
instrument
for
managing liquidity in the banking
system,
supported
by
continued
interventions in the foreign exchange
market by the Bank. While there were
occasions of inactivity at the interbank
segment, the OBB segment remained
largely active throughout the review
period. As a result, the interbank call
rate ranged between 6.44 and 22.68
per cent, averaging 11.36 per cent,
while the OBB rate ranged between
6.76 and 22.94 per cent, averaging
11.86 per cent. Overall, the average
interbank call rate was marginally lower
than the OBB rate.
Table 5.1
Weighted Average Monthly Money Market
Interest Rates (July - December 2018)
MONTHS
Interbank OBB
MPR
SDF
SLF
NIBOR -
30DAYS
Jul-18

11.44 14.00

16.00
13.18
Aug-18
6.44
8.42
14.00

16.00
11.87
Sep-18
8.68
7.64
14.00

16.00
12.90
Oct-18
14.18
13.93 14.00

16.00
13.71
Nov-18
7.17
6.76
14.00

16.00
12.44
Dec-18
22.68
22.94 14.00

16.00
16.09
Average

Source: (Statistics, CBN)
Figure 5.1
Weighted Average Monthly Money Market
Interest Rates (July - December 2018)


(i)
The Interbank Call Rate
During the review period, there were
several no-transaction days in the
interbank call segment of the money
market. The high frequency of nontrading days in the uncollateralized
segment of the market, in preference
for the collateralized segment, clearly
signals increased risk aversion amongst
deposit money banks (DMBs), resulting
CBN Monetary Policy Review

in wider fluctuations in money market
rates. The rate decreased from 9.0 per
cent in July to 6.44 per cent in August,
rising sharply to 14.18 per cent in
October, before declining to 7.17 per
cent in November and closed at a high
of 22.68 per cent in December, 2018.
The interbank call rate averaged lower
at 11.36 per cent in the second half of
2018, compared with 15.12 per cent in
the preceding period. A review of the
daily rates showed that the call rate
ranged from 2.50 to 60.00 per cent
between July and December 2018.
Various factors were responsible for the
hikes recorded in the review period.
These included: issuance of OMO bills;
increased capital outflows by portfolio
investors,
following
an
increased
perception of sovereign risk in the buildup to the 2019 general elections;
amongst
other
factors.
By
endDecember 2018, the rate eased to
14.00 per cent following the monthly
statutory FAAC injection, payment of
matured
OMO
bills,
and
foreign
exchange purchases. In summary, the
injections and withdrawals of liquidity,
as well as the Bank’s sustenance of its
tight monetary policy influenced the
movement of the market rates.

Figure 5.2
Daily Interbank Call Rate (July– December 2018)

(ii)
The Open Buy Back (OBB) Rate
The OBB segment of the money
market remained active throughout
the review period, recording no nontrading days. The OBB rate fell from
11.44 per cent in July to 8.42 per cent in
August, before rising to 13.93 per cent
in October, 2018. The rate, further
dropped to 6.96 per cent in November
before closing at a high of 22.94 per
cent in December, 2018. The spikes
observed in the OBB rate in October
and December 2018, were largely
associated with dips in overall market
liquidity conditions attributed to the
issuance of OMO bills. The OBB rate
averaged lower at 11.86 per cent in
the review period compared with 12.58
per cent in the preceding half year.
Analysis of the daily rates showed that
the OBB rates oscillated between 2.84
and 63.00 per cent between July and
December 2018. By end-December
2018, the rate eased to 18.95 per cent
following the monthly statutory FAAC
injections, payments of matured OMO
bills, and foreign exchange purchases.
Figure 5.3
Daily Open Buy Back Rate (July– December
2018)

CBN Monetary Policy Review

(iii)
The Nigeria Interbank Offered
Rate (NIBOR)
Relative stability was observed in the
review period across all tenors of the
Nigerian money market reference rate,
the NIBOR. On average, the rate
generally
fluctuated
upwards
in
tandem
with
movements
in
the
interbank call and OBB segments. The
weighted average 30-day NIBOR, fell
from 13.18 per cent in July to 11.87 per
cent in August 2018, but rose to 13.71
per cent in October, and closed at
16.09 per cent in December 2018.
During the review period, the NIBOR
averaged 13.37 per cent compared
with 14.25 per cent in the preceding
half
year,
indicating
improved
financing conditions in the money
market (Table 5.1).

5.2
Foreign Exchange Market
In the second half of 2018, the
continued normalization of monetary
policy
in
some
major
advanced
economies,
particularly
the
United
States, led to the appreciation of US
dollar denominated assets and thus
increased
capital
reversals
from
emerging market economies, posed a
considerable challenge to the stability
in
the
Nigerian
foreign
exchange
market. The increased accretion to
external reserves in the first half of 2018
and
improved
activities
at
the
Investors’ and Exporters’ (I&E) window
sustained the stability in the foreign
exchange market in the review period.
The
Bank
also
continued
the
implementation of existing demand
management measures such as: the
restriction
of
access
to
foreign
exchange for 41 items and the inclusion
of fertilizer in the list; monitoring the
adoption of Bank Verification Number
(BVN)
in
BDC
transactions;
the
continuation
of
the
policy
on
repatriation of export proceeds as well
as return of unutilized foreign exchange
sourced from the CBN auctions. The
direct purchase of the Chinese yuan by
importers under the naira-yuan swap
deal
also
helped
moderate
the
demand pressure in the market. On the
supply
side,
market
liquidity
was
sustained through direct interventions
and periodic sales to BDCs by the Bank
and
International
Money
Transfer
Operators
(IMTOs),
special
foreign
exchange auctions to the real sector
and sales to small and medium scale
enterprises. These policies, amongst
others, provided stability in the foreign
exchange market in the review period.

Figure 5.4
Daily Naira/US Dollar Exchange Rate (July -
December 2018)


CBN Monetary Policy Review

5.2.1
Average Exchange Rates
The exchange rate at the Interbank
foreign exchange market depreciated
marginally by 0.19 per cent, to an
average of N306.38/USD in the second
half of 2018 from N305.79/USD in the first
half of 2018. In the BDC segment, the
rate appreciated by 0.40 per cent,
from an average of N362.25/USD to
N360.79/USD in the same period, a
reflection
of
trend
towards
convergence in market rates (Table
5.2).
Table 5.2
Average Monthly Spot Exchange Rates (Jan –
Dec 2018) (N/US$)
Month / Year
Interbank
Rate
BDC Rate
2018: Jan
305.78
363.20
Feb
305.90
362.48
Mar
305.74
362.07
Apr
305.61
362.25
May
305.83
362.86
Jun
305.87
360.66
Average
305.79
362.25
2018: Jul
305.81
359.36
Aug
306.06
359.00
Sep
306.27
359.25
Oct
306.51
360.81
Nov
306.72
362.88
Dec
306.92
363.46
Average
306.38
360.79

5.2.2
End-Period (Month) Exchange
Rates
In the second half of 2018, the
performance of the naira at the
interbank and BDC segments of the
foreign exchange market was mixed.
At the interbank segment, the naira
depreciated by 0.41 per cent to
N306.47/USD at end-December, 2018
from N305.78/USD at end-June 2018. At
the BDC segment however, the naira
appreciated by 0.20 per cent to
N361.29/USD at end-December 2018
from N362.0/USD at end-June 2018. The
narrowing of the premium between the
two markets reflects the continued
effectiveness of the Bank’s foreign
exchange policy measures (Figure 5.5
and Table 5.3).
Table 5.3
End-Month Exchange Rates (Jan – Dec 2018)
(N/US$)
Month /
Year
Interbank
Rate
BDC Rate
2018: Jan
305.70
363.00
Feb
305.90
362.00
Mar
305.65
362.00
Apr
305.70
362.00
May
305.95
362.50
Jun
305.75
360.50
Average
305.78
362.00
2018: Jul
305.90
359.00
Aug
306.15
359.00
Sep
306.35
360.00
Oct
306.60
361.75
Nov
306.80
367.00
Dec
307.00
361.00
Average
306.47
361.29
5.2.3
Nominal
and
Real
Effective
Exchange Rates
The Nominal Effective Exchange Rate
(NEER) appreciated by 5.09 per cent to
an average of 181.73 in the second
half from an average of 191.48 in the
first half of 2018. When compared with
CBN Monetary Policy Review

190.17 in the corresponding period of
2017, it also appreciated by 4.44 per
cent.
Similarly,
the
Real
Effective
Exchange Rate (REER) appreciated by
9.12 per cent to an average of 88.20 in
the second half from an average of
97.05 in the first half of 2018. When
compared
with
99.85
in
the
corresponding period of 2017, the REER
appreciated by 11.67 per cent (Table
5.4). From the foregoing, the naira
appreciated in both nominal and real
terms relative to the currencies of
Nigeria’s major trading partners in the
review period. This reflects a reduced
inflation
pass-through
to
domestic
prices
from
its
trading
partners
occasioned by relative stability in the
foreign exchange market (Table 5.4
and figure 5.6).
Table 5.4
Nominal and Real Effective Exchange Rates
Indices (Jul 2017 – Dec 2018)

NEER
REER
2017: Jul
193.31
102.98
Aug
189.77
100.45
Sep
188.98
99.40
Oct
187.67
98.21
Nov
189.63
98.69
Dec
191.63
99.37
2017:H2 Average
190.17
99.85
2018: Jan
196.82
101.42
Feb
194.48
99.75
Mar
194.86
99.13
Apr
191.14
96.68
May
187.45
93.96
Jun
184.14
91.35
2018:H1 Average
191.48
97.05
2018: Jul
184.94
91.42
Aug
181.18
88.82
Sep
181.32
88.27
Oct
179.22
86.75
Nov
181.68
87.18
Dec
182.01
86.74
2018:H2 Average
181.73
88.20


Figure: 5.5
Nominal and Real Effective Exchange Rates
Indices (July 2017 – December 2018)

5.2.4 Foreign Exchange Flows through
the CBN
Foreign exchange inflows through the
CBN decreased by 4.93 per cent to
USD28,910.42 million in the second half
of 2018, from USD30,409.51 million in the
preceding half year. It was, however,
an increase of 13.21 per cent when
compared with USD26,861.61 million in
the corresponding period of 2017.
Outflows rose by 45.53 per cent to
USD33,388.79 million in the second half
from USD22,942.11 million in the first half,
and by 88.37 per cent compared with
US$17,724.26
million
in
the
corresponding
half
of
2017.
The
transactions resulted in a net outflow of
USD4,478.37 million in the second half
of 2018 in contrast to the net inflows of
USD7,467.40 million and USD9,137.35
million
in
the
previous
and
corresponding half-years, respectively
(Table 5.5 and Figure 5.7). The net
outflow in the review period was due
largely to increased capital reversals
triggered
by
the
progressive
normalization of monetary policy in the
advanced economies, particularly in
the US, as well as the heightened
CBN Monetary Policy Review

perception of sovereign risk as the 2019
general elections approached. Also,
the moderation in crude oil prices
during the period reduced inflows and
accretion to external reserves required
to moderate the outflows.

Table 5.5
Monthly Foreign Exchange Flows through the CBN
(July 2017 – December 2018)
Dates
Inflow
(CBN)
Total
Outflow
(CBN)
Net Flow
(CBN)
Jul-17
3,867.04
3,358.32
508.72
Aug-17
3,943.45
3,594.32
349.13
Sep-17
4,425.53
2,390.41
2,035.12
Oct-17
4,132.80
2,839.15
1,293.65
Nov-17
6,811.96
2,957.60
3,854.36
Dec-17
3,680.83
2,584.46
1,096.37
2017 H2
Total
26,861.61 17,724.26
9,137.35
Jan-18
4,212.56
2,734.38
1,478.18
Feb-18
7,303.15
3,163.07
4,140.08
Mar-18
5,076.48
3,754.12
1,322.36
Apr-18
4,238.05
3,437.72
800.33
May-18
4,373.01
4,821.91
-448.90
Jun-18
5,206.51
5,030.91
175.60
2018 H1
Total
30,409.51 22,942.11
7,467.65
Jul-18
4,722.44
6,014.85
-1,292.41
Aug-18
3,957.38
5,102.75
-1,145.36
Sep-18
4,239.49
6,270.21
-2,030.72
Oct-18
2,871.70
4,929.03
-2,057.33
Nov-18
8,061.53
5,216.64
2,844.89
Dec-18
5,057.88
5,855.31
-797.44
2018 H2
Total
28,910.42 33,388.79
-4,478.37


Figure 5.6
Monthly Foreign Exchange Flows through the CBN
(Jul 2017 – Dec 2018)


5.2.5 Foreign Exchange Flow through
the Economy
Total foreign exchange inflow to the
Nigerian economy declined by 37.92
per cent to US$41,552.52 million in the
second half of 2018, from US$66,931.28
million in the first half. It also decreased
by 26.65 per cent when compared with
US$56,646.51
million
in
the
corresponding period of 2017. Similarly,
gross
foreign
exchange
outflow
decreased
by
6.27
per
cent
to
US$23,364.83 million in the second half
of 2018, from US$24,928.57 million in the
first half. It however, increased by 18.32
per
cent
when
compared
with
US$19,746.94
million
in
the
corresponding period of 2017.

