CENTRAL BANK OF NIGERIA COMMUNIQUÉ NO 120 OF THE MONETARY POLICY
COMMITTEE MEETING OF SEPTEMBER 24 AND 25, 2018, WITH PERSONAL
STATEMENTS OF MEMBERS
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 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 on-going 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 (year-on-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, 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
profit-taking by portfolio investors and capital reversals as foreign yields become
increasingly more attractive.
The 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 non-oil 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, 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.
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,
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.
The Committee’s Decision
In light of the above, the MPC decided by a vote of seven (7) members to
retain the MPR at 14 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;
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

PERSONAL STATEMENTS BY THE MONETARY POLICY COMMITTEE MEMBERS
1.
ADAMU, EDWARD LAMETEK
The September 2018 meeting of the Monetary Policy Committee (MPC) held
against the backdrop of increased uncertainty in the global economic and
financial environment. In Europe, Brexit is proving much harder to negotiate
than envisaged, while the trade tension between the U.S. and China continues
to degenerate, apparently progressing towards a trade war. In emerging
markets and developing economies (EMDEs), local currencies and capital
markets have come under severe pressure due to sustained dollar appreciation
and the attendant capital reversals. On the domestic front, there appears to
be a resurgence of inflation pressures accompanied by slowing output
recovery. The overall medium-term outlook remains unclear owing to
uncertainties around liquidity, capital flows and economic growth.
From the available data and forecasts, I figured that some of the macro
vulnerabilities and threats were already weighing negatively on the financial
system. Banking industry resilience appears to be receding with the rising nonperforming loans (NPLs) ratio, driven essentially by oil sector exposures. Equally
concerning is the decline in capital market indices. Both the All-Share Index (ASI)
and Market Capitalization (MC) decreased by about 14.0 per cent between
June and September 2018 owing in part to capital flow reversals as foreign yields
become increasingly more attractive.

There is no gain saying that monetary policy cannot mitigate all of the current
risks to economic stability. However, it remains the proximate tool for achieving
price stability. The deceleration in inflation and stability in the naira exchange
rate in over a year have been mainly as a result of the tight monetary policy
stance. This is why the urge to further tighten the policy stance given the extant
risks to price stability continues to be strong. As I stated in my July 2018
statement, the option of tightening further remains relevant even as I voted at
the September 2018 meeting to once more hold all the policy parameters. I did
so owing to the following considerations:
First, the pressure on consumer prices which led to the increase in headline
inflation in August came mainly from food as core inflation continued to
moderate. In line with past trends, we expect some moderation in food prices
during the next two months (September and October) as harvests kick-in fully.
The major risks to this expectation are coming from the recent floods and
distribution bottlenecks which cannot be addressed using monetary policy tools.
Second, although the outlook for liquidity remains inclement due to election
(campaign) spending and the likely expansive fiscal orientation in the rest of the
year, growth in key monetary aggregates up to end-August, remained
moderated. Effectively, the sterilization actions of the Bank have prevented
money supply from growing unabated, thereby providing some control on the
demand side. Besides, the slow pace of fiscal injections up to September has

meant that the much anticipated surge in federal government expenditure may
not happen so soon, if at all.
Third, output recovery has remained sluggish. In Q2, 2018, real GDP grew by 1.50
per cent from 1.95 per cent in Q1. Growth can be better than currently seen if
credit to the real sector improves and some of the constraints on agricultural
production are alleviated. Further tightening at this time could depress credit
and undermine the weak recovery. It could also narrow the space for the much
needed fiscal actions aimed at stimulating growth and employment in the short-
to medium-term.
Finally, the financial system has come under increased pressure in recent months
owing to a combination of adverse external and domestic conditions,
manifesting in divestments in the equities market and rising NPLs. Further
tightening of the monetary policy stance may not be helpful at this time to the
system. In the banking sub-sector especially, it could lead to asset re-pricing,
increased operating cost and higher risk to asset quality.
I believe that although demand management measures will continue to be
useful in curbing price pressures, they cannot be depended upon alone to
achieve overall economic stability. It is in this light that complementary policies
in other sectors are indispensible in addressing the supply issues that tend to hold
down economic growth and stoke price increases. Government investment in

key infrastructure and sustained effort in the area of security will continue to be
fundamental to the recovery process.
Therefore, I voted to retain all the monetary policy parameters at the levels prior
to the September 2018 meeting, primarily in consideration of growth and
employment concerns while hoping that routine sterilization actions of the Bank
will continue to have their desired effect on inflation and exchange rate
pressures. Specifically, I voted to retain:
MPR at 14.0 per cent;
CRR at 22.5 per cent;
Liquidity Ratio at 30.0 per cent; and
Asymmetric corridor at +200 and -500 basis points around the MPR.

2. ADENIKINJU, ADEOLA FESTUS
Introduction
The reports presented by the staff on the performance of the Nigerian economy
as well as global economies at the September meeting of the MPC painted a
very mixed picture. However, while there are several positive developments,
especially with the high price of oil, and the positive output growth in countries
like the U.S., the economic slowdown in China, and some major and emerging
economies, combine with geopolitical tensions will continue to cast a shadow
on overall global economic growth. The IMF projects global output growth to
reduce from 2.4 per cent in 2018 to 2.2 per cent in 2019. It is also not clear how
long the high oil price will subsist, with veiled American threat on OPEC to lower
price and rising oil output from the U.S. Agriculture and commodities prices are
declining. The growth of the U.S. economy continues to accelerate and
unemployment rates continue to fall to record low. The Inflation rates in the
OECD are already trending above targets signaling potential rise of interest rates
with negative consequences on the economies of emerging countries.
Continued U.S. Policy normailization and appreciation of the dollar are further
casting shadows on the fortunes of economies of emerging countries. Several of
these countries have experienced exchange rate depreciation, significant
contraction in stock market indices as portfolio investors continue to flee to safer

havens. Nigeria must calibrate its economic projections taking account of these
global developments both in the short and medium term.
Recent statistics released by the National Bureau of Statistics (NBS) are indicative
that Nigeria economy may not be immune from the effects of global and
domestic factors that have weighed negatively on the economy. National
Bureau of Statistics data showed that the Nigerian economy growth rate slowed
down in the second quarter from 1.95 per cent in the first quarter when
compared to 1.50 per cent in the second quarter. Furthermore, headline
inflation which had become sticky in its deceleration in the first quarter actually
turned the corner to inch up to 11.23 in September from 11.14 per cent in
August. While the increase in inflation rate was attributed to seasonal effects
and cost push factors, especially in food prices, the rising trend in broad money,
M3, signifies an underlying monetary impulse.
The threat of inflation weighed heavily on my mind as I cast my vote at this
meeting. There is no doubt that I am concerned about slowing economic
growth rate and high unemployment rate, however, as I indicated in my July
personal statement, a turning point on inflation rate in upward direction will tilt
my decision for a tightening of the monetary policy. Inflation poses a long term
threat to both economic growth and indeed welfare of Nigerians and Central
Bank must do all within its power to moderate its effects.