Consequently, total foreign exchange
flows through the economy in the
review period resulted in a lower net
inflow
of
US$18,187.69
million,
compared with US$42,002.71 million in
the
preceding
half
year
and
US$36,899.57
million
in
the
corresponding period of 2017. The
decrease in net inflow through the
economy
in
the
review
period
CBN Monetary Policy Review

reflected the impact of continued
capital reversals, the effectiveness of
the various foreign exchange demand
management measures by the Bank,
as well as reduced foreign exchange
receipts from moderating oil prices.

5.3
Capital Market
The Nigerian capital market was
mostly bearish in the second half of
2018. The development reflected the
flight to safety by investors as yields on
US dollar asset improved coupled with
the rising domestic sovereign risk which
resulted in persistent sell-off and profit
taking activities. The dwindling price of
crude oil, slowing accretion to external
reserves, and increasing domestic and
foreign debt stock, amongst others,
contributed significantly to dampen
investor sentiments in the review period.

5.3.1
Equities Market
The All-Share Index (ASI) decreased
by 17.89 per cent to 31,430.50 at endDecember 2018 from 38,278.55 at endJune 2018. It also decreased by 17.81
per cent compared with 38,243.19 at
end-December 2017. Similarly, Market
Capitalization
(MC)
decreased
by
15.50 per cent to N11.72 trillion at endDecember 2018 from N13.87 trillion at
end-June 2018. When compared with
N13.61 trillion at end-December 2017, it
decreased by 13.89 per cent. These
significant decreases reflected the selloff and flight to safety of portfolio
investors in the light of progressive
normalization of monetary policy in
some advanced economies and rising
perception of domestic soverign risk as
the country moves towards a general
election. There was also increased
policy uncertainty as the preparations
for the elections reduced focus on
governance.
CBN Monetary Policy Review

Table 5.6
Monthly Foreign Exchange Flows through the Economy (January 2017 – December 2018)
(US$ Million)
PERIOD
Inflow
(CBN)
Inflow
(Autonomous)
Total
Inflows
Outflows
(CBN)
Outflows
(Autonomous)
Total
Outflow
Net
Flow
Net Flow
(CBN)
Net Flow
(Autonomous)
Jan-17

Feb-17

Mar-17

Apr-17

May-17

Jun-17

2017 H1 Total 15,933.36

Jul-17

Aug-17

Sep-17

Oct-17

Nov-17

Dec-17

2017 H2 Total 26,861.61

Jan-18

Feb-18

Mar-18

Apr-18

May-18

Jun-18

2018 H1 Total 30,414.98

Jul-18

Aug-18

Sep-18

Oct-18

Nov-18

Dec-18

2018 H2 Total 17,926.59


Source: Trade and Exchange Department.


Figure 5.7
Monthly Foreign Exchange Flows through the
Economy (Jan 2017 – Dec 2018) (US$ Million)


Table 5.7
NSE All-Share Index (ASI) and Market
Capitalization (MC) (December 2017 – December
018)
Date
ASI
MC(Equities)
N’Trillion)
Dec-17
38,243.19
13.61
Jan-18
44,343.65
15.90
Feb-18
43,330.54
15.55
Mar-18
41,504.51
14.99
Apr-18
41,268.01
14.95
May-18
38,104.54
13.80
Jun-18
38,278.55
13.87
Jul-18
37,017.78
13.41
Aug-18
34,848.45
12.72
Sep-18
32,766.37
11.96
Oct-18
32,466.27
11.85
Nov-18
30,874.17
11.27
Dec-18
31,430.50
11.72
Source: NSE

CBN Monetary Policy Review

Figure 5.8
NSE ASI and MC (December 2017– December

Dec-17
Jan-18
Feb-18
Mar-18
Apr-18
May-18
Jun-18
Jul-18
Aug-18
Sep-18
Oct-18
Nov-18
Dec-18
(N' Trillion)
All-Share Index
Equities Market Capitalisation (N' Trillion)

Source: NSE

Figure 5.9
NSE ASI and MC (June 2018 – December 2018)

Jun-18
Jul-18
Aug-18
Sep-18
Oct-18
Nov-18
Dec-18
(N' Trillion)
All-Share Index
Equities Market Capitalisation (N' Trillion)

Source: NSE

5.3.2 Market Turnover
In the second half of 2018, aggregate
stock market turnover decreased by
48.31 per cent to 34.56 billion shares,
valued at N400.50 billion in 400,384
deals compared with 66.86 billion
shares, valued at N798.63 billion in
646,829 deals in the first half of 2018.
Market turnover on a year-on-year
basis, also decreased by 41.81 per cent
from 59.39 billion shares, valued at
N803.82
billion
in
491,300
deals.
Although,
total
foreign
portfolio
investment inflows in the second half of
2018 exceeded outflows by N194.85
billion, the slowdown in the equities
market
may
imply
that
portfolio
investors are showing a preference for
short tenored investments in the money
market.

5.3.3 Sectoral Contribution to Equity
Market Capitalization
In spite of the slowdown in market
activity,
the
Construction
sector
continued to dominate overall market
capitalization, led by
the
Building
materials sub-sector. The sub-sector’s
contribution rose to 30.02 per cent at
end-December 2018 from 29.85 per
cent in the preceding half year. The
continued dominance of this subsector was largely attributable to the
share of Dangote cement in the
market. Other major sub-sectors were:
banking;
food
&
beverages;
and
breweries, with market shares of 14.16,
13.41 and 9.55 per cent, respectively,
at end-December 2018 (Figure 5.12).

Figure 5.10
NSE Market Capitalisation by Sector as at EndJune 2018
Food and Beverages
13.80%
Banking
14.66%
Insurance
1.06%
Breweries
11.35%
Conglomerates
0.78%
Oil and Gas
2.28%
Building Materials
29.85%
Other Sectors
26.22%

Source: NSE

CBN Monetary Policy Review

Figure 5.11
NSE Market Capitalisation by Sector as at EndDecember 2018
Food and Beverages
13.41%
industrial goods
3.21%
Banking
14.16%
Insurance
0.99%
Agriculture
1.12%
Breweries
9.55%
Conglomerates
0.74%
Oil and Gas
2.29%
Building Materials
30.02%
Construction
0.59%
Personal Household
products
2.29%
Services
1.08%
Other Sectors
20.55%

Source: NSE

5.3.4 The Warren Buffett Valuation
Metric and Nigeria’s Equities
Market
During the review period, the Warren
Buffett valuation metric showed that
the
Nigerian
equities
market
was
moderately undervalued. The index
measures the market value of securities
as a ratio of GDP to determine overall
valuation of the market. At 66.16 and
62.0 per cent in the third and fourth
quarters of 2018, the metric was below
the threshold of normal valuation of
75.0 - 115.0 per cent. Below 75.0 per
cent, the market is undervalued and
above 115.0 per cent, the market is
overvalued. The continued incidence
of weak corporate earnings against the
backdrop
of
improving
macrofundamentals, the flight to safety and
quality
as
a
result
of
political
uncertainty
and
monetary
policy
normalization
in
some
advanced
economies were strong contributors to
the development. The undervaluation
of equities in the review period offers
attractive investment opportunities for
both domestic and foreign investors to
participate in the Nigerian capital
market.

Figure 5.12
Warren Buffett Valuation of Nigerian Equities
Market

Per cent
WARREN BUFFET INDICATOR

5.3.5 Bond Market
Activities in the bonds market in the
second half of 2018 was dominated by
Federal Government of Nigeria (FGN)
securities. Some minor activity was also
recorded
in
the
Sub-national
government
and
corporate
bonds
segments of the market, with the latter
recording the least share by market
volume.

5.3.5.1 FGN Eurobond
The 10-year dollar-denominated bond
yield for Nigeria increased by 21 basis
points to 6.11 per cent at endDecember 2018, from 5.90 per cent at
end-June 2018. When compared with
4.47 per cent at end-December 2017, it
CBN Monetary Policy Review

increased by 164 basis points (Figure
5.14).
This
increase
reflects
the
perception of rising sovereign risk by
foreign investors.


Figure 5.13
10-Year U.S. Dollar-denominated Bond Yield for
Nigeria (Dec 29, 2017 – Dec 31, 2018)

FGN bond yields rose by 172.11 basis
points to 14.88 per cent in October
2018 from 13.16 per cent at end-June,
2018 and by 64.81 basis points when
compared with 14.23 per cent at endDecember 2017. The yield curve is
slowly turning positive, suggesting that
risks are gradually being appropriately
priced (Figure 5.15).

Figure 5.14
FGN Bonds Yield Curves: end-Dec. 2017 vs. endJun. 2018 vs. end-Oct. 2018


Yield
Time to Maturity
Dec-17
Jun-18
Oct-18
June 2018
Dec 2017
Oct 2018

5.3.5.2 State/Local Government Bonds
Activity in the sub-national bonds
market remained generally weak in the
review
period.
Total
value
of
outstanding
state/local
government
bonds declined by 8.94 per cent to
N515.26 billion at end-December 2018
from N565.82 billion at end-June 2018.
When compared with N562.81 billion at
end-December 2017, it also decreased
by 8.45 per cent.

5.3.5.3 Corporate Bonds
In the corporate bonds segment,
activity weakened in the review period.
The value of outstanding corporate
bonds at end-December 2018 declined
by 4.17 per cent to N256.56 billion from
N267.72 billion in the first half of 2018.
When compared with N297.44 billion in
the corresponding period of 2017, it
also declined sharply by 13.74 per cent.
The softening in this market, signposts a
weakening of investor confidence in
the Nigerian economy. This could be
due to the slow pace of economic
recovery and the dampening effect of
the rising perception of sovereign risk as
the 2019 general elections approach.

5.3.5.4 Overall Analysis of the Nigerian
Capital Market
The value of FGN bonds increased
marginally by 1.3 per cent to N9.38
trillion at end-December 2018 from
N9.26 trillion at end-June 2018, and by
11.27 per cent when compared with
N8.43 trillion at end-December 2017.
FGN bonds accounted for 42.87 per
CBN Monetary Policy Review

cent
of
aggregate
market
capitalization at end-December 2018.
State/municipal
bonds,
corporate
bonds and supranational bonds had
values of N515.26 billion, N256.56 billion
and
N8.09
billion,
respectively,
representing 2.35, 1.18 and 0.04 per
cent
of
aggregate
market
capitalization. At end-December 2018,
the equities segment of the market
contributed
53.56
per
cent
of
aggregate market capitalization, while
the
combination
of
FGN
bonds,
state/municipal
bonds,
corporate
bonds
and
supranational
bonds
accounted for the balance of 46.44
per cent (Figure 5.16). Thus, during the
review period, the Nigerian capital
market was dominated by the equities
segment.

Figure 5.15
Structure of the Nigerian Capital Market
(December, 2018)

5.4
Global
Financial
Market
Developments
In the second half of 2018, the global
financial
markets
continued
to
experience volatility spillovers from the
first half. Key factors driving the volatility
included:
the
continued
monetary
policy normalization by the US Fed and
the
Bank
of
England
(BOE);
commencement of monetary policy
normalization by the European Central
bank
(ECB);
on-going
trade
wars
between the US and some of its key
trading partners; increasing uncertainty
on the direction of BREXIT; weakening
oil prices; and the imposition of primary
and secondary sanctions on Iranian oil.
However, the commencement of trade
negotiations between the US and
China, temporary lifting of secondary
sanctions on some major buyers of
Iranian oil and indications from OPEC
and
non-OPEC
members
of
the
imposition of a production ceiling,
helped in moderating the volatility.
Overall, the US dollar continued to
appreciate against most currencies,
thus increasing the flow of capital into
US dollar-denominated assets.
5.4.1 Money
Market
and
Central
Bank Policy Rates
The
continued
withdrawal
of
monetary accommodation by some
major
advanced
economies
influenced liquidity conditions in the
global financial markets in the review
period. This was as a result of improved
growth conditions and rising inflation
above their long term objectives. With
the US Fed progressively raising its
benchmark
policy
rate,
the
BOE
continuing with policy normalization
and the ECB terminating its quantitative
easing
programme
in
the
review
period,
there
was
a
marked
improvement in the pricing of US dollardenominated assets. In the United
Kingdom and the EU however, asset
price recovery followed a slower pace
mired by the uncertainties surrounding
CBN Monetary Policy Review

BREXIT, with their markets experiencing
episodes of volatility. In Japan and
China,
growth
remained
generally
tepid with weak price developments
and a relatively hazy macroeconomic
and
trade
environment.
In
the
emerging markets and developing
economies, the earlier recovery in the
first half of the year in oil and other
commodity
prices,
which
helped
reverse
currency
depreciations
appeared to be moderating as oil
prices weakened progressively, thus
constraining their central banks from
major
downward
revisions
of
the
benchmark policy rates.
Accordingly, the US and the UK raised
their policy rates to improve yields on
domestic
assets
and
contain
inflationary pressures, while the EU and
Japan retained their rates in the review
period. Amongst the emerging markets
and developing economies, Russia,
India, South Africa, and Indonesia
raised their policy rates to douse price
pressures and attract foreign capital,
while China, Brazil, Ghana and Kenya
maintained their policy rates to support
on-going recovery of output, and
stabilize inflation expectations. The CBN
also maintained its policy rate to stem
capital outflow and stave off domestic
price developments.


Table 5.8
Policy Rates of Selected Countries June –
December 2018
Country
Jun-18 Jul-18 Aug-18 Sep-18 Oct-8 Nov-18
Dec-18
Kenya

S. Africa

Ghana


17.0

Nigeria


14.0

Brazil

USA

Japan

Euro Area

India

Russia

China

UK

Indonesia


5.4.2 Global Capital Market
During the review period, major stock
markets showed mixed performance, in
response to global developments. The
continued
normalization
of
US
monetary policy played a strong role in
the redirection of capital flows as well
as uncertainty surrounding the BREXIT
negotiations, and the possibility of a nodeal BREXIT, promoted the US as a
choice destination for portfolio capital.
The weakening of oil prices in the
second half of 2018 also increased
uncertainty around major oil exporters
as their external reserves and hence
currencies became the subject of
increased pressure. The on-going trade
war between the US and its key trading
partners, though appearing to be
easing, continued to create some
uncertainty in the market.
CBN Monetary Policy Review

Following these developments, various
stock markets reacted differently. In
Europe,
the
Russian
MICEX
index
increased by 2.72 per cent while, the
UK FTSE 100, French CAC 40 and
German DAX indices decreased by
11.90, 11.14 and 14.20 per cent,
respectively. In North America, the
United
States
S&P
500,
Canadian
S&P/TSX Composite and Mexican Bolsa
indices decreased by 7.78, 12.01 and
12.64 per cent, respectively. In South
America, the Brazilian Bovespa and
Argentine Merval indices increased by
20.79 and 16.34 per cent, respectively,
while, the Columbia COLCAP index
decreased by 15.92 per cent. In Asia,
the Indian BSE Sensex index increased
by 1.82 per cent, while the Japanese
Nikkei 225 and Chinese Shanghai SE
indices decreased by 10.27 and 12.43
per cent, respectively. In Africa, the
Nigerian NSE All-Share, South African
JSE All-Share, Kenyan Nairobi NSE 20,
Egyptian EGX CASE 30 and Ghanaian
GSE All Share indices all decreased by
17.89, 8.46, 13.75, 20.26 and 13.18 per
cent, respectively, indicating the effect
of capital reversals from the African
market.

Table 5.9
Selected International Stock Market Indices as at December 31,2018


Country
Index
29-Dec-17
29-Jun-18
31-Dec-18
December
29, 2017December
31, 2018
% Change
Jun 29 -
Dec 31,
2018 %
Change
AFRICA
Nigeria
ASI

South Africa
JSE African AS

Kenya
Nairobi NSE 20

Egypt
EGX CSE 30

Ghana
GSE All Share

NORTH AMERICA
US
S&P 500

Canada
S&P/TSX Composite

Mexico
Mexico Bolsa (IPC)

SOUTH AMERICA
Brazil
Bovespa Stock

Argentina
Merval

Colombia
COLCAP

EUROPE
UK
FTSE 100

France
CAC 40

Germany
DAX

Russia
MICEX


ASIA
Japan
NIKKEI 225

China
Shanghai SE A

India
BSE Sensex

Source: Bloomberg
CBN Monetary Policy Review

5.4.3 Commodities
The earlier indication of commodity
price recovery observed in the first half
of 2018
was
reversed,
particularly
following moderation in global growth,
continuing trade war between the US
and China, and easing of secondary
sanctions on eight (8) countries after
the earlier imposition of both primary
and secondary sanctions on Iranian oil.
As a result, the IMF energy index fell
from 163.9 points in June to 133.3 points
in December 2018. This was reflected in
the OPEC reference basket which
decreased by 22.23 per cent to an
average of US$56.94pb in December
2018 from US$73.22pb in June 2018.
Prospects of recovery in the oil market
were, however, raised following the
discussions and final agreement by
OPEC
and
non-OPEC
member
countries to impose ceilings on crude
oil production.
The non-fuel price index also fell from
110.2 points to 104.1 points between
June
and
December
2018.
Consequently, the price of metals
declined in the review period. The price
of Aluminum fell by 14.18 per cent to
US$1,920.38/mt
in
December
from
US$2,237.62/mt in June 2018. Similarly,
the price of Zinc fell by 15.29 per cent
to US$2,616.29mt in December 2018
from US$3,088.57/mt in June.
The Food and Agriculture Organization
(FAO) Food Price Index fell by 6.31 per
cent to 161.8 points in December 2018
from 172.7 points in June. The subindices of meat, vegetable oil and
dairy fell, while cereals and sugar
increased. The development was due
to strong export supplies of meat from
Oceania;
ample
supplies
of
vegetables,
particularly
in
South
America; as well as high export supplies
of
dairy
from
Europe.
Cereals
production faced inclement weather
particularly in the Southern hemisphere.

5.4.4 Global Foreign Exchange Market
In the second half of 2018, most
currencies depreciated against the US
dollar, largely on account of continuing
normalization of monetary policy by
the US Fed which led to rising yields in
US treasuries and other financial assets,
and
improving
macroeconomic
conditions in the United States.
As a result, in North America, the
Canadian dollar depreciated by 3.70
per cent, while the Mexican peso
appreciated by 1.31 per cent; In South
America,
the
Argentine
peso and
Colombian peso both depreciated by
23.20 and 9.82 per cent, respectively;
while the Brazilian real appreciated by
0.05 per cent.
In Europe, the British pound, the Euro,
and Russian ruble all depreciated
against the U.S dollar by 3.41, 1.88 and
10.0 per cent, respectively. In Asia, the
Chinese yuan, and Indian rupee both
depreciated by 3.74 and 1.86 per cent,
respectively, while the Japanese yen
appreciated marginally by 0.98 per
cent.
In Africa, the Nigerian naira, South
African rand, Kenyan shilling, Egyptian
pound,
and
Ghanaian
cedi
all
CBN Monetary Policy Review

depreciated against the U.S. dollar by
0.41, 4.33, 0.82, 0.02 and 3.81 per cent,
respectively.


Table 5.10
Exchange Rates of Selected Countries (value in currency units to US$)


Currency
29-Jun-18
31-Dec-18 Jun 18 - Dec 18
(% App/Dep)
AFRICA
Nigeria
Naira
305.75
307.00
-0.41
South Africa
Rand
13.73
14.35
-4.33
Kenya
Shilling
101.01
101.85
-0.82
Egypt
Pound
17.92
17.92
-0.02
Ghana
Cedi
4.73
4.92
-3.81
NORTH
AMERICA
Canada
Dollar
1.31
1.36
-3.70
Mexico
Peso
19.91
19.65
1.31
SOUTH
AMERICA
Brazil
Real
3.88
3.87
0.05
Argentina
Peso
28.93
37.66
-23.20
Colombia
Peso
2930.50
3249.75
-9.82
EUROPE
UK
Pound
0.76
0.78
-3.41
Euro Area
Euro
0.86
0.87
-1.88
Russia
Ruble
62.74
69.72
-10.00
ASIA
Japan
Yen
110.76
109.69
0.98
China
Yuan
6.62
6.88
-3.74
India
Rupee
68.47
69.77
-1.86
Source: bloomberg
Exchange Rates of Selected Countries (Value in currency units to US$)
CBN Monetary Policy Review

BOX 5.1: THE NIGERIA – CHINA CURRENCY SWAP AND POLICY IMPLICATIONS
Currency swap is an agreement between two parties to exchange cash flows in
different currencies at a predetermined rate for specified terms and conditions. It
enables two countries or institutions to exchange payments in one currency for the
equivalent amount in another currency to fast track trade and investments.
Currency swaps also provide liquidity support to financial markets, and hedge
against exchange and interest rate risk and in some cases avoidance of
transaction costs and taxes. The initiator may be required to pay interest on the
amount exchanged at the end of the transaction, which can be a fixed or floating
rate. Interest rates are usually the prevailing interbank lending rates in both markets.
Bilateral currency swap is usually arranged by countries to promote trade,
economic integration and other beneficial purposes. For example, in order to
facilitate the internationalization of the Renminbi, China signed twenty (20) Bilateral
Currency Swap Agreements (BCSAs) with various countries.
Nigeria experienced a period of prolonged foreign exchange demand pressures
due to the import dependent nature of the economy. The situation worsened with
the sudden decline in international crude oil prices from Mid-2014, which led to
sharp depreciation of the naira, depletion of external reserves and negative output
growth. In response to the unfavourable outcomes of the crash in crude oil prices
and recession, government commenced fiscal injections and the CBN embarked
on several policy measures; including deepening of foreign exchange market,
providing financial support to the real sector and entering into negotiations for a
Nigeria-China Currency Swap arrangement to reverse the trend. During the
recession, the economy experienced the challenge of providing sufficient foreign
currency liquidity to support trade. The swap agreement was an innovative
response to this problem.
The negotiation for the Nigeria-China Currency Swap Agreement started on April
12, 2016 between Chinese President Xi Jinping and Nigeria’s President Muhammad
Buhari in Beijing, China. Subsequently, the Industrial and Commercial Bank of China
Limited and the CBN signed a deal on Yuan transaction. In recognition of China’s
strategic importance, the CBN had as far back as 2014, increased the Chinese
Yuan portion of its external reserves from 2.0 to 7.0 per cent. In 2014, the world
recognised the Renminbi (Yuan) as a likely global reserve currency, which made
other countries to integrate the Chinese currency into their financial markets.
The Currency Swap deal was in three parts:
A bilateral currency swap arrangement between the People’s Bank of China and
the Central Bank of Nigeria (CBN) whereby both countries exchange their
currencies.
CBN Monetary Policy Review

A structured, secured, cross currency swap between the Industrial and Commercial
Bank of China Ltd. (ICBC) and the CBN. In this arrangement, the CBN will agree to
exchange a specified amount of naira for Yuan, which the ICBC converts into US
dollars and loans it to CBN. However, Nigeria would have to place its investments
overseas as collateral.
Adoption of Nigeria as the clearing hub for the Yuan in West Africa, with the ICBC
acting as the liaising bank in China.
Having reviewed and agreed on the terms and conditions of the bilateral currency
swaps, the Governor of the Central Bank of Nigeria, Mr. Godwin Emefiele, on
behalf of the Nigerian government on April 27, 2018, signed a 3-year agreement
along with his counterpart, the Governor of the Peoples Bank of China, Mr. Yi Gang
who represented the People’s Republic of China. The signing was held in Beijing,
China and the amount involved was Renminbi (RMB) 15.0billon or N720.0billon
(about U$2.5 billion), which could either be extended by mutual consent at
expiration in 2021 or reversed. The aim is to provide liquidity to facilitate trade
transactions for both Nigerian and Chinese businesses.
Implications for Policy
The rationale for the currency swap is to eliminate the challenges of searching for
third currencies for businesses involving Nigeria and China. Its operationalization
would also enhance foreign exchange management, financial system stability and
economic cooperation. Overall, it is likely to facilitate speedy recovery of the
Nigerian economy from the recent economic recession. Specifically, the BCSA will
benefit Nigeria in the following ways:
Reduction in Cost of Funding: with the agreement, Nigeria will benefit from
reduction in transaction costs of cross-border trade and direct investment for firms
in the participating countries. Invoicing and settling of cross-border trade and
investment in a third party currency, carries added degree of foreign exchange
risk, which the swap agreement eliminates.
Hedge against Exchange Rate Fluctuations and Reduce Concentration Risk: Swap
will help the country hedge against exchange rate volatility. To realize this benefit,
the BCSA must specify that the exchange rate for initiating and terminating a
transaction should be the same. The agreement will help Nigeria reduce exposure
to interest and exchange rate risks.
Exports and Trade Deficit: The swap can help Nigeria shore up her exports and
reduce trade deficits. It can also help reduce pressure on the naira. If Nigerian
importers from China begin to get the RMB directly rather than buying USD, and
then converting to RMB, it will help reduce pressure on the USD as it would be the
CBN Monetary Policy Review

first step towards isolating the legitimate demand for the USD from speculative
practices. It would also help reduce the foreign exchange costs for importers.
West Africa Renminbi Hub: The agreement would facilitate the setting up of a
clearing bank thereby making it a first step to making Nigeria a West African hub
for the RMB.
Encourage Cooperation and Exchange between Countries: It will encourage
cooperation and exchange between the two countries, and help the
development of mutual trade and investment.
Cross-border Settlement and Investment in RMB: The swap with China will aid
efficient settlement of cross-border trade and direct investment in RMB.
CBN Monetary Policy Review