The MPC in its previous meeting has agreed on a number of non-conventional
measures to boost credit to the real sector and therefore stimulate growth.
These measures include a dynamic CRR to encourage deposit banks that lend
to the private sector and the encouragement of operators in the agricultural
and industrial sector to raise commercial papers that CBN may also subscribe at
a single digit interest rates. These measures adopted at the July meeting should
be given time to work their effects through the economy.
I am concerned about the lack of fiscal buffer in the midst of high oil price, the
high debt service revenue ratio, unpredictability in the release of capital votes,
the continuous fall in the NSE share index value as portfolio investors’ move out
of the economy. Furthermore, the reducing level of foreign reserves, due partly
to efforts aimed at stabilizing the naira exchange rate, may affect the
opportunity to maintain robust foreign reserves at a time of high oil price. It is not
by coincidence that external reserves declined from a height of US$47.43 billion
end- April 2108 to US$43.91 billion on September 20, 2018.
I am also not unmindful of cloud of uncertainties that continues to hang over the
economy which would require careful maneuvering of the fiscal authorities.
These include, the persistent farmers-herders clashes, effects of flooding on
agriculture, trade and services, clamour by labour for increase in minimum
wage rate, anticipated election spending, release of capital budget in a

manner that may affect liquidity in the economy and significant cash grants
currently being injected into the economy for economic empowerment.
I am of the opinion that a marginal adjustment in the monetary policy rates will
serve a strong signal to stakeholders that CBN will not condone any resurgence
of inflation. Waiting for any of the upticks to inflationary pressures to manifest
would require stronger monetary policy adjustments. A tightening will protect
our currency and mitigate current rate of capital outflow. Comparator countries
like Indonesia, Russia and Turkey have already raised interest rates in a bid to
curb inflation and support their currencies.
Hence on the balance of probabilities, I strongly feel that the measures already
put in place by the CBN to support economic growth, which ordinarily should be
led by the fiscal authorities, should be monitored and continue to be fine-tuned
to pressure deposit banks to increase credits to the real sectors. However, the
Central Bank should focus on its primary mandates of ensuring price and
exchange rate stability and protecting foreign reserves at a time of oil boom,
which from lessons of experience is highly volatile, and easily reversible.
Decision
Given the aforementioned reasons, I believe when situations are right, marginal
step to tame inflationary build up and manage sensitive economic decisions is a
better option than a delay that may necessitate stronger countervailing
measures that may pose a major shock to the economy, I cast my vote to:

i. Increase MPR by 25 basis points to 14.25%
ii. maintain CRR at 22.5%
iii. Maintain existing asymmetric corridor around the MPR

3.
AHMAD, AISHAH
Introduction
Recent domestic and international economic developments shaped discussions
at
the
September

MPC
meetings.
Fragile domestic growth
and
rising inflation was tempered by a relatively stable exchange rate, whilst external
reserve buffers appeared to show signs of some strain in the light of foreign
portfolio investor exits. The monetary policy ‘trilema’ came sharply into focus as
the committee was confronted with the multiple challenges of driving growth
and stemming rising inflation amidst increasing exchange rate pressures.
International economic headwinds are manifest. Trade tensions continued to
build as the US renegotiated a number of bilateral trade agreements and
introduced a wide range of tariff hikes, stocking considerable uncertainty in the
global trade arena.
In addition, the US GDP growth of 4.1 per cent in Q2 2018 and inflation above its
long run target at 2.7 per cent in August 2018 (year on year), presents
a convincing case for further monetary policy rate hikes. This has been
repeatedly signaled by the Federal Open Market Committee, with attendant
implications for capital outflows from the rest of the world, particularly, emerging
market economies which have recorded significant currency depreciation.

However, some analysts have suggested that these emerging market currency
weaknesses in response to a stronger dollar are largely idiosyncratic and isolated
to each individual country’s balance of payments, with no theoretical
justifications for contagion. Arguably, some of these countries have huge current
account deficits and high inflation rates, which is challenging for countries with
significant dollar exposures particularly in a rising interest rate environment.
Thankfully, Nigeria has maintained a healthy balance of payment surplus
boosted by rising oil prices and robust external reserves. Although reserve levels
are declining, from $47.1b as at end July 2018 to $45.1bn as at September 17th
2018, it remains at levels that can sustain significant months (estimated at
about seventeen months)
of
imports
and
further
portfolio
investment
withdrawals.
Domestic growth remains fragile
GDP growth slowed to 1.50 per cent in Q2 2018 from 1.95 per cent in Q1 2018,
tempering the optimism from the positive trajectory from the last two quarters of
2017, following the exit from recession. According to the National Bureau of
Statistics, this lower growth was driven by lower than expected oil production
and relatively weak agricultural output. Notwithstanding, it is good to note that
Q2 output growth was driven by the non-oil sector, which grew by 2.05 per cent,
representing the strongest growth in non-oil GDP since the fourth quarter of 2015.
These are indications that some structural reforms are beginning to yield

results and require sustained efforts to forestall any reversals. Near term growth
projections also remain positive on account of rising crude oil prices,
expected agricultural harvest
and
anticipated
fiscal
stimulus
from
the
implementation of the 2018 federal budget.
This sluggish growth was reflected as both a cause and consequence on
financial system soundness indicators. CBN staff reports indicate that NonPerforming Loans (NPLs) ratio which had earlier declined in June 2018 rose
marginally in August 2018, amidst moderated return on assets and equity. Whilst
Bank Staff offered further insights into the rise in NPLs due to the implementation
of the new IFRS 9 provisions, which requires significant increases in expected loss
provisions, there is clearly a need to further incentivize the banking system to
support the required boost in economic activities.
The rise in NPLs partly reflected in the observed decline in new credit - a
concern the CBN has continuously highlighted in view of its implications for real
sector growth. Hence, as part of the CBN’s efforts to expand credit to critical
real sectors, at the July 2018 MPC meetings, the Committee announced a
dynamic Cash Reserve Ratio regime and encouraged the issuance of
Commercial Papers by large corporates. Guidelines for these policies have
been issued and there is optimism that the initiatives will yield the desired
results. On
the
whole, the
banking
system
remains
resilient
and
the

CBN is committed to providing the needed impetus to drive the sector’s
contribution to overall economic performance.
Inflationary headwinds in sight, but still far in distance
In earlier statements, I cautioned about rising price levels due to a number
of inflationary headwinds and the eventual dissipation of the base effect
momentum. These appear to have surfaced with headline inflation increasing,
for the first time in eighteen months, to 11.23 per cent in August from 11.14 per
cent in July. Food inflation rose to 13.16 per cent from 12.85 per cent over the
same period resulting from increases in prices of food due to seasonality from
the Sallah celebrations, distribution constraints, farmers/herdsmen conflicts in
food producing areas and reduced supply from off-season effect.
However, the early signs of rising headline inflation may be isolated and largely
driven by cost-push factors; especially as core inflation continued to decline,
reducing to 10.02 per cent in August 2018 from 10.18 per cent in the previous
month on account of improved supply of petroleum products and stable
energy prices. Besides, the much anticipated expansionary fiscal activities have
not manifested, given muted fiscal budget spending thus far, whilst there
appears to be no recognizable inflationary effect from election spending
despite two concluded state elections amidst preparations for the general
elections which is also well underway.