CHAPTER 6
ECONOMIC OUTLOOK
6.1
Overview
lobal output grew by 3.7 per
cent in 2018, down from 3.8
per cent in 2017 (IMF WEO
January, 2019), and was also lower
than the earlier estimate of 3.9 per cent
for the year. Global growth in 2018 was
largely
driven
by
growth
in
the
advanced economies, resulting from
increased household spending, nonresidential investments, strong export in
the US and the UK and improved
performance in France and Spain. In
the EMDEs, growth was supported by
strengthening investment and private
consumption, and improved external
environment
resulting
from
higher
commodity
prices
and
access
to
capital markets.
The
moderating
factors
to
global
growth, however, were: the difficult
BREXIT negotiations; ongoing US-China
trade war; tighter financial conditions
due to continued monetary policy
normalization
in
the
advanced
economies; capital flow reversals and
exchange rate pressures in emerging
markets; rising oil import bills; continued
geopolitical
tensions
and
other
country-specific factors.
In the advanced economies, output
growth was estimated at 2.3 per cent in
2018, down from 2.4 per cent in 2017.
The development was due to the
moderation witnessed in the Euro area,
UK, Japan and Canada as well as the
impact of elevated trade tensions. The
United States economy grew by 2.9 per
cent in 2018, compared with 2.2 per
cent in 2017 as a result of fiscal stimulus,
despite the ongoing normalization of
monetary policy. In the Euro area,
growth slowed to 1.8 per cent in 2018
compared with 2.4 per cent in 2017,
while in the UK it also weakened to 1.4
per cent in 2018 from 1.8 per cent in
2017, due primarily to difficult BREXIT
negotiations. In Japan, growth slowed
to 0.9 per cent in 2018 compared with
1.9 per cent in 2017 owing to the
impact of natural disasters.
In
the
Emerging
Market
and
Developing
Economies,
growth
moderated to 4.6 per cent in 2018,
from
4.7
per
cent
in
2017.
The
development reflected weak recovery
in commodity exporting economies,
deceleration of growth in commodity
importers,
continued
capital
flow
reversals, exchange rate pressures and
pockets
of
geopolitical
tensions.
Growth in China was estimated at 6.6
per cent in 2018, compared with 6.9
per cent in 2017, owing to slowing
external demand and internal financial
regulatory tightening. In India, the
economy expanded by 7.3 per cent in
2018, from 6.7 per cent in 2017 due to
stronger demand and recovery from
earlier currency and tax shocks. Output
growth in Brazil improved to 1.3 per
cent in 2018 compared with 1.1 per
cent in 2017 owing to strengthened oil
prices and private investment. Growth
in Russia was estimated at 1.7 per cent
in 2018 up from 1.5 per cent in 2017,
due
to
improved
oil
prices
and
recovery in domestic demand.
G
CBN Monetary Policy Review

In sub-Saharan Africa, growth was
estimated at 2.9 per cent in 2018, same
as in 2017, with varied performance
across
countries.
The
growth
momentum was driven largely by
higher commodity prices and improved
access to international markets. Output
growth in South Africa was estimated
at 0.8 per cent, down from 1.3 per cent
in
2017,
due
largely
to
political
uncertainty in the run-up to the 2019
general elections. In Nigeria, growth
was estimated at 1.9 per cent in 2018,
up from 0.8 per cent in 2017 supported
by improved oil prices and sustained
implementation of the ERGP.
6.2
Outlook for Global Output
Global growth projection for 2019 was
revised downwards as a result of the
slowdown witnessed in the second half
of 2018. The downward revision was
due to a number of factors such as: the
lingering trade war between the US
and China; newly introduced fuel
emission
standards
in
Germany,
expected to slow down activity in the
auto industry; residual impact of natural
disasters in Japan; and substantial
financial market pressures in some large
emerging markets and developing
economies. Other factors underlying
the
revision
were:
the
continued
rebalancing in China and slowdown in
its
export
demand;
pockets
of
geopolitical tensions; uncertainty over
BREXIT negotiations; and slower-thanexpected recovery in oil and other
commodity prices. Accordingly, global
growth is projected to slow to 3.5 and
3.6
per cent
in 2019
and 2020,
respectively, from 3.7 per cent in 2018.
Growth in the advanced economies is
projected at 2.0 and 1.7 per cent in
2019 and 2020, respectively, down from
2.3 per cent in 2018, largely due to
expected slowdown in growth in the
United States from 2.9 per cent in 2018
to 2.5 per cent in 2019 and further to 1.8
per cent in 2020. This is expected to
occur as the rapid pace of monetary
policy normalization overshadows the
current
expansionary
fiscal
policy.
Normalization is expected to continue
due
to
rising
domestic
demand
associated with strong wage growth
and low unemployment rate.
In the Euro area, growth is expected to
moderate from 1.8 per cent in 2018 to
1.6 per cent in 2019, but pick-up slightly
to 1.7 per cent in 2020. The weaker
projection for the region is predicated
on: the impact on industrial production
in Germany’s automobile sector, as
new emission standards come into
effect; the likely adverse effect of
workers protests on output in France;
uncertainty over BREXIT negotiations;
continued trade wars between the US
and its key trading partners; and
geopolitical tensions in Spain. In the UK,
in spite of difficult BREXIT negotiations,
output growth is expected to rise
moderately from 1.4 per cent in 2018 to
1.5 and 1.6 per cent in 2019 and 2020,
respectively, on the back of expected
improvements in household spending
and domestic exports.
In Japan, output growth is forecast to
rise moderately from 0.9 per cent in
2018 to 1.1 per cent in 2019 before
falling to 0.5 per cent in 2020. Growth in
the Japanese economy continues to
CBN Monetary Policy Review

be hampered by an ageing labour
force and the impact of natural
disasters.
In
the
emerging
market
and
developing
economies,
growth
is
projected to moderate slightly to 4.5
per cent in 2019 from 4.6 per cent in
2018, but rise to 4.9 per cent in 2020.
This will be due largely to an expected
dip
in
emerging
and
developing
Europe from 3.8 per cent in 2018 to 0.7
per cent in 2019, moderated by
expected growth in sub-Saharan Africa
and Latin America. Growth in China is
expected to decline to 6.2 per cent in
2019 and 2020 apiece from 6.6 per
cent in 2018, on the back of continuing
internal financial regulatory measures
and slowdown in external demand. The
decline is, however, expected to be
moderated
by
proposed
stimulus
packages in 2019. In India, growth in
2019 and 2020 is expected to rise to 7.5
and 7.7 per cent, respectively, up from
7.3 per cent in 2018. The development
is traceable to the expected rebound
in
external
demand,
strengthened
investment and private consumption.
In the Middle East and North Africa
(MENA) region, growth is forecast at 2.4
per cent in 2019 same as in 2018,
before rising to 3.0 per cent in 2020,
premised on recovering oil prices. In
Sub-Saharan Africa, growth is expected
to rise to 3.5 and 3.6 per cent in 2019
and 2020, respectively, from 2.9 per
cent in 2018. In Nigeria, growth is
estimated to rise to 2.0 and 2.2 per cent
in 2019 and 2020, respectively, from 1.9
per
cent
in
2018,
anchored
on
sustained recovery in oil prices. In South
Africa, growth is projected to rise from
0.8 per cent in 2018 to 1.4 and 1.7 per
cent in 2019 and 2020, respectively.
6.3
Downside
Risks
to
Global
Outlook
In
the
present
environment
of
elevated policy uncertainty, risks to the
global economic outlook in the short to
medium term appeared skewed to the
downside. These risks include: the
unresolved trade tensions between the
US
and
China;
policy
uncertainty
thrown up by the US-Mexico-Canada
(USMCA) free trade agreement; fiscal
policy upheavals in Italy; and impact of
China’s internal financial regulation.
The continued risk of capital flow
reversals
from
emerging
market
economies
is
also
expected
to
heighten foreign exchange volatility in
countries with weaker fundamentals.
In the advanced economies, the risks
to growth remains increased volatility in
financial markets as monetary policy
normalization
progresses,
causing
economic agents to reassess risks. In
addition,
financial
conditions
are
expected to tighten as negative output
gaps closes and price development
picks up pace.
In
the
emerging
markets
and
developing economies, the progressive
normalization of monetary policy in the
advanced economies, particularly the
US, could tighten financial conditions as
US Treasury yields improve. This will result
in heightened capital outflows and
coupled
with
weak
fiscal
buffers,
accentuate pressure on exchange
CBN Monetary Policy Review

rates. The development will also lead to
increased debt service payments and
cost
of
new
borrowing,
thus,
encroaching further on the limited
fiscal
space.
The
uncertainty,
surrounding domestic elections in some
countries is also expected to increase
sovereign risk and dampen investment
growth.
In the Middle East and North Africa
region, lingering geopolitical tensions
are likely to continue to weaken
economic performance. Other factors
that may hurt growth and investment in
the region include: moderation in
economic activity in China; and US
sanctions on Iran.
In sub-Saharan Africa, the key risk to
growth
remains
the
likelihood
of
declining oil and other commodity
prices which may dampen export
growth in the region. In addition, the
forthcoming 2019 general elections in
several countries including in Nigeria
and South Africa may also impose a
drag
on
investment
as
market
participants await clarity on the policy
direction of the new governments.


Table 6.1
Global Output and Inflation Outlook

2019*
2020*
A. World Output
World Output

Advanced
Economies

USA

Euro Area

Japan

UK

Canada

Other Advanced
Economies

2.8

2.8

2.5

2.5

Emerging &
Developing
Economies

4.7

4.6

4.5
4.9
Commonwealth
of Independent
States


Latin America
and the Caribbean

1.3

1.1

2.0

2.5

Middle East and
North Africa

2.2

2.4

2.4

3.0

Sub-Saharan
Africa

B. Commodity
Prices (US' Dollars)


Oil

Non-fuel

6.4

1.9

-2.7

1.2

C. Consumer Prices
Advanced
Economies

1.7

2.0

1.7

2.0

Emerging &
Developing
Economies

4.3

4.9

5.1

4.6

Source: IMF WEO Update, January 2019
*Forecast
6.4
Global Inflation Outlook
Global inflation is projected to rise to
3.8 per cent in 2019 from 3.7 per cent in
2018,
reflecting
the
impact
of
a
number
of
developments.
These
include recovery in oil and other
commodity prices, strong wage growth
CBN Monetary Policy Review

and accommodative monetary policy
in some advanced economies, as well
as currency depreciations.
In the advanced economies, inflation is
projected to decline to 1.9 per cent in
2019 from 2.0 per cent in 2018, due to
continued normalization of monetary
policy and expected moderation in oil
price. Inflation in the United States is
projected to moderate to 2.1 per cent
in 2019 from 2.4 per cent in 2018, driven
by monetary policy normalization by
the Fed and waning effect of tax cut.
In the United Kingdom, inflation is
expected to decline to 2.2 per cent in
2019 from 2.5 per cent in 2018, due to
subdued growth in demand, lower
petrol prices and freeze in the rate of
fuel and alcohol duties. In the Euro
area, inflation is projected at 1.7 per
cent in 2019 same as in 2018. Inflation in
Japan is forecast to rise to 1.3 per cent
in 2019 from 1.2 per cent in 2018, as
monetary
policy
remains
accommodative.
In
the
emerging
markets
and
developing
economies,
inflation
is
expected to rise to 5.2 per cent in 2019
from 5.0 per cent in 2018, reflecting
upward pressure on prices in key
economies in the region. In China, the
rise in price level to 2.4 per cent in 2019
from 2.2 per cent in 2018 is expected to
be driven by higher food and energy
prices.
In
Brazil,
inflation
is
also
projected to increase to 4.2 per cent in
2019 from 3.7 per cent in 2018, driven
primarily by rising food prices. In India,
inflation is projected to rise to 4.9 per
cent in 2019 from 4.7 per cent in 2018,
due
to
expected
acceleration
in
demand and rising energy prices. In
Russia, inflation is forecast to rise sharply
to 5.1 per cent in 2019 from 2.8 per cent
in 2018, the highest increase in the
group, driven by weaker rubble, and
likely increase in Value Added Tax
(VAT). The planned increase in VAT is
expected to fuel consumer inflation in
Russia.
In
sub-Saharan
Africa,
inflation
is
forecast to moderate to 8.5 per cent in
2019 from 8.6 per cent in 2018. This will
be
led
by
declines
in
Angola,
Democratic Republic of Congo (DRC)
and Ethiopia from 20.5, 23.0 and 12.7
per cent in 2018 to 15.8, 13.5 and 9.5
per cent in 2019, respectively. In South
Africa, however, inflation is projected
to rise to 5.3 per cent in 2019 from 4.8
per cent in 2018. In Nigeria, inflation is
also projected to rise to 13.5 per cent in
2019 from 12.4 per cent in 2018, driven
by exchange rate pressure arising from
capital flow reversals and widening
fiscal deficits. In the MENA region,
including Afghanistan and Pakistan,
inflation is forecast to decline to 10.20
per cent in 2019 from 10.79 per cent in
2018.
Outlook for Domestic Output Growth
The domestic economy is expected to
continue on a path of recovery in 2019.
Real GDP in the fourth quarter of 2018
strengthened to 2.38 per cent (year-onyear) from 1.81 and 2.11 per cent in the
preceding
quarter
and
the
corresponding
period
of
2017,
respectively. This was mainly attributed
to the non-oil sector, which grew by
2.70 per cent in the fourth quarter
CBN Monetary Policy Review

compared with 2.32 and 1.45 per cent
in the preceding quarter and the
corresponding period of 2017. Overall,
the economy expanded by 1.93 per
cent in 2018 from 0.82 per cent in 2017.
The outlook for 2019 remains broadly
positive. With output growth estimated
at 1.9 per cent in 2018, the IMF and the
World Bank projected the Nigerian
economy to grow in 2019 by 2.0 and
2.2 per cent, respectively. Similarly, the
CBN has projected 2019 output growth
of 2.28 per cent for the country. This
outlook is anchored on expected
improvements in oil production and
prices, continuing reforms in the foreign
exchange market and prospects of
improved
agricultural
output.
In
addition,
the
current
diversification
drive anchored on increased non-oil
revenue is expected to improve the
fiscal
space,
thus
supporting
the
implementation
of
the
Economic
Recovery and Growth Plan (ERGP).
Key headwinds to the growth outlook
however, are the likely moderation in
oil prices, capital flow reversal in
response
to
monetary
policy
normalization,
perception
of
rising
sovereign risk associated with the 2019
general
elections,
persistence
of
security challenges such as insurgency
and herdsmen attack in some parts of
the country, and weak intermediation
from the banking system to the real
economy.
Outlook for Domestic Inflation
Headline inflation trended upwards in
the second half of 2018, remaining
above
the
CBN’s
6-9
per
cent
indicative
band.
The
uptick
was
attributed to increase in food prices,
mainly
from
adverse
weather
conditions in some parts of the country,
increased spending towards the 2019
general elections and capital flow
reversals. Staff estimates suggest that
headline
inflation
(year-on-year)
is
projected to increase to 11.60, 11.56,
11.73, 12.01, 12.11, and 12.08 per cent
in January, February, March, April, May
and June 2019, respectively. Upside
risks to these estimates are the residual
impact
of
the

flooding
on
agricultural output, insecurity in some
parts of the food producing belt of the
country, inflation pass-through from
exchange rate depreciation, increased
spending towards the 2019 general
elections, as well as infrastructurerelated
challenges.
As
the
Bank
continues
to
manage
liquidity
conditions in the banking system, price
development
will
continue
to
be
monitored to ensure moderation in the
upside risks.

CBN Monetary Policy Review


Jul-16
Aug-16
Sep-16
Oct-16
Nov-16
Dec-16
Jan-17
Feb-17
Mar-17
Apr-17
May-17
Jun-17
Jul-17
Aug-17
Sep-17
Oct-17
Nov-17
Dec-17
Jan-18
Feb-18
Mar-18
Apr-18
May-18
Jun-18
Jul-18
Aug-18
Sep-18
Oct-18
Nov-18
Dec-18
Jan-19
Feb-19
Mar-19
Apr-19
May-19
Jun-19
Headline Inflation (Y/Y) in %
Headline Inflation (Y/Y) in %
Month
Actual
Forecast
Fig 1: Inflation Forecast

YEAR-ON-YEAR INFLATION RATE
12-MMA INFLATION RATE
Status Month
Headline
inflation
Food
inflation
Core
inflation
Status Month
Headline
inflation
Food
inflatio
n
Core inflation
Actual
Jul-18
11.14
12.85
10.18
Actual
Jul-18
13.95
17.10
11.48
Aug-18
11.23
13.16
10.02
Aug-18
13.55
16.50
11.28
Sep-18
11.28
13.31
9.84
Sep-18
13.16
15.94
11.09
Oct-18
11.26
13.28
9.88
Oct-18
12.78
15.36
10.90
Nov-18
11.28
13.30
9.79
Nov-18
12.41
14.80
10.70
Dec-18
11.44
13.56
9.77
Dec-18
12.10
14.35
9.51
Forecast
Jan-19
11.60
13.83
9.81
Forecast
Jan-19
11.82
13.98
10.34
Feb-19
11.56
13.85
9.85
Feb-19
11.61
13.70
10.19
Mar-19
11.73
13.76
10.18
Mar-19
11.48
13.53
10.11
Apr-19
12.01
14.33
10.18
Apr-19
11.45
13.50
10.06
May-19
12.11
14.57
10.02
May-19
11.50
13.60
10.00
Jun-19
12.08
14.36
9.82
Jun-19
11.57
13.69
9.94


Source: CBN Staff Estimates
CBN Monetary Policy Review

Outlook for Monetary Policy in 2019
Monetary Policy by the Bank in 2019
will continue to provide an anchor for
inflation
expectations
in
order
to
maintain price stability conducive to
economic growth. To achieve this, the
Bank will maintain its use of heterodox
monetary policy strategies to moderate
the speculative activities of market
agents in response to temporary shocks
to the economy.
Risks to monetary policy in 2019 arising
from the global environment include:
the
continuing
normalisation
of
monetary policy in the US and other
advanced
economies;
financial
market volatilities arising from a no-deal
BREXIT; trade tensions between the US
and its key trading partners; as well as
currency depreciations due to the
strengthening US dollar and expected
weak oil price. On the domestic front,
the risk to monetary policy include: the
rising
public
domestic
debt;

general election spending; constraints
to credit growth; and the still fragile
economic
recovery.
With
headline
inflation projected to trend upwards in
the near-term, these issues will continue
to demand close monitoring by the
monetary authorities.
Factors
expected
to
support
the
achievement
of
the
objective
of
monetary
policy
are:
increased
accretion to external reserves; stability
in
the
foreign
exchange
market;
improved security situation in the food
and oil producing regions of the
country; as well as enhanced flow of
credit to the real economy.


CBN Monetary Policy Review

Appendices
CENTRAL
BANK
OF
NIGERIA
COMMUNIQUÉ
NO

OF
THE
MONETARY
POLICY
COMMITTEE
MEETING OF JULY 23 AND 24, 2018.
1.0
Background
The Monetary Policy Committee (MPC)
held its 262nd meeting on Monday, 23rd
and Tuesday, 24th July, 2018 amid
fragile improvements in global growth
and the domestic economic recovery.
The
Committee
reviewed
developments
in
the
global
and
domestic
economic
and
financial
environments, as well as the outlook for
the rest of the year. The MPC also
assessed the risks to price stability,
credit growth, employment creation
and financial system stability, in the
short-to-medium
term.
Ten
(10)
members of the Committee were in
attendance.
Global Economic Developments
Global growth momentum remained
promising despite rising trade tensions,
uncertainties in BREXIT negotiations and
scepticism
over
North
Korea’s
commitment to the denuclearise the
Korean Peninsula. Global growth was
projected at 3.9 per cent in 2018,
compared with 3.7 per cent in 2017,
largely driven by the recovery in oil
prices, rising asset prices and long term
yield on major financial markets as well
as
a
rebound
in
investment,
manufacturing output and trade.
In the Advanced Economies, growth
was projected at 2.4 per cent in 2018,
the same as in 2017. The growth was
expected to be driven majorly by fiscal
stimulus in the United States coupled
with
accommodative
financial
conditions. In the Emerging Markets
and Developing Economies output
growth was projected at 4.9 per cent in
2018, up from 4.7 per cent in 2017, due
largely to sustained recovery in global
commodity prices (particularly crude
oil);
rebound
in
investment,
manufacturing and trade as well as the
strengthening
of
domestic
consumption.
The downside risks to global output
growth remains the build-up in financial
vulnerabilities; rising costs of borrowing
in
the
Emerging
Markets
and
Developing
Economies;
fragile
corporate balance sheets; escalating
trade protectionism, uncertainties
around
the
BREXIT
negotiations;
heightened geopolitical tensions; and
fiscal sustainability concerns.
Global inflation was projected at 3.2
per cent in 2018, driven by rising energy
prices, and currency depreciations in
some
emerging
market
and
developing
economies.
In
the
advanced economies, inflation was
projected to increase to 2.2 per cent in
2018, up from 1.7 per cent in 2017, as a
result of increases in the cost of
transport, housing, energy and food.
Similarly, inflation in the emerging
markets and developing economies is
projected to rise from 4.0 per cent in
2017 to 4.4 per cent in 2018, due to
currency
depreciations
and
rising
energy prices. The Committee believes
that global inflation is likely to remain
subdued
over
the
medium
term
CBN Monetary Policy Review

relative to long term trends despite
subsisting monetary accommodation in
some advanced economies.
Domestic Output Developments
Economic recovery was sustained with
a positive outlook over the mediumterm, anchored on oil price recovery,
fiscal spending and stability in the
foreign exchange market. Data from
the National Bureau of Statistics (NBS)
showed
that
real
Gross
Domestic
Product (GDP) grew by 1.95 per cent in
the first quarter of 2018, compared with
2.11 per cent and a contraction of 0.91
per
cent
in
the
preceding
and
corresponding
quarters
of
2017,
respectively. The oil sector, which
contributed 1.26 per cent in Q1 2018,
compared with 0.76 per cent during Q4
2017 was the major source of the
growth.
The
Purchasing
Managers
Indices (PMI) for manufacturing, and
non-manufacturing activities rose for
the
fifteenth
and
fourteenth
consecutive months to 57.0 and 57.5
index points, respectively, in June 2018.
The Committee noted the positive
impact of the sustained improvement
in foreign exchange supply on the
performance of manufacturing and
other key sectors of the economy. The
Committee welcomed the positive
economic growth, but observed that
the recovery was still fragile and called
for the speedy implementation of the
2018 Federal Government Budget and
the Economic Recovery and Growth
Plan
(ERGP)
to
strengthen
output
growth in the Nigerian economy.

Developments in Money and Prices
The Committee observed that Narrow
money (M1), contracted by 4.25 per
cent, annualised to -8.49 per cent,
relative to the provisional benchmark
of 8.04 per cent. Broad money supply
(M2), however, grew by 2.79 per cent in
June 2018, annualised to 5.58 per cent,
compared with the provisional growth
benchmark of 10.84 per cent for fiscal
2018. The increase in M2 was mainly
driven by Net Foreign Assets (NFA),
which grew by 18.15 per cent in June
2018, annualised to 36.30 per cent,
compared
with
the
provisional
benchmark of 18.15 per cent for 2018.
The
development
reflected
improvements in foreign receipts arising
from favourable crude oil prices. On
the other hand, Net Domestic Credit
(NDC) contracted by 1.40 per cent,
annualized
to
-2.80
per
cent,
compared
with
the
provisional
benchmark of 12.45 per cent. The
development was driven largely by the
decrease in net credit to government,
which contracted by 9.74 per cent in
June 2018, annualised to -19.48 per
cent
against
the
provisional
benchmark of 54.97 per cent. Credit to
the private sector similarly contracted
by 0.04 per cent, annualised to -0.08
per cent in June 2018, in contrast to the
provisional annual benchmark of 5.64
per cent.
A revised and seasonally adjusted
money supply aggregate, however,
showed an uptick. The new aggregate
(M3), which is still being finalised by the
Bank,
appears
to
comprehensively
capture the liquidity in and outside the
banking system, compared with the
CBN Monetary Policy Review

existing M2. More details about the
impact of M3 on macroeconomic
variables would be reviewed at future
MPC meetings.
Headline
inflation
(year-on-year)
trended
downwards
for
the
seventeenth consecutive month to
11.23 per cent in June 2018 from 11.61
per cent in May 2018. Food and Core
inflation also fell to 12.98 and 10.40 per
cent, from 13.45 and 10.71 per cent,
respectively, over the same period. The
Committee, however, noted the rise in
the month-on-month inflation rate, to
1.24 per cent in June, from 1.09 per
cent in May 2018. Food inflation
(month-on-month) also increased from
1.33 per cent in May to 1.57 per cent in
June 2018, representing an increase of
0.24 percentage point. During the
same period, core inflation (month-onmonth) also rose by 0.05 percentage
point, from 0.98 per cent in May to 1.03
per cent, in June 2018. In view of the
trend in rising month-on-month inflation
rate, amid the slowly declining year-onyear
headline
inflation,
indications
were that inflationary pressures are
rebuilding in the domestic economy.
The review of developments in the
money
market
revealed
that
the
average inter-bank call rate fell to 5.0
per cent in June 2018, from 25.43 per
cent in May 2018, while the average
Open Buy Back (OBB) rate decreased
from 18.37 per cent in May 2018 to
10.84 per cent in June 2018. The trend
in market rates and the net liquidity
position reflected the impact of the
auction of Open Market Operations
(OMO)
bills,
foreign
exchange
interventions,
FAAC
allocations
to
various levels of government, as well as
the servicing of maturing CBN Bills.
External reserves stood at US$47.2 billion
on July 23, 2018. The Committee was
optimistic
and
expected
further
increases in the level of external
reserves in the near term, citing the
favourable
crude
oil
prices.
The
Committee,
therefore,
advised
the
Bank to sustain its current efforts to
maintain
investor
confidence
and
ensure accretion to external reserves.
The MPC also called on the Federal
Government to continue to build fiscal
buffers against possible oil price shocks
in the future. Noting that the rise in the
monthly distribution of revenues at the
FAAC portend the danger of the
absence of reserve buffers to absorb
shocks in the future.
The All-Share Index (ASI) increased
marginally by 0.09 per cent to 38,278.55
on June 29, 2018, from 38,243.19 at
end-December
2017.
Market
Capitalisation (MC) also increased by
1.89 per cent to N13.87 trillion on June
29, 2018, from N13.61 trillion at endDecember 2017. However, ASI and MC
fell by 7.24 per cent, respectively, on
June 29, 2018 compared with the level
at end-April 2018, due majorly to profit
taking activities of investors, and the
effect of monetary policy normalization
in the United States. The Committee
noted with satisfaction, the relative
stability in the foreign exchange market
and high level of activities, particularly,
at the Investors’ and Exporters’ (I&E)
window.
CBN Monetary Policy Review