In the short term, these considerations justify some optimism where inflationary
headwinds and the inflation forecast are concerned, two key factors in
determining the monetary policy response. However, it is prudent to remain
vigilant regarding price developments in the medium term, particularly as
budget implementation picks up steam and party primaries are concluded
amidst the increasing clamour for a rise in the minimum wage.
Crude oil prices look set to remain strong for the rest of 2018 in view of ongoing
supply concerns over US sanctions on Iran that come into force November this
year. Current price of Bonny Light crude at $80p/b (21st September, 2018)
remains higher than the 2018 budget bench mark ($51p/b) which provides an
opportunity for re-building fiscal and external reserve buffers. This gives the CBN
the leverage to manage the exchange rate and respond to capital flow
reversals which may be sustained over the medium term on account of
normalization of interest rates in the US and short-term political and economic
uncertainties.
Although high and rising crude oil prices are good for the economy, the
attendant increase in the price of imported refined crude oil may heighten
subsidy payments by the federal government if petrol pump prices are to
remain within regulated levels. This underscores the importance of the ongoing
efforts of the federal government at revenue and economic diversification in

view of the vulnerability associated with heavy reliance on crude oil export
proceeds for economic management.
More importantly, intensified implementation of the Economic Recovery and
Growth Plan which recognizes the all-important need to diversify the productive
and export base of the economy is critical to support a more robust and resilient
economic recovery.
Decision
Based on the foregoing developments, the balance of risks to overall economic
outlook in Nigeria, particularly with respect to growth and inflation has shifted
further to the downside in the short term. In particular, i) Nigeria’s economic
rebound observed since Q2 2017 remains fragile and could be derailed in the
near-term if imminent shocks are misjudged; ii) Inflation which had maintained a
downward trajectory is reversing and may persist in the near term –
thus remaining above the acceptable band with adverse implications; iii)the
relative stability in the exchange rate is gratifying, however, observed decline in
the external reserves position raises concerns in view of policy directions in the
US; iv) the expected budgetary injections and election spending could expand
aggregate demand beyond acceptable levels thus intensifying the inflationary
trend.
In this circumstance, further tightening of the monetary policy stance, which is
ideal to curb rising inflationary trends and capital flow reversals may further

exacerbate the already slow growth momentum. Thus, juxtaposing the
objective of price stability with the benefits of sustained growth, there is a
compelling case for keeping policy rates at current levels to support gradual
improvements in output growth as the direction of liquidity injections become
clearer.
Therefore, I vote to retain the current monetary policy stance, by keeping MPR
at 14%; Cash Reserve Ratio at 22.5%; Liquidity Ratio at 30% and Asymmetric
corridor at +200 and -500 basis points around the MPR.

4.
ASOGWA, ROBERT CHIKWENDU
Background:
The September 2018 MPC meeting took place against the backdrop of
changing and unexpected developments in the domestic economic
projections especially the 2018 quarter 2 GDP growth and the recent year-onyear Inflation figures for August 2018. These worrisome trends accompanied by
the yet unabated uncertainties at the domestic front such as the expected
impact of the 2018 budget and other pre-election spending as well as the
increasing turbulence in the stock market continue to limit policy choices. At the
international levels, key downside risks relating to the ongoing trade tensions
between major economies and the gradual pace and pattern of monetary
policy normalization process in some advanced economies also continue to
create considerable uncertainty in global financial market conditions. As such,
choice of policy rate at this MPC meeting will rest on two key approaches; either
to strongly respond to these emerging domestic concerns and scenarios even
though deemed temporary or to maintain the existing status quo so as to
enable for more time to monitor developments in the near-term.
International Economic Outlook:
On the international economic outlook, the monetary policy normalization in
some advanced economies which appears to be proceeding in a well
communicated manner thus generating financial market uncertainties and

turbulence remains a growing policy challenge for developing and emerging
economies. In September, the US Federal Reserve raised its key interest rate for
the third time in 2018 by 25 basis points to a range of 2-2.25% and has signalled
one more hike in 2018, most likely in December. While the Bank of England
retained policy rates in September after it was raised to 0.75 in August which is
similar to the ECB and several other economies the rise on US Treasury yields
alone continue to trigger adjustments in global financial market conditions. For
instance, the US Dollar has continued to strengthen over the past six months,
while the Euro, Yen and British Pounds remain almost unchanged. In contrast,
most emerging and developing market currencies have depreciated sharply.
CBN staff report for September 2018, show significant depreciation in the
currencies of South Africa, Brazil, Argentina, Russia, India while there are
moderate depreciations in the currencies of Ghana, Egypt, Canada, Columbia,
UK, the Euro Area and China. Similarly, the equity indies for most of these
economies declined but modestly. CBN staff report also show stock market
indices declined in Nigeria, Kenya, Egypt, Ghana, UK, Columbia and China
between June and August 2018.
Most of these negative trend (in currencies and equity index) reflects largely the
weakening capital flows and a general uptick in non-resident sales of portfolio
debt and equity securities in many emerging and developing economies and
the corresponding higher yields in the US. Moreover, the rising trade tensions
which has seen the US impose tariffs on a variety of imports thereby prompting

retaliatory measures from trading partners have also clouded the earlier
projected positive macroeconomic outlook for so many countries.
In terms of recent global output, CBN Staff data show that the dip in output in
the first quarter of 2018 for several developed economies was indeed only
temporary, with momentum recovering in the second quarter of 2018 despite
the forecasts which have lately been revised downwards. There were
improvements in second quarter growth in the US, Germany, UK, Japan, China
and India but marginal slowdown in South Africa, Ghana and Nigeria
compared to the first quarter of 2018. The positive growth outlook in these major
economies is quite encouraging inspite of the considerable uncertainty in the
global trade area and the rising geopolitical tensions. Eventhough South Africa
had a slip in the negative growth territory in the first quarter of 2018, there are
somewhat huge expectations of positive recovery over the remainder of 2018
and 2019.
Similar to the global output data, the updated Inflation data based on the CBN
Staff Report show mixed trends in the near term outlook for several economies.
While there were mild increases in the August inflation data for the UK, Japan,
China, Ghana, Egypt and Russia, there were decreases in the August inflation
rates for the US, the Euro Area, India, South Africa and Brazil. These marginal
changes in the inflation rates did not however alter the policy rates decisions in
most of the countries either in August or September. Interestingly, such countries

as India, Indonesia, and the US where the policy rates were raised in
August/September, their inflation rates had dropped marginally in the
preceding months before the hike.
Domestic Economic Outlook:
On the domestic front, the economic outlook especially the August Inflation
Report and the 2018 second quarter GDP changed on the negative side
against projections relative to the position at the last MPC meeting in July. The
factors shaping the recent outcomes do not however warrant panicky policy
adjustments. While the year-on-year headline Inflation increased marginally to
11.23% in August from 11.14% in July, the core inflation however declined from
10.20% in July to 10.02% in August. The food inflation increased from 12.85% in
July to 13.16% in August. While the marginal uptick in headline inflation (year-onyear) raises some concern, its cost push nature arising mainly from scarcity of
farm produce due to temporary underlying factors provides optimism for
reversal in the coming months especially if potential threats of huge elections
spending is minimised in the remaining months of 2018.
The dip in 2018 quarter 2 output to 1.50 % from the 1st quarter level of 1.95%
which although is considered to be temporary, however raises considerable
concern especially with the slowing performance of the Industrial sector
(manufacturing and mining). The manufacturing index in the second quarter of
2018 remained at about 175.9 points which is a decrease of 3.5% when

compared to the levels of the first quarter of 2018. The manufacturing PMI in
September also stood at 56.2 index points which although indicated expansion
in the sector for the 18th consecutive months, but grew at a slower rate when
compared to the month of August. Similarly, the PMI for the non-manufacturing
sector was 56.5 points in September also an indication of expansion for the 17th
consecutive month but also at a slower rate when compared to August level.
Given the expected temporary nature of the swings in these two key domestic
variables; inflation and GDP, an appropriate policy stance at this time would be
to stay on the side of caution while monitoring developments in the future.
Mixed Performance of the domestic financial soundness and external sector
indicators:
Besides the domestic headline inflation and the Q2 GDP data which are
deemed temporary to warrant any strong policy changes at this time, the
emerging signal of mixed performance in both the financial soundness and
external sector indicators appear also to be clouding the positive outlook which
is expected in the coming months.
Two financial soundness indicators which evoke new concerns based on the
recent CBN staff report are the Non-Preforming Loans (NPLs) ratio and the
Capital Adequacy Ratio (CAR). The NPL ratio which is a measure of the
industry’s asset quality increased from 12.45% in June to 14.70% in August, while
the Capital Adequacy Ratio (CAR) declined from 12.0% in June to 10.79% in

August. This trend is worrisome given the expectation that loan losses by the
banking industry should be declining at this time, with the exit from recession.
Other financial soundness indicators such as total assets and total credit growth
however recorded some modest improvements. Whilst the total banking industry
assets grew from 33.7 trillion Naira in July to 34.05 trillion Naira in August, the total
Industry credit moved slightly from 15.53 trillion Naira to 15.76 trillion Naira. Given
that the banking sector as a whole has continued to be liquid, fairly profitable
and solvent despite the recent asset quality deterioration, cautious monetary
policy options will be ideal at this time to avoid provoking any further distress in
the banking sector.
Similarly, the mixed performance in the external reserves/foreign capital inflow
and the exchange rate which to some extent reflect the monetary policy
normalization process in some advanced economies would require more policy
patience than a hasty approach to policy changes. For instance, the partial but
consistent decline in the external reserves since July 2018 inspite of the increase
in the crude oil revenue receipts is linked to the decline in foreign capital inflows
from July and the increased capital outflows as from August. While the sudden
appreciation of the dollar against major currencies has not affected the relative
stability in the Nigerian foreign exchange market largely because of the
sustained interventions by the Central Bank, managing the uncertainties very
cautiously remains critical. The prospects of tighter monetary policy at this time
may also expose the country to higher borrowing costs and heavy debt

servicing schedule given the growing foreign debt component in the national
debt management strategy.
Decision:
It is critical for monetary policy to remain supportive of growth amid the
emerging inflationary pressures which look temporary and the heightened
uncertainty in the capital inflow environments arising from increasing domestic
political risk and the monetary normalization process in advanced economies. A
cautionary approach which I am disposed to at this Monetary Policy Committee
meeting will require keeping policy parameters as they are while monitoring
developments in the near-term. I will thus vote to:
Retain the MPR at 14.0 %
Retain the CRR at 22.5%
Retain the Asymmetric Corridor at +200/-500 basis points
Retain the Liquidity Ratio at 30.0%.

5.
BALAMI, DAHIRU HASSAN
Financial Soundness of the Banking Sector
In the Nigerian banking sector, the trend of financial soundness indicators show
that Capital Adequacy Ratio (CAR) fell from 12.08% to 10.79% in August 2018.
This was below the prudential requirement of 10% and 15% for banks with
national authorisation and international authorisation, respectively. The Nigerian
banking sector registered a low CAR when compared with her pairs like Turkey,
South Africa and Malaysia. On the other hand, the asset based soundness
indicators showed that the Non-Performing Loans (NPLs) ratio had risen from
12.45% in June 2018 to a high of 14.70% higher than the maximum 5% prudential
requirement, compared to Turkey, South Africa and Malaysia with 2.8%, 3.1%,
and 1.6%, respectively.
The high NPL ratio may not be unconnected with poor credit administration of
the Deposit Money Banks (DMBs) as well as high interest rate in the economy.
Again macroeconomic challenges affecting the obligor’s cash flow particularly
in the oil sector where credit concentration is high may also have been
responsible for the high NPLs ratio. The good news is that about 82% loan loss
provision has been made in the books as at August 2018. The liquidity ratio on
the other hand has marginally increased from 46.09% in June to a high of 46.68%
in August as against a minimum of 30% as required by the prudential
requirement.

The income and expense based result shows that both return on equity and
return on asset decelerated from 22.22% to 2.15% in June to 20.84% and 1.97% in
August 2018, respectively. The ratio of interest margin to total operating income
decreased from 70.15% in June to 69.01% August 2018, while the ratio of total
operating cost to total operating income rose from 70.90% in June to 72.75% in
August 2018.
The banking industry financial soundness indicators shows a more robust banking
industry if the four outlier banks are removed. The capital adequacy ratio of
17.88% is higher than the prudential requirement. However NPLs at 8.17% is still
higher than the maximum of 5% required. The liquidity ratio improved from
48.58% to a high of 49.44% in August 2018 but still lower than that of Malaysia
(152.8%) and Turkey (71.5%), although higher than that of South Africa (31.9%).
The CBN intervention and regulatory policies should be intensified to address the
problems of the four outlier banks. It should be noted that the average CAR for
banks with international authorisation at end-August 2018 stood at 11.68% while
banks with national authorisation is 8.36% both fall below the prudential
requirement. This was due to increase in risk weighted assets as well as payment
of interim dividend.
Credit Portfolio Distribution and NPLs
Sectoral credit allocation showed that the share of the five major sectors were;
oil and gas (30.81%), manufacturing (12.95%), Government (9.58%), general

commerce (7.36%), and general (6 .34%).Credit availability and good
administration is supposed to be a good driver of growth in the economy.
However, evidence-based analysis shows that the sector that enjoys the most
credit is not an important employment generation sector of the economy
because oil and gas is capital intensive. Ordinarily, the areas which more credit
should flow to are sectors such as agriculture, manufacturing, transport and
storage, service, mining and quarrying as well as real estate activities. It should
be noted that eight sectors recorded increases in credit between August 2017
and August 2018, while 18 sectors recorded decreases in credit. The critical
question to ask is what credit appetite do banks have for giving more credit to
the gas and oil sector?
In Nigeria, the sectors with highest credit concentration are also sectors with
high impact on the NPLs. For example, between August 2017 and August 2018,
the Oil and Gas (44.67%), General Commerce (8.31%), General (8.85%), Power
and Energy (6.95%), and Manufacturing (6.13%) and so on. As highlighted in July
statement, there is need for CBN to employ the use of unconventional and
innovative monetary policy instrument such as discriminated CRR and
introduction of corporate bonds to encourage the advancement of credit to
the real sectors of the economy. The low CAR and rising level of NPLs increases
caution by Nigerian banks in lending to the real sector which is supposed to be
the prime driver of the economy.