The
Committee
noted
the
commencement of the currency swap
deal with the People’s Bank of China
(PBoC)
and
observed
that
the
availability of Renminbi currency to
Nigerian investors would ease pressure
in the foreign exchange market. The
MPC called for speedy implementation
of the framework of the currency swap
and urged the Bank to carry out
sensitization programme for the public.
2.0.
The Overall Outlook and Risks to
the Domestic Economy
The forecasts of key macroeconomic
indicators point to positive economic
growth in the second half of 2018. The
expectation
is
premised
on
the
implementation of the 2018 budget,
sustained
stability
in
the
foreign
exchange market, as well as increase
in crude oil production and prices. The
MPC, cautioned that the downside risks
to
the
growth
outlook
include:
continuing delay in the implementation
of the 2018 budget; worsening farmerherdsmen conflicts in some parts of the
country; continued non-payment of
workers’ salaries and pensions in some
states; rising sovereign debt, as well as
uncertainties surrounding the direction
of
trade,
including
the
external
demand for Nigeria’s oil.
Inflation forecast for the near term
points to further moderation in price
level in the short term. However, the
downside risks to inflation include: the
impact of excess liquidity that could
arise from the implementation of the
approved
N9.12
trillion

FGN
budget;
pre-election
spending;
anticipated review of salaries and
wages;
security
challenges;
and
monthly
FAAC
injections.
Although
these could boost aggregate demand,
it would equally exert upward pressure
on domestic prices for the rest of the
year. The Committee, therefore, called
for a co-ordinated fiscal, monetary and
exchange rate policies to stem the
upward build-up in price pressures.
The Committee observed that rates in
the foreign exchange market have
remained relatively stable in near term,
supported by continued intervention in
the market by the Bank, sustained
increase in the price of crude oil in the
international market, as well as positive
developments in the external sector.
3.0.
The
Considerations
of
the
Committee
The MPC noted with satisfaction the
fourth consecutive quarters of growth
in real GDP and the positive growth
outlook in the domestic economy. This
is shown by the sustained improvement
in
the
Manufacturing
and
Nonmanufacturing Purchasing Managers’
indices in the second quarter of the
year.
The
MPC
commended
the
approval of 2018 Federal Government
budget and called for an accelerated
implementation to further support the
fragile
growth
recovery.
The
Committee also called for sustained
implementation
of
the
Economic
Recovery and Growth Plan (ERGP) to
further stimulate output growth. The
Committee was, however, concerned
about the liquidity impact of the 2018
expansionary
fiscal
budget
and
increasing FAAC distribution, arising
from rising prices of crude oil as well as
CBN Monetary Policy Review

the
build-up
in
election
related
spending.
Notwithstanding, the positive direction
of the outlook, the MPC reviewed the
effects of the sustained monetary
policy normalization in the US with
implications for capital flow reversals,
exchange rate and domestic price
pressures, as well as other challenges to
growth during the second half of 2018.
The Committee took note of the
sustained moderation in inflationary
pressures, especially headline inflation,
as well as stability in the foreign
exchange
market,
but
expressed
concern on the threat posed by
incessant herdsmen-farmers crisis in
some key food producing states and
the negative impact on food supply
chains which would continue to exert
upward pressure on food prices. The
Committee, therefore, called on the
Bank to continue to build on the
progress already made to sustain the
moderation in inflation.
The
MPC
also
observed
with
satisfaction high level of activities in the
Investors’ and Exporters’ (I&E) window
of the foreign exchange market which
continued to supply liquidity in foreign
exchange market, narrow exchange
rate premium, and reduce speculative
activities in the market.
The
MPC
noted
the
continued
improvements in the performance of
deposit money banks and expressed
optimism that the moderation in the
levels of non-performing loans in the
industry
would
continue.
The
Committee, therefore, called on the
Federal Government to accelerate the
settlement of outstanding contractor
debts and also encourage the Bank to
ensure strict compliance prudential
guidelines.
In discussing the economic report
presented to the members, it was
observed that as the prices of crude oil
rose in 2017 and 2018, the monthly
allocation
to
various
levels
of
government also increased, suggesting
that the Federal Government may not
be saving adequately for the future.
The Committee, therefore, advised the
fiscal authority to build-up buffers,
especially now that the price of crude
oil is relatively high.
4.0
The Committee’s Decisions
Informed by the developments in the
global and domestic economic and
financial environments, the Committee
painstakingly
reviewed
the
policy
options available. In particular, the
Committee considered the sustained
positive growth in real GDP over the last
quarter,
stability
in
the
foreign
exchange market and high level of
accretion to the external reserves.
The MPC deliberated on the rise in food
inflation, impact
of the expected
liquidity from expansionary 2018 FGN
budget and rising FAAC disbursement
in the second half of the year along
with the build-up in pre-election year
spending.
The
Committee
strongly
considered the option of tightening
believing that tightening would curtail
the threat of a rise in inflation, even as
the injection from the fiscal authorities
would still provide the economy with
CBN Monetary Policy Review

substantial
liquidity.
Notwithstanding
the deceleration in headline inflation,
the current double digit inflation rate
remains above the Bank’s 6-9 per cent
target
range.
In
addition,
the
Committee was of the view that
tightening would help stem the tide of
capital flow reversals in the face of
sustained
monetary
policy
normalization
in the
US.
This, the
Committee
believed
would
rein-in
inflationary pressure and moderate
inflation rate to single digit, increase
real
interest
rate,
build
investor
confidence with attendant positive
impact on capital inflows and further
stabilize the country’s exchange rate.
On the contrary, the Committee was of
the view that raising interest rate at this
time would weaken consumption and
raise the cost of borrowing to investors
in the domestic economy. In addition,
the policy would trigger the re-pricing
of financial assets by deposit money
banks, thus further constrict credit to
the
real
sector,
and
that
would
promote non-inclusive growth.
In considering the option of loosening,
the Committee assessed the potential
effects
of
stimulating
aggregate
demand through lower cost of capital.
This could stimulate consumption and
aggregate demand. The Committee,
however,
considered
its
potential
relevance, taking into account the
expected liquidity injections from the

budget,
increased
FAAC
disbursements and election related
spending ahead of the 2019 general
elections. If these crystalize, it would
exacerbate inflationary and exchange
rate pressures as well as return the real
interest rate into negative trajectory.
Moreover, lowering the policy rate may
not translate to an automatic reduction
in market rates due to poor transmission
mechanism
owing
to
structural
rigidities. The Committee was also of
the view that loosening could reverse
the gains already made on reduced
importation which has strengthened
the current account balance. It would
also lower banks risk appetite and
possible rise in NPLs which could
negatively impact on the banking
industry stability.
In the discussion for a hold, it was noted
that risks to the macroeconomic and
financial environment appears fairly
balanced with improvements in output
growth and inflation. Holding policy at
the current stance would support
growth and further moderate inflation.
The Committee, however, noted the
preference of the public for loosening,
concerns that the MPC had held the
MPR at 14 per cent since July 2016 and
also considering the dynamic nature of
the market, the MPR may have lost its
signalling effect to the market. The
argument in favour of maintaining the
current policy stance is to monitor the
magnitude of the liquidity impact of
the
fiscal
injections
and
electionrelated expenditure ahead of the 2019
general elections.
Overall, the MPC was of the opinion
that, while it is difficult to encourage
job creation in an environment with
deficit infrastructure, the Committee
believes that the Bank should continue
to encourage deposit money banks
CBN Monetary Policy Review

(DMBs) to increase the flow of credit to
the
real
economy
to
consolidate
economic recovery. In this regard, the
Committee believed that a heterodox
approach to reform the market in order
to strengthen the flow of credit would
be
appropriate
at
this
time.
Consequently,
credit
constrained
businesses,
particularly
the
large
corporations are encouraged to issue
commercial paper to meet their credit
needs and the Central Bank of Nigeria
may, if need be, buy those instruments
to complement the efforts of the DMBs.
In addition, as a way of incentivise
deposit money banks to increase
lending to the manufacturing and
agriculture sectors, a differentiated
dynamic cash reserves requirement
(CRR) regime would be implemented,
to direct cheap long term bank credit
at 9 per cent, with a minimum tenor of
seven (7) years and two (2) years
moratorium
to
employment
elastic
sectors of the Nigerian economy.
Details of this framework are being
worked out by the Banking Supervision,
Monetary
Policy
and
Research
Departments of the Bank and would be
released soon.
In consideration of the foregoing,
therefore, the Committee decided by
a vote of Seven (7) members to retain
the Monetary Policy Rate (MPR) at
14.00 per cent alongside all other
policy parameters. Two (2) members,
however, voted to increase the MPR by
50 basis points, while one (1) member
voted to increase the MPR by 25 basis
points.
Consequently, the MPC voted to retain
the:
(i) MPR at 14.0 per cent;
(ii) CRR at 22.5 per cent;
(iii) Liquidity Ratio at 30.0 per cent; and
(iv) Asymmetric corridor at +200 and -
500 basis points around the MPR.
Thank you for listening.
Godwin I. Emefiele
Governor, Central Bank of Nigeria
24th July, 2018