Challenges in the Nigerian Economy and CBN’s Mandate
The Nigerian economy has a number of challenges. At the global level, the
normalisation of US economy and interest rate is triggering capital flows out of
Nigeria leading to a drop in the foreign reserve. There is also threat on crude oil
price from US - China trade war. At the domestic level, the challenges include
issues related to growth, employment, inflation, issue related to accretion to
reserve, debt service, and downturn in the capital market. If there are mandates
that affects the CBN, then multiples of unconventional polices should be
adopted. It should be noted that through credit creation and innovative ideas,
such as the introduction of dynamic CRR and corporate bonds to support
credit, the Bank can play a supportive role while also monitoring the
administration of the policies to ensure their effectiveness. The credibility of the
CBN is of paramount importance and therefore the Bank must remain proactive.
The adoption of heterodox policies and methods should be adopted.
Policy Choice
In my view, specific targets should have specific instruments, although certain
policy instrument can conflict with others. For example policy put in place to
promote growth may be inflationary. The two policy options for current
challenges will either be tightening or to hold. Given the five challenges
highlighted earlier, tightening should be the more appropriate policy to be
taken. The challenges of growth will be tackled through the policy
recommended at last MPC as well as the fiscal side. Tightening would assist in

taming inflation. It will assist in attracting more inflow both in terms of FDI and FPIs
into the economy as well as discouraging outflow which is important for the
economy. This would assist in stabilizing the exchange rate as well as the
external reserves. In view of the above, I vote to tighten. I, therefore,
recommend the following:
I. Raise the MPR by 25 basis point to be 14.25percent;
Ii. Retain the CRR at the 22.5 percent;
Iii. Retain the Liquidity Ratio at 30.00 percent; and
iv. Retain the Asymmetric Corridor at +200 and -500 basis points around the MPR.

6.
ISA-DUTSE, MAHMOUD
A. EXTERNAL ECONOMIC CONDITIONS
Global growth indices are being threatened by geo-political tensions and a
renewed wave of trade protectionist policies since the beginning of 2018.
Against this backdrop, global growth forecast for 2018 is put at 3.9 per cent
based on expected modest growth outcomes in some advanced economies as
well as significant recovery in emerging and developing economies.

The normalization of policy rates in some advanced economies, especially in
the US, continued to exert negative effects on capital market performance and
portfolio investment flows especially in developing countries. The strengthening
of the US dollar has contributed significantly to currency depreciation in many
countries. The world economy is, however, witnessing upward movements in the
price of oil which is expected to be sustained given the recent abrogation of
the US-Iranian nuclear agreement coupled with the impending formalization of
harsh sanctions against Iran. This development should raise fiscal buffers and
promote a relatively stable exchange rate regime in Nigeria and other major oil
exporting nations.

B. DOMESTIC ECONOMIC CONDITIONS
Domestic output performance remains subdued as real GDP grew by 1.50 per
cent in the second quarter of 2018 compared with 1.95 per cent in the first

quarter. It is noteworthy that while the growth drivers exclude the manufacturing
and oil sectors, which contracted by 0.29 per cent and 0.36 per cent
respectively in Q2 2018, the growth propellers (services, construction and
agricultural sectors) in the review period are weak. The growth in the economy is
therefore quite fragile. Consequently, it is important that in the choice of policy
options, this reality should be taken into consideration.

Headline inflation increased marginally from 11.15 per cent in July 2018 to 11.23
per cent in August 2018. A further breakdown shows that, while the food
component of inflation rose from 12.85 to 13.16 per cent between July and
August 2018, core inflation decreased from 10.20 to 10.18 per cent in the same
period. The slight uptick in the price level could be attributed to structural
problems, massive flooding that destroyed farmlands, herdsmen/farmers
clashes, among others. The expected rise in spending towards 2019 general
elections and review of wages/salaries could further cause inflation to rise in the
near to medium-term. The fact that the growth rates of monetary aggregates
were largely below the benchmarks is a reflection of the effects of sustained
non-accommodative monetary policy stance.

Moreover, the credit developments in the economy indicate that credit to the
private sector grew by a meager 0.81 per cent as compared to the provisional
benchmark of 5.64 per cent in August 2018. In addition, the retail lending rates

of deposit money banks remain high and interest spreads widened during the
review period. This has serious implications for small and medium enterprises
which constitute veritable engines of growth.

The foreign exchange market has been characterized by a fairly stable nairadollar exchange rate due to the sustained supply of foreign exchange from
both official and autonomous sources against the backdrop of rising oil price.
Consequently, the normalization of policy rates in the US and other advanced
economies may not have an over-bearing impact on the market. Also of note is
the investors’ and exporters’ (I & E) window in the foreign exchange market that
has boosted liquidity and contributed to the accretion in foreign reserves.

The level of non-performing loans (NPL) is still high but the expected
improvements in key macroeconomic fundamentals following improved oil
prices would continue to exert a moderating influence. Banks patronized the
standing deposit facility window more than the standing lending facility which is
an indication that the system was awash with liquidity in the review period. This
liquidity overhang could be addressed through Open Market Operations and
other tools available to the CBN without resort to a hike in MPR.

C. VOTING DECISION
The implications from global and domestic economic conditions, call for
tightening of monetary policy to reverse portfolio outflows, improve capital
market performance and rein-in inflationary pressures. However, increasing the
policy rate at this time is not advisable in view of the need to prop up weak
domestic growth and avoid slipping back into recession. Increasing the policy
rate will also worsen the heavy burden of government debt service, reduce
available fiscal space and constrain public infrastructure investment and
aggregate demand, further compounding the growth dilemma. The rising trend
in the international price of crude oil is anticipated to continue well into 2019
and this should facilitate accretion in foreign reserves and thus reduce the need
to employ the policy rate as a stabilizing tool. Against this background, I voted
as follows:
MPR should remain at 14% per annum;
The asymmetric corridor at +200/-500 basis points should be maintained;
Liquidity ratio to remain at 30% per annum;
Dynamic differentiated CRR to encourage banks to lend to the real
sector.

7.
NNANNA, OKWU JOSEPH
Growth was lower than projected, reflecting weak domestic demand on
account of weak purchasing power and lagged implementation of the capital
budget. Available data showed that Real GDP moderated to 1.50 per cent in
the second quarter relative to 1.95 per cent in the first quarter of 2018 (NBS,
2018). The change was attributed to the 2.05 per cent growth in the non-oil
sector. Specifically, construction, services and agriculture sectors grew by 7.66,
4.19 and 1.19 per cent, respectively. The oil sector fell by 3.95 per cent during
the period, in contrast to a growth rate of 14.77 per cent in the first quarter. Key
PMI indicators showed that manufacturing and non-manufacturing stood at
56.2 and 56.5 index points in September, respectively, indicating a gradual
momentum in the sector. At the backdrop of the subdued growth, the high rate
of unemployment has remained protracted.
Reversal of the disinflation process reflected base-effect normalisation, incipient
inflationary pressures due to cost-push effects associated with insecurity and
flooding in farming areas. Headline inflation rose in August to 11.23 per cent
compared with 11.14 per cent in the previous month. Similarly, food inflation rose
to 13.16 per cent at end-August 2018, from 12.85 per cent in the preceding
month. However, core inflation decelerated further to 10.02 per cent relative to
10.18 per cent recorded at end-July 2018. On month-on-month basis, headline
and core inflation fell, while food inflation, increased marginally in the month of

August, due, mainly, to increase in the price of staple foods. The anticipated
deficit financing of 2018 FGN budget and 2019 election spending, including
review of salaries and wages in 2018 constitute upside risks to inflation in the
near-term.
Despite the growth in the monetary aggregates, it was not sufficient to conclude
on inflationary pressure concerns. Broad money (M2) grew by 2.98 per cent at
end-August 2018, and 4.47 per cent on annualized basis. Money market rates
reflected liquidity conditions in the banking system, indicating the effects of CBN
liquidity management strategy and FAAC distributions to the 3-tiers of
governments. The monthly average inter-bank call and OBB rates for June 2018
were 16.32 per cent and 12.26 per cent, respectively.
Risks to financial stability are being intensified by simmering fragility in the
banking industry as intermediation remains weak with elevated ratio of nonperforming loans (NPLs). Claims on the core private sector grew marginally by
0.43 per cent, annualised to 0.65 per cent at end-August 2018. Net claims on the
Federal Government fell by 34.68 per cent in August 2018, representing a
decline of 52.01 per cent on annualized basis. While the recovery in oil price
offers hope to the banking industry, lending and asset quality in the near term
remain sticky. The combination of rising oil price, pending settlement of Federal
Government’s contractual obligations to the private sector and accelerated

pace of economic growth remain tailwinds to subdue NPLs, improve asset
quality and sustain financial system stability in the long-run.
Protracted monetary policy normalisation in some advanced economies has
continued to weigh in negatively on the financial markets, resulting in capital
reversals. Consequently, as at September 21, the All-Share Index (ASI) fell by
14.99 per cent from 38,278.55 at end-June 2018. Similarly, Market Capitalization
(MC) fell by 14.33 per cent to N11.88 trillion at end-June 2018. A reversal of the
bearish trend is, however, expected in the medium term, to depend on
continued improvements in key macroeconomic fundamentals.
I hold the same view that expectation of expansionary fiscal policy in the nearterm remains a concern to macroeconomic stability. I therefore advocate for
greater efficiency in government expenditure: better focused and targeted on
capex and other infrastructural spending rather than on recurrent and
overheads.
The retail spot and forward foreign exchange markets have remained the game
changer in achieving exchange rate stability. Consistent with the improved FX
liquidity and a healthy external reserve buffers, the foreign exchange market will
continue to support a healthy balance of payments position. The current
account surplus observed in recent times will be sustained on account of
recovery in oil prices and high export revenues. The I&E window exchange rate,
which recorded a weighted average of ₦360.86/US$ at end-June 2018, was

₦362.38/US$ in August 2018. The naira exchange rate at the retail SMIS window
and the BDC segment remained at an average of ₦330.00/US$ and ₦359.0/US$,
respectively. These rates are consistently aligned with the real effective and
relative purchasing power parity rates of the naira.
Against the backdrop of continued stability in the key macroeconomic
indicators and concerns about emerging fiscal surprises, I vote to raise the CRR
by 150 basis points and to hold the other policy metrics at current levels. Recent
empirical study in Nigeria has shown that raising the cash reserve ratio (CRR), is
more potent than raising the Monetary Policy Rate (MPR), in curbing time
inconsistent growth in monetary aggregates, arising from fiscal surprises.

8.
OBADAN, MIKE IDIAH
The implications of developments in the global economy, especially in the areas
of global output, trade and trade policies, commodity prices, financial market
developments, regional integration policies and issues, among others, have
continued to be important for the Nigerian economy. Of specific importance
are the following:
The escalating trade war between the United States on the one hand and
China, Europe, Mexico and Canada on the other. Escalating the USChina tariff/trade war is the most recent imposition by the US of 25
percent tariffs on US$ 200.0 billion worth of Chinese goods and
announced plans to issue additional US$ 267 billion, and the retaliation by
China with a tariff hike of US$ 60.0 billion of US goods effective September,
2018. The new tariffs have brought ‘new uncertainties’ to China-US
negotiations as China has cancelled planned trade talks. Europe, Mexico
and Canada have also continued to respond appropriately to US trade
policy measures, using retaliatory trade tariffs against the U.S. The various
trade policies may slow down investments and trade flows globally.

The politico-economic conflict between the US and Iran has continued as
the US has widened sanctions on Iran to include purchase, subscription or
facilitation of issuance of Iranian debt, auto motive sector, etc. This implies

that any persons or firms dealing with Iran, after November 4, 2018, may
face sanctions.

The uncertainties surrounding the BREXIT have not abated. The possibility
of a ‘no deal’ BREXIT looms large and this seemingly chaotic option could
adversely affect the British economy with spill-over effects.

Manifestations of the worrisome implications of Chinese loans to sovereign
nations. Defaults on repayments of such loans have resulted in Chinese
seizure and control of key national assets in African countries and others
outside Africa. While such loans have aimed at developing infrastructure
in the countries concerned, the threat of China’s recolonization of the
debtor countries and their loss of sovereignty can be avoided if the loan
beneficiary countries strive to make loan repayments as and when due
and the loans are deployed to productive projects. Importantly, before
loan agreements are entered into, the conditions must be thoroughly
scrutinized and understood.

Monetary policy normalization in the US and parts of Europe and
implications for capital flows to the emerging market economies including
Nigeria. There has been reduced capital inflows to emerging markets,
particularly those with weaker fundamentals or higher potential risks,

Nigeria included, while inflows to the normalizing countries, for example,
US, has increased. Capital flow reversals have threatened exchange rate
and price stability.

Although global inflation is still subdued, pressures are rebuilding such that
the inflation rate is projected to rise to 3.2 percent in 2018 from 3.1 percent
in 2017 considering rising energy prices, and moderate currency
depreciations in some emerging market and developing countries.

Global growth is good for trade flows and improved welfare. But the momentum
of global economic activity is mixed while recovery is moderate. Global growth
in 2018 is projected to reach 3.9 per cent compared with 3.7 per cent in 2017.
The improved growth is hinged on the expectations of continued improvements
in some advanced economies and sharp recovery in a number of emerging
markets and developing economies. However, in the advanced economies,
growth is projected, on average, to remain flat at 2.4 per cent, the same level it
attained in 2017 largely due to moderations in the Euro area and Japan.
Growth in the emerging market and developing economies is projected at 4.9
per cent, up from 4.7 per cent in 2017. China and India are currently Nigeria’s
largest trading partners. China’s growth is expected to slow to 6.6 per cent in
2018 compared with 6.9 per cent in 2017 as it continues to pursue its

rebalancing programme which de-emphasizes exports in favor of domestic
consumption. India is, however, expected to grow by 7.3 per cent in 2018, a
significant improvement, compared with 6.7 per cent recorded in 2017.
The expected improvement in global output in 2018 is expected on the back of
improved oil and other commodity prices as well as major trade agreements
between the Euro area, Japan and Canada. However, the 2018 global growth
forecast could be mitigated by factors such as the renewed wave of trade
protectionist policies in the U.S; uncertainties surrounding the BREXIT negotiations
in Europe, the continued pace of monetary policy normalization by the US
Federal Reserve Bank, and sizeable slack in many advanced economies.
Nigeria is expected to grow at 2.1 percent in 2018 from 0.8 per cent in 2017,
largely owing to higher oil production due to improvement in security in the
Niger Delta region, rising oil prices and expected increase in public spending.
This is in spite of a slowdown to 1.50 per cent at the end of the second quarter of
2018 from 1.95 per cent at the end of the first quarter.
Developments in the world oil market are of particular significance to Nigeria.
Although oil accounts for about 10 percent of the nation’s gross domestic
product (GDP), it remains the driver of economic activities in the country,
accounting for over 95 percent of foreign exchange earnings and about 80
percent of government revenue. Consequently, the current regime of high
crude oil prices in the world market is good news to the country. The price of

Bonny light on September 14, 2018, stood at US$ 79.03 per barrel compared with
US$ 78.83 on July 11, 2018 and the opening price of US$ 67.02 per barrel on
January 2, 2018. The improvement in the price of Bonny Light largely reflected
the continued impact of the Organization of Petroleum Exporting Countries
(OPEC) production freeze as well as likely U.S. sanctions on Iranian oil scheduled
to commence from November 04, 2018.
With the recent cancellation of the U.S–Iranian nuclear deal, oil prices are
expected to sustain the current upward trajectory well into 2019; signals from the
futures market indicate that the price may cross the US$100 mark by July 2019.
While this will enhance the Central Bank’s ability to effectively manage the
exchange rate with the continued accretion of external reserves, the lesson for
Nigeria is the strong need to deliberately build fiscal buffers through saving of
part of oil revenue. This is the more pertinent considering the increasing
investment in shale oil production coupled with increasing shale oil production
by the US which remains a significant threat to future oil price increases.