CBN Monetary Policy Review

CENTRAL
BANK
OF
NIGERIA
COMMUNIQUÉ
NO

OF
THE
MONETARY
POLICY
COMMITTEE
MEETING OF SEPTEMBER 24 AND 25,
2018.
1.0
Background
The Monetary Policy Committee (MPC)
met on the 24th and 25th of September,
2018 and evaluated developments in
the global and domestic economic
and financial environments in the first
eight months of 2018, as well as the
outlook for the rest of the year. Ten
members of the Committee were in
attendance.
Global Economic Developments
The Committee noted the uneven
expansion in global output amidst
growing trade tension, rising oil prices
and debt levels as well as currency
depreciation in most of the notable
emerging markets and developing
economies.
These
developments
notwithstanding, there was evidence of
resilient financial markets and output
growth in the advanced economies
led
by
the
United
States,
which
experienced sharp improvements in
output growth. In the Euro area, United
Kingdom and Japan, the pace of
growth was moderate but steady,
while in the Emerging Markets and
Developing
Economies
(EMDEs),
growth was sluggish and relatively
uneven.
Growth in the advanced economies
was projected to remain at 2.4 per
cent in 2018, same as in 2017, led by
the US which grew by 4.1 per cent in
Q2 2018 and is projected to grow by
2.9 per cent in 2018. The Euro area and
Japan, grew by 0.4 and 0.7 per cent,
respectively, in Q2 and are projected
to grow by 2.2 and 1.0 per cent,
respectively, in 2018. In the EMDEs and
Developing
Economies,
growth
is
expected to remain strong at 4.9 per
cent in 2018 compared with 4.7 per
cent in 2017. Growth in the EMDEs is
expected to be led by India and
China, which are projected to grow by
7.3 and 6.6 per cent, respectively, in
2018.
On average, the momentum of the
global economy remained on track
towards achieving the 2018 growth
projections of 3.9 per cent as financial
conditions remain broadly favourable
with limited spillover of trade tensions
amongst
the
general
political
sentiments.
However,
the
recent
episodes of large-scale flooding in
major areas across the globe could
pose some threat to growth.
Accordingly, the MPC believes that
rising
oil
prices,
tighter
financial
conditions,
higher
yields
in
the
advanced economies and capital flow
reversal from the EMDEs, resulting in
pressure
on
currencies
of
some
countries with fragile conditions, as well
as growing trade tensions between the
US and China, would continue to
shape developments in the EMDEs in
the medium term.
Domestic Output Developments
Available
data
from
the
National
Bureau of Statistics (NBS) showed that
real GDP growth declined by 45 basis
points as the economy grew by 1.50
CBN Monetary Policy Review

per cent in the second quarter of 2018,
down from 1.95 per cent in the
preceding quarter, but higher than 0.72
per cent in the corresponding quarter
of 2017. The growth slowdown was
traceable to contraction in the oil
sector in the second quarter of 2018,
compared with the previous quarter.
The Committee noted that non-oil real
GDP grew by 2.05 per cent, reflecting
the
strong
performance
of
construction, services and agriculture,
which grew, by 7.66, 4.19 and 1.19 per
cent, respectively. Furthermore, the
non-oil sector was similarly supported
by the stability in the foreign exchange
market, continued implementation of
the 2017 capital budget and the ongoing interventions of the Bank in the
real sector of the economy.
The MPC was of the view that even
though growth remained weak, the
effective implementation of the 2018
FGN capital budget and policies that
would encourage credit delivery to the
real sector of the economy would
boost aggregate demand, stimulate
economic
activity
and
reduce
unemployment in the country.
Developments in Money and Prices
The Committee noted that relative to
the level at end-December 2017, Broad
Money (M2) grew by 2.98 per cent in
August 2018, annualised to 4.47 per
cent,
but
below
the
provisional
benchmark of 10.48 per cent for 2018.
The growth in M2 was largely driven by
growth in Net Foreign Assets (NFA) of
18.63
per
cent
in
August
2018,
annualised to 27.94 per cent and
above
the
provisional
growth
benchmark of 18.15 per cent for the
year. Net Domestic Credit (NDC),
however, contracted by 4.18 per cent,
annualized to 6.27 per cent, in contrast
to the growth benchmark of 12.45 per
cent for 2018. The contraction in NDC
was attributed to the 34.68 per cent
contraction
in
net
credit
to
the
Government
in
August
2018.
Conversely, credit to the private sector
grew marginally by 0.81 per cent in
August 2018 from a contraction of 0.13
per cent in July 2018, annualized to 1.21
per
cent,
against
the
annual
benchmark of 5.64 per cent.
The MPC observed that despite the
under-performance of key monetary
aggregates, headline inflation (yearon-year) inched up to 11.23 per cent in
August 2018, from 11.14 per cent in July
2018. The rise in headline inflation was
from
food,
while
core
inflation
declined, indicating that supply side
factors were driving the price increase.
The near-term upside risks to inflation
remained the dissipation of the base
effect, expected 2019 election-related
spending, continued herdsmen attack
on farmers and the current episodes of
flooding which has destroyed crops
and would affect food supply and
prices. In this regard, the Committee
urged the fiscal authorities to ensure
sustained implementation of the 2018
budget to relieve the supply side
growth constraints, as well as address
the flooding incidence which has
become perennial, on a permanent
basis.
The
average
inter-bank
call
rate
declined from 9.0 per cent in July 2018,
CBN Monetary Policy Review

to 4.0 per cent on September 20, 2018.
Similarly, the average Open Buy Back
(OBB) rate declined from 11.44 to 4.72
per cent over the same period. The
relative
decline
in
market
rates
reflected
the
increased
statutory
allocations
to
states
and
local
governments and maturing securities.
The development did not significantly
transmit to retail interest rates as
average
maximum
lending
rates
marginally declined to 30.93 per cent in
August from 31.09 per in July 2018.
Similarly, average prime lending rate
decreased to 16.65 per cent in August
from 16.83 per cent in July 2018. The
weighted average deposit rate also
declined to 4.57 per cent in August
from 4.79 per cent in July 2018,
widening the spread between the
average lending rate and weighted
average deposit rate to 26.36 per cent
in August 2018 from 26.30 per cent in
July 2018.
The Committee noted the decrease in
external reserves to US$44 billion on
September 20, 2018 from US$45 billion
at the end-July 2018. Total foreign
exchange inflow through the economy
fell by 38.34 per cent to US$6.00 billion
in July from US$9.73 billion in June 2018.
The Committee believes that accretion
to external reserves should strengthen
in the last quarter of 2018, with crude oil
price remaining above the budget
benchmark price of US$51.00 per barrel
and oil production increasing to 2.3
million barrels per day.
The Committee, noted the relative
stability in both the Investors’ and
Exporters’ (I&E) window of the foreign
exchange market, which was sustained
by autonomous inflows and measures
taken by the Bank to deepen the
foreign exchange market and curb
speculative practices.
The MPC expressed concern at the
decline in major capital market indices.
The All-Share Index (ASI) decreased by
14.99
per
cent
to
32,540.17
on
September 21, 2018 from 38,278.55 at
end-June
2018.
Similarly,
Market
Capitalization
(MC)
decreased
by
14.33 per cent to N11.38 trillion on
September 21, 2018 from N13.87 trillion
at end-June 2018. The development
was due largely to sustained profittaking by portfolio investors and capital
reversals as foreign yields become
increasingly more attractive.
2.0
Overall Outlook and Risks
Available data and forecast of key
macroeconomic indicators show a
positive outlook for the economy in the
third quarter of 2018. The Committee
expects that sustained implementation
of the 2018 budget, improvements in
the security situation and sustained
stability in the foreign exchange market
will stabilize prices and strengthen
economic growth. Growth in the nonoil
sector,
especially
agriculture,
manufacturing,
services
and
light
industries are expected to drive output
growth over the medium term. The
Committee, however, identified the
downside risks to the outlook to include:
the impact of increased monetary
policy normalization in the advanced
economies and the strengthening US
dollar.
Others
are:
the
late
implementation of the 2018 budget,
CBN Monetary Policy Review

weakening demand and consumer
spending, build-up in contractor debt,
low minimum wage, impact of flooding
on
agricultural
output
and
other
economic activities, continuing security
challenges across the North-East and
North-Central zones, and growing level
of sovereign debt.
The outlook for the year, however,
remains positive as the economy is
projected to grow by 1.75 per cent in
2018, anchored on continued stability
in
the
foreign
exchange
market,
sustained high price and production of
oil and improved electricity supply.
Inflation
outlook
suggests
a
mild
resurgence of inflationary pressure in
the economy, traceable largely to
cost-push
factors,
election
related
spending, amongst other domestic
factors. The moderating factors to the
outlook
would
include;
improved
power supply, increased expenditure
on capital projects and improved
security conditions, all of which may
exert downward pressure on consumer
prices in the near-term.
3.0.
The
Considerations
of
the
Committee
The
Committee
appraised
the
macroeconomic
environment
and
noted that at its July meeting, modest
stability had been achieved in key
indicators,
including
inflation,
exchange rate and external reserves. In
particular,
relative
stability
had
returned to the foreign exchange
market, buoyed by a robust level of
external reserves with inflation trending
downwards for the 18th consecutive
month. These gains so far achieved
appear to be under threat of reversal,
following new data which provides
evidence of weakening fundamentals.
The Committee identified rising inflation
and pressure on external reserves
created by capital flow reversal as the
current challenges to growth. It noted
that inflationary pressures have started
rebuilding and capital flow reversals
have intensified as shown by the
bearish trend in the equities market
even
though
the
exchange
rate
remains very stable.
The Committee was concerned that
the exit from recession may be under
threat as the economy slowed to 1.95
and 1.50 per cent in Q1 and Q2 2018,
respectively. The Committee noted
that the slowdown emanated from the
oil sector, with strong linkages to
employment and growth in other key
sectors of the economy. In this regard,
the Committee urged government to
take advantage of the current rising oil
prices
to
rebuild
fiscal
buffers,
strengthen government finances in the
medium term and reverse the current
trend of decline in output growth. The
MPC also called on the fiscal authorities
to intensify the implementation of the
Economic Recovery and Growth Plan
(ERGP) to stimulate economic activity,
bridge the output gap and create
employment.
The Committee noted that disruptions
to the food supply chain in major food
producing states due to the combined
effects of poor infrastructure, flooding
and the on-going security challenges
resulted in a rise in food prices,
CBN Monetary Policy Review

contributing to the uptick in headline
inflation. The Committee was, however,
optimistic that as harvests progress in
the coming months, pressure on food
prices would gradually recede, while
growth enhancing measures would
over the medium term have some
moderating impact on food prices.
The MPC expressed concern over the
potential impact of liquidity injections
from election related spending and
increase in FAAC distributions which is
rising in tandem with increase in oil
receipts.
The Committee was concerned with
the rising level of non-performing loans
in the banking system, traced mainly to
the oil sector and urged the Bank to
closely
monitor
and
address
the
situation. It also expressed concern
over
the
weak
intermediation
by
Deposit Money Banks and its adverse
impact
on
credit
expansion
and
investment
growth
by the
private
sector.
In view of the above developments,
the MPC noted that the economy was
still confronted with growth headwinds
and inflationary pressures. It reiterated
the
need
for
synergy
between
monetary and fiscal policies as a viable
option for macroeconomic stability.
The Committee, therefore, identified
two likely policy options as tightening or
maintaining
the
status
quo
ante.
Tightening
would
tame
inflationary
pressures, stem the reversal in portfolio
capital, improve the external reserves
position and maintain stability in the
foreign exchange market. Conversely,
the MPC felt that raising rates would
further weaken growth as credit would
become more expensive, NPLs would
increase
further,
leading
to
a
deceleration
in
output.
In
the
Committee’s
opinion,
the
upward
adjustment would not only signal the
Bank’s commitment to price stability
but also its desire to maintain positive
real interest rates.
A decision to hold all policy parameters
constant
would
sustain
gradual
improvements
in
output
growth,
maintain the current monetary policy
stance
and
await
a
clearer
understanding of the quantum and
timing of liquidity injections into the
economy before deciding on possible
adjustments. The MPC, however, called
on the government to fast track the
implementation of the 2018 budget to
help
jumpstart
the
process
of
sustainable economic recovery, and to
facilitate passage of the Petroleum
Industry Bill in order to increase the
contribution of the sector to overall
GDP.
4.0.
The Committee’s Decisions
In light of the above, the MPC decided
by a vote of seven (7) members to
retain the MPR at

per cent.
However, three (3) out of these seven
(7) members voted to raise the Cash
Reserve Requirement (CRR) by 150
basis points, an indication that left to
them, we should have tightened. The
other three (3) members voted to
tighten by raising the MPR by 25 basis
points.
In summary, the MPC voted to:
I.
Retain the MPR at 14 per cent;
CBN Monetary Policy Review

II.
Retain the asymmetric corridor
of +200/-500 basis points around
the
MPR;
III.
Retain the CRR at 22.5 per cent;
and
IV.
Retain the Liquidity Ratio at 30
per cent.

Thank you.

Godwin I. Emefiele
Governor, Central Bank of Nigeria
25th September, 2018


CBN Monetary Policy Review

CENTRAL
BANK
OF
NIGERIA
COMMUNIQUE
NO.