In the Nigerian economy, significant challenges have remained. Although crude
oil prices have improved significantly, oil production has yet to reach the
expected target. The budgeted oil production target of 2.3 mbpd has yet to be
met as average crude oil production and exports rose to 1.85 mbpd and 1.40
mbpd, respectively, in August 2018 from 1.82 mbpd and 1.37 mbpd in July 2018

owing largely to repairs and re-opening of major oil installations in the Niger
Delta region. More efforts are required to shore up oil production and export.

The normalization of monetary policy in some advanced countries, particularly,
the US, has contributed to capital flows reversal in Nigeria with significant
pressure on external reserves which has witnessed notable reductions in recent
months. External reserves stood at US$ 43.91 billion on 20 September, 2018
compared with US$ 47.43 billion at end-April, 2018. This development is a threat
to the gains in exchange rate stability and inflation deceleration witnessed for
several months.
In the financial sector, non-performing loans have remained a threat to the
stability of the financial system and the macro-economy. The oil and gas sector
accounts for the highest proportion (44.67 percent) of non-performing loans. This
was understandable during the recession and oil market crash when the
fortunes of the oil sector dwindled. But under the current regime of high oil prices
and improved oil production, the oil and gas sector obligors should be able to
service their loans and consequently, reduce the stress of the financial sector.

Nigeria’s real GDP grew by 1.50 per cent in the Q2 2018, a decline of 0.45
percentage point compared with 1.95 per cent in the Q1 2018. It however,
recorded an increase of 0.79 percentage point above the 0.72 per cent
recorded in Q2 2017. The major drivers of the growth in Q2 2018 were mainly

from the services, construction and agricultural sectors which contributed 1.56,
0.33 and 0.27 per cent, respectively to total. Crude oil and natural gas
contracted by 3.95 percent in the second quarter of 2018 compared to an
expansion in the first quarter. Growth of the economy thus remains a challenge.
Another incipient challenge is the reversal of the trend of deceleration of
inflation witnessed for 17 months. Inflationary pressure in the economy
resurfaced, as headline inflation (year-on-year) increased marginally to 11.23
per cent in August 2018 from 11.14 per cent in July 2018. Food inflation also
increased to 13.16 per cent in August from 12.85 per cent in July 2018. Core
inflation, however, decreased to 10.18 from 10.20 per cent. Thus, two measures
of inflation (headline and food) marginally increased in August 2018 thereby
ending the downward trend in domestic prices, which commenced in January
2017. The slight upward trend in the headline inflation was largely driven by food
component (processed and farm produce). The upward turnaround of inflation
may have to do with the base effects which have ended and cost push factors
rather than monetary. This is in view of the fact that broad money and other
monetary aggregates underperformed (in relation to targets) during the period.
However, the behavior of M3 (M2 - broad money supply plus OMO bills
discounted by DMBs) elicits concern as it grew by 7.8 percent in August 2018
compared to 9.17 percent in July, annualized to 11.79 percent; this is above the
M2 provisional growth benchmark of 10.48 percent for the year.

One thing though is that it is not clear as to the sustainability of the upward trend
in inflation, hence the situation would need to be watched for sometime. This is
the more so as some of the identified risks to inflation have not yet started to
manifest and it is not clear what their impact would be. The risks include the
following: sustained implementation of the capital budget; electioneering
expenditure towards the 2019 elections; possible implementation of the
proposed minimum wage; effects on food supply of continuous clashes
between farmers and herdsmen; effects of flooding on agricultural production
and distribution in various states in the country.
Opinion
My opinion is predicated on the above considerations and, in particular, the
following:
That the extant indicators portray an already sufficiently tight monetary
policy stance and there is a limit on what conventional monetary policy
can achieve under the present circumstances
Growth is fragile and there are concerns that the economy could slip
back into recession.
Most of the possible headwinds to inflation have yet to materialize and
there is no evidence that the upturn in inflation will be sustained.
At this point in time, raising the MPR may result in more damages to the
economy than benefits.

Therefore, there is no need to take precipitate monetary policy actions that may
achieve some ends but inflict serious damages in other areas, particularly the
growth and employment objectives. This suggests that generally the current
monetary policy stance should be retained with a careful watch on monetary,
price, exchange rate and other macroeconomic developments in the next two
months. The expected benefits of this option outweigh the costs.
However, against the backdrop of the extant policy of lower cash reserve
requirement (CRR) for banks that are willing to lend to agriculture and
manufacturing at single digit interest rates, the CRR for the other banks can be
reviewed upwards in order to simultaneously address the issue of growth and
employment and concerns about inflationary expectations. This entails using a
carrot and stick approach to realise the objective of increased lending to
agriculture and manufacturing by the Deposit Money Banks.
Supportive Measures
Meanwhile, the following actions could be considered in support of the
monetary and price stability goals.
CBN to sustain the institution specific prompt corrective actions to address
cases of banking sector weaknesses.
Investigate why the oil and gas sector has not improved in its loan
servicing obligations to the banking sector as well as the challenges of
redeeming collaterals used to secure loans.

CBN to continue the monetary policy actions that aid cost reduction by
real sector operators with positive effect on inflation reduction. This
includes financing support at single digit interest rates.
Support to relevant agencies aimed at addressing security challenges in
the agricultural ones.
Need to restrict the monetary policy instruments aimed at managing
liquidity (CBN bills) from being traded in the open market, as so doing has
implications for liquidity build up and inflation. M3 growth is founded on
access to the instruments by non-bank public including foreign investors. .
As oil earnings are still very crucial for external reserves build-up, the
government must do the needful to douse any incipient tensions in the
Niger Delta region, boost security of oil assets and installations and, hence
boost oil production and export.
CBN could tinker with rates on government securities as incentive for
capital inflows.
Implement prudential capital controls, for example, those that can
change the duration and structure of inflows to relatively long-term;
Efforts geared towards developing and improving confidence in the
financial system can reduce the volatility of portfolio and banking flows.
Explore the possibility of further supporting monetary policy with trade
policy as in the case of the 41 import items.

9.
SANUSI, ALIYU RAFINDADI
1. Decision:
I have voted to further tighten the monetary policy stance in today’s meeting
for a number of reasons, key amongst which is the crystallisation of the threat to
the disinflationary process and capital flows in the month of August, both of
which I have anticipated. Secondly, further tightening is required to sustain the
exchange rate stability which, in itself, is a crucial requirement for a sustainable
disinflation. In this meeting, I voted to raise the MPR by 25 basis points, a smaller
magnitude relative to the 50 basis points I voted in the last meeting, because of
the fragility of the output recovery as observed in the realised output growth in
the 2nd quarter. Output growth is, however, forecasted to remain positive in the
3rd and 4th quarter of the year. Thirdly, although the rising non-performing loans
(NPLs) are a significant constraint in my consideration to voting for a raise, the
proactive regulatory intervention by the Bank to recapitalise the defunct Skye
Bank has allayed my fret for the banking system’s stability amidst of tighter
monetary conditions. Finally, my interpretation of the available data, staff
forecasts and estimates, strengthens my belief that an optimal forward-looking
monetary policy requires further tightening now.