OF
THE
MONETARY
POLICY
COMMITTEE
MEETING OF WEDNESDAY 21ST AND
THURSDAY 22ND NOVEMBER, 2018
1.0
Background
The Monetary Policy Committee (MPC)
met on the 21st and 22nd of November,
2018, amidst a resurgence of global
inflationary
pressures,
increased
fragilities
in
the
global
financial
markets, weakening crude oil prices,
continuous capital flow reversal and
moderate
currency
depreciations,
especially in the emerging markets as
well as a strengthening US dollar and
subdued
global
economic
growth
outlook. The Committee appraised
recent developments in the global and
domestic
macroeconomic
and
financial environments, as well as the
economic outlook for the first half of
2019. In attendance were eleven (11)
members of the Committee.
Global Economic Developments
The Committee noted the contraction
in global output, underpinned largely
by escalating trade tensions resulting in
widespread uncertainty and waning
investor
confidence.
Consequently,
global
growth
in

has
been
downgraded to 3.7 per cent from the
earlier projection of 3.9 per cent.
Growth softened in major advanced
economies in the third quarter of 2018.
In
the
Emerging
Markets
and
Developing
Economies
(EMDEs),
growth remained divergent, reflecting
a
combination
of
country-specific
factors.
Thus,
growth
in
the
advanced
economies is expected to remain at 2.4
per cent in 2018, supported by strong
output growth in the US projected at
2.9 per cent. The U.S. expansionary
fiscal stance, strong wage growth and
continued inflow of capital into U.S.
dollar
denominated
assets,
are
expected to provide the impetus for
growth. In the United Kingdom, growth
remained
weak,
hampered
by
uncertainties
around
Brexit
negotiations. Growth in the Euro Area,
projected at 2.0 per cent, appears to
be
subdued
by
low
domestic
aggregate demand amidst relatively
high
unemployment
and
reduced
global trade. In the Emerging Markets
and Developing Economies, growth
was revised downwards to 4.7 per cent
from the earlier projection of 4.9 per
cent, largely in anticipation of a
slowdown in China as the country is
confronted with an adverse external
trade environment.
Overall, the downside risks to global
economic activity remained: elevated
financial
fragilities
and
policy
uncertainties, the gradual erosion of
rule-based multilateral trading system,
tighter financial conditions with latent
disruptive
portfolio
adjustments,
increased capital flow reversals with
potentials for heightened exchange
rate depreciation and some volatility,
fiscal fragilities and increased debt
burden,
geo-political
tensions
and
increasingly
depressed
aggregate
demand in some countries. These
factors
will
continue
to
shape
developments for the rest of 2018 and
into 2019.
CBN Monetary Policy Review

The MPC also noted that monetary
policy in most advanced economies,
particularly the US, continued on a
path of normalisation in view of strong
wage
growth
and
declining
unemployment. The Bank of England
hiked its policy rate in August 2018,
while the European Central Bank (ECB)
has given guidance to terminate its
asset
purchase
programme
in
December 2018. The Committee was
concerned that these developments
will in the medium term, accentuate
capital flow reversals from emerging
and developing economies, including
Nigeria.
Domestic Output Developments
The Committee noted the positive
outlook for output growth, evidenced
by
the
Manufacturing
and
Nonmanufacturing Purchasing Managers
Indexes (PMI), which stood at 56.8 and
57.0
index
points,
respectively,
in
October 2018, indicating expansion for
the 19th and 18th consecutive months.
This was attributed to the stability in the
foreign
exchange
market,
implementation of the 2018 capital
budget and the on-going intervention
of the Central Bank of Nigeria (CBN) in
the real sector of the economy.
However, the recent incidence of
flooding across the country and the
impact of herdsmen attack on farming
communities
could
affect
output
growth for the rest of the year.
Overall, the Committee believes that,
even though output recovery remains
fragile, the effective implementation of
the

capital
budget,
relative
improvements
in
power
supply,
progress with counter-insurgency in the
North-East and sustained intervention
by the CBN in the real sector, will
improve the investment climate and
reduce unemployment. Consequently,
the MPC reaffirmed its support for all
initiatives
designed
to
stimulate
domestic output growth.

Developments in Money and Prices
The Committee noted that broad
money (M2) grew by 6.52 per cent in
October 2018 over its level at the endDecember 2017; and annualised to a
growth rate of 7.82 per cent, which was
below the provisional benchmark of
10.48 per cent for 2018. The growth in
M2 was largely due to the significant
growth in Net Foreign Assets (NFA)
which grew by 20.71 per cent in
October 2018, annualised to 24.85 per
cent
which
is
above
the

provisional growth benchmark of 14.50
per cent. Credit to Government and
Net Domestic Credit (NDC) expanded
by 7.43 and 2.71 per cent, annualized
to 8.92 and 3.26 per cent, respectively;
but below the annual benchmark of
13.10 and 17.40 per cent, respectively.
Credit to the private sector grossly
underperformed as it grew by 1.94 per
cent, annualised to 2.33 per cent,
below the 2018 benchmark of 12.40 per
cent. The underperformance of the
monetary aggregates was of concern
to the MPC, which urged the CBN to
ensure improved credit delivery to the
small and medium scale industries,
particularly to the unbanked urban and
rural populations.
The Committee noted the benign
performance of inflation, as headline
CBN Monetary Policy Review

inflation (year-on-year) decreased to
11.26 per cent in October 2018 from
11.28 per cent in September 2018 after
two consecutive months of marginal
increases. The drop in headline inflation
was driven by food inflation, which
moderated
to
13.28
per
cent
in
October
from
13.31
per
cent
in
September
2018.
Core
inflation,
however, inched up marginally to 9.9
per cent in October 2018 from 9.8 per
cent in the previous month. On a
month-on-month basis, headline and
food inflation also moderated to 0.74
and 0.82 per cent in October from 0.84
and 1.0 per cent in September 2018,
respectively,
while
core
inflation
increased
from
0.64
per
cent
in
September 2018 to 0.80 per cent in
October 2018.
The
Committee
noted
that
the
moderation in inflation was largely
seasonally driven and was therefore,
unsustainable as prices were expected
to pick towards the end of the year.
However, the MPC observed that the
near-term
upside
risks
to
inflation
remained; the disruption to agricultural
production and distribution arising from
flooding, insurgency in the North-East,
herdsmen-farmer crisis, high cost of
energy, anticipated spending in the
run-up to Christmas festivities and
campaign-related spending towards
the upcoming 2019 general elections.
Accordingly, the Committee enjoined
the appropriate authorities to continue
to address these challenges and to
sustain the implementation of the 2018
budget and the Economic Recovery
and Growth Plan of the Federal
Government to ameliorate the supply
side constraints.
Money market interest rates oscillated
throughout
the
review
period,
reflecting
fluctuations
in
banking
system liquidity. Inter-bank call and
Open Buy Back (OBB) rates, which
stood at 16.00 and 17.08 per cent,
respectively, on September 26, 2018,
declined moderately to 14.00 and
16.31
per
cent,
respectively,
on
October 24, 2018. On average,
interbank call and OBB rates rose from
8.68 and 7.64 per cent in September
2018 to 14.18 and 13.93 per cent,
respectively, in October 2018, closing
at
10.00
and
9.72
per
cent,
respectively, on November 21, 2018.
The
developments
in
net
liquidity
position and flows which culminated in
higher
market
rates
reflected
the
impact of higher risk perception in the
market, withdrawals from the banking
system
for

monthly
statutory
disbursements to states and local
governments; OMO sales and foreign
exchange interventions.
The average naira exchange rate
remained
relatively
stable
and
converging at both the Bureau-deChange (BDC) and the Investors’ and
Exporters’ (I&E) window segments of
the foreign exchange market during
the review period. The exchange rate
at
the
I&E
window
opened
at
N364.00/US$ and closed at N363.90/US$
with a daily average of N363.87/US$
between September 26 and November
16, 2018. At the BDC segment, the
exchange rate opened at N360.00/US$
and closed at N361.85/US$, with a daily
CBN Monetary Policy Review

average of N360.98/US$, over the same
period. The relative stability in the
foreign exchange market, the MPC
noted,
was
attributable
to
the
sustained policies of the Bank to
increase
the
supply
of
foreign
exchange from autonomous sources.
Gross official reserves decreased from
US$42.60 billion at end-September, 2018
to US$41.53 billion on 16th November,
2018.
The Committee noted the bearish trend
in the equities segment of the capital
market during the review period. Thus,
All-Share Index (ASI) decreased by 8.70
per cent from 34,848.45 on August 31,
2018 to 32,058.28 on November 16,
2018. Similarly, Market Capitalization
(MC) decreased by 8.72 per cent from
N12.72 trillion to N11.70 trillion during the
same period. Relative to the endDecember 2017, the indices decreased
by
19.29
and
16.32
per
cent,
respectively.
These
developments
largely reflect the sustained profit
taking activities by portfolio investors as
foreign
yields
become
increasingly
more attractive abroad. The MPC,
however, believes that this trend will
reverse in the medium term given the
current efforts at further improving
investor confidence and the relative
stability in the Investors and Exporters
(I&E) window of the foreign exchange
market.

2.0.
Overall Outlook and Risks
Forecasts
of
key
macroeconomic
variables indicate a positive outlook for
the economy in Q4 of 2018. The
Committee expects that the effective
implementation
of
the
Economic
Recovery and Growth Plan (ERGP) and
the 2018 budget, improvements in the
security challenges, enhanced flow of
credit to the real sector and stability in
the
foreign
exchange
market
will
redirect the economy on a path of
inclusive
and
sustainable
growth.
Increased production in the oil and the
non-oil sectors are also expected to
drive output growth in the medium
term.
The
Committee,
however,
acknowledged the downside risks to
this
outlook
to
include:
reduced
portfolio inflows, weak of fiscal buffers,
low domestic credit, and sluggish
aggregate demand.
The
inflation
outlook
suggests
continued but moderate inflationary
pressure to the end of 2018, based
largely
on
increased
consumer
spending for the Christmas festivities,
election-related
expenditure
and
increased pace of implementation of
the 2018 Federal government budget.
Improvements in the security, increased
harvests as well as a stable exchange
rate are expected to moderate the rise
in inflation.
Overall, the outlook for the economy
remains
positive
with
a
growth
projection of 1.75 per cent in 2018.
3.0.
Committee’s Considerations
The
Committee
assessed
the
macroeconomic environment in 2018
and noted the modest stability thus far
achieved in domestic prices, output
growth and the financial system. The
Committee noted that the economy
was on the right path but some key
sectors
continued
to
experience
CBN Monetary Policy Review

significant
challenges.
The
MPC,
however, expressed concern about the
tepid
growth
expectations
and
growing uncertainty in the global
financial markets arising from the poor
reception of the Brexit deal by British
politicians,
continuing
trade
war
between the US and her major trading
partners,
as
well
as
the
commencement of US sanctions on
Iran.
The Committee believed that although
the domestic economy was recovering
modestly from recession, however, the
recovery was tepid and efforts should
be
stepped
up
to
strengthen
aggregate output and demand. In this
regard, the Committee urged the CBN
to deepen and broaden access to
finance to high employment elastic
sectors with particular emphasis on
small and medium scale enterprises.
The Committee called on the CBN to
extend the success recorded under the
Anchor Borrowers Programme to other
items including fish and palm oil, etc.
by introducing more stringent measures
to curb access to foreign exchange for
products that can be produced within
Nigeria.
The MPC welcomed the moderation in
inflation in October, reflecting declining
food prices. The Committee believes
that given the negative output gap,
the proposed increase in the national
minimum wage would stimulate output
growth
due
to
prolonged
weak
aggregate demand arising from salary
arrears
and
contractor
debt.
Consequently,
its
impact
on
the
aggregate price level would be largely
muted,
given
that
the
monetary
aggregates
have
largely
underperformed
in
fiscal
2018.
In
addition, the prevailing stability in the
foreign
exchange
market
would
continue to moderate pressures on the
domestic price level.
The MPC noted the improvements in
the
financial
stability
indicators,
including non-performing loans, capital
adequacy and liquidity ratios of the
Deposit Money Banks (DMBs). It urged
the Bank to sustain its surveillance over
the Banking industry by taking prompt
corrective measures to further improve
stability in the system. The Committee
also called on the fiscal authorities to
build significant buffers to strengthen
the efficacy of monetary policy.
Overall,
the
MPC
considered
the
options to loosen, hold or tighten. The
Committee continues to hold the view
that
although
loosening
would
encourage the flow of credit to the real
sector,
help
in
reduction
of
the
aggregate cost of credit and spur
business
spending
and
investment,
thereby reinforcing the CBN’s support
for
output
growth
and
economic
recovery, it, however, believed that
doing so will reverse more rapidly, the
gains of price and exchange rate
stability achieved so far given the
liquidity impact that would entail. The
ensuing liquidity will exert pressure on
the exchange rate in the light of
increased capital flow reversals arising
from monetary policy normalization by
the US Fed. This would further depress
the capital market.

CBN Monetary Policy Review

As for tightening, the MPC hold the
view
that,
while
tightening
will
strengthen the stability of the foreign
exchange
market
because
of
its
dampening effect on the demand for
foreign exchange, it was however
convinced
that
this
would
simultaneously
dampen
investment
growth, widen the output gap, depress
aggregate
demand
and
weaken
output growth.

The MPC recognizes the fact that it had
held the policy rate and other policy
parameters constant over the last
several
meetings.
The
Committee
underscores that by holding its policy
position constant, it has confidence in
the various policies and administrative
measures deployed by the Bank which
have resulted in the moderation in
domestic price levels and stability in the
foreign exchange rate. Thus, a hold
position is an expression of confidence
in the policy regime, given the gradual
improvements in both output growth
and price stability. On this premise, the
downside risks to growth and upside
risks to inflation appears contained.

4.0.
The Committee’s Decisions
In light of the above, the MPC decided
by a vote of all eleven (11) members
present to HOLD.
In summary, the MPC voted to:
1. Retain the MPR at 14 per cent;
2. Retain the asymmetric corridor
of +200/-500 basis points around
the MPR;
3. Retain the CRR at 22.5 per cent;
and
4. Retain the Liquidity Ratio at 30
per cent.

Thank you.

Godwin I. Emefiele
Governor, Central Bank of Nigeria
22nd November, 2018