2. Background and Justification
2.1. Global Economic Developments
The global output growth, the escalating trade war between US and China and
US sanctions on Iran have important implications for Nigeria’s trade, while the
sustained monetary policy normalisation in the US continues to threaten capital
inflows, reserves, asset prices, exchange rate stability and, consequently,
domestic inflation in the medium-term.

The US has imposed tariffs on another set of Chinese goods worth $200 billion by
the US effective from 24th September 2018 at an initial rate of 10 per cent to be
increased to 25 per cent in January 2019. China has announced retaliatory tariff
of US$ 60 billion worth of US goods on the 18th September 2018 and has
announced, on the 22nd September 2018, the cancellation of planned trade
talks ahead of the impending implementation of the US tariffs on US$ 200 billion
worth of Chinese goods. By the 24th September 2018, the third round of tariffs
would be implemented, bringing the total amount to US$ 250 billion with of
Chinese products.
The escalation of the trade war between the US and China continues to
threaten global output in the medium to longer term, thus threatening the
global demand for oil. However, the US has also sanctioned Iran and is
threatening to sanction any firms or persons dealing with Iran after 4th November

2018. In addition to raising price hike in the global oil market, this implies that the
demand for Nigeria’s crude by India (the second largest importer of Iran’s oil
after China) may rise in the near term. These two global developments are likely
to raise Nigeria’s reserve accretion, especially if Nigeria can sustain the steady
increase in crude production observed since June 2018.
As the US Federal Reserve continues with its monetary policy normalisation, a
further rate hike is expected, and capital flow reversals from emerging markets
are likely to continue with attendant implications for the stability of their asset
prices, reserves, exchange rate stability and price level. This implies that
exchange rate and price stability in Nigeria requires a monetary policy stance
that raises the yields on Naira-denominated assets are needed to reduce the
adverse consequences of the rising US yields.

2.2. Domestic Economic Developments
Domestic economic conditions and outlook suggest that in the medium-term,
output recovery would remain positive but fragile, and the uptick in inflation
may put a halt to the disinflationary process.
Domestic output grew at a lower rate of 1.5 per cent in the second quarter of
2018 compared with 1.95 per cent growth in the first quarter. The increase was
driven by the activities of the non-oil sector, which grew by 2.05 per cent. The oil
sector contracted by 3.95 per cent during the quarter. The Purchasing

Managers Index (PMI) indicates expansion of manufacturing and nonmanufacturing activities in the month of September 2018, albeit at a slower rate
than observed in August 2018. Staff forecasts for the third and fourth quarters
show that output growth will continue to be positive, albeit slower than
forecasted earlier. Output forecast for 2018 is expected to grow at 1.75 per
cent. Key drivers include the effective implementation of the ERGP, diversified
government revenue sources, improved production and exports of oil, sustained
the stability of the exchange rate, as well as enhanced flows of credit to the
private sector. Critical headwinds to output growth include the farmers/herders
conflicts and flooding across states, which affects agricultural output and
political activities that could affect investor confidence.

Latest data on price developments show that headline inflation has increased
from 11.14 per cent in July 2018 to 11.23 per cent in August 2018, mainly due to
the rise in prices of food and non-alcoholic beverages. Core inflation, however,
declined. The key drivers of the food price movements are distribution
constraints, farmers/herders conflict and the off-season effects of some food
items which reduced their supply. Availability of petroleum products and stability
of energy prices account for the decline in Core Inflation during the period. Staff
forecasts indicate that, in the medium-term, headline inflation is likely to
continue to rise, albeit remain within the lower two-digit level, driven mainly by
the rise in core inflation. Critical drivers of prices in short to medium-term include

the electioneering spending, sustained implementation of the 2019 budget, the
possible implementation of the proposed new minimum wage, effects of
flooding and farmers/herders conflicts on agricultural output and distribution
across states.

Development in the monetary sector indicates that while M2 grow at an
annualised rate of 4.47 per cent, below the programmed target of 10.48 per
cent, the broader definition (M3), which better captures liquidity outside the
banking system, grew by an annualised rate of 11.8 per cent in August 2018.
Credit flows to the private sector remains positive, but weak at an annualised
rate of 1.12 per cent in August 2018, mainly due to the perceived risks that
reduce the inflows of credit to the real sector. The foreign exchange market
continues to remain stable with Naira remaining stable in the interbank market,
but depreciated slightly in the I&E window and appreciating in the BDC
segment. Despite the net capital outflows in the month of August, external
reserves remain strong at about US$ 44 billion, enough to finance 17 months of
imports. The banking sector remains stable, especially with the proactive
regulatory intervention by the Central Bank, which enabled the takeover and
recapitalisation of the defunct Skye Bank Plc. This policy has significantly
reduced the NPL ratio of the industry.

3. The basis for My Policy Choice

Although the realised data on inflation appear to show that the rise in headline
inflation in the month of August 2018 is predominantly supply side, pointing at
food and beverages, projections based on staff forecasts suggest that, in the
medium term, headline inflation would be driven by rising core inflation. Indeed,
the forecasts show that food inflation would moderate in the medium term. The
forecasted rise in core inflation implies that there is space for forward-looking
monetary policy levers for effective stabilisation of the mounting inflationary
pressure. Because of policy lags, an action is required now to dampen the
pressures in the medium term and rein in inflation. A rise in the policy rate is also
consistent with the need to accommodate international monetary policy
spillovers by raising the yields of Naira-denominated assets thereby retaining
Nigeria’s relative attractiveness amongst it's emerging market peers and
mitigate capital flow reversals. This, in my opinion, is required not only for
exchange rate and price stability but also for output stability in the mediumterm, given the role of foreign exchange supply on output. My concern for the
fragile output recovery is allayed, in part, by the implementation of the dynamic
CRR policy taken at the last MPC, which is expected to have effects during the
second half of the year. This policy, along with the other existing credit
interventions is expected to improve the flow of credit at low interest rates. This is
especially true as we expect the electioneering spending and sustained

implementation of the ERGP and 2019 budget during the fourth quarter would
significantly boost aggregate demand.

Consequently, to further tighten I voted to:

Raise the MPR by 25 basis points to 14.25 per cent;
Retain the CRR at 22.5 per cent;
Retain the asymmetric corridor at +200/–500 basis points; and
Retain liquidity ratio at 30.0 per cent.

10.
EMEFIELE, GODWIN I.
GOVERNOR OF THE CENTRAL BANK OF NIGERIA AND CHAIRMAN, MONETARY
POLICY COMMITTEE
Since the last MPC meeting, uncertainties have heightened in the global
financial markets with increased vulnerabilities especially in emerging market
economies. The rising yields in the US and strengthening dollar, reinforced by
escalating trade tensions between the US and China, exposed financial
fragilities and imbalances in key emerging markets. This has led to huge capital
flow volatility in these economies with immense pressures on exchange rates,
official reserves and balance of payments. Accordingly, global economic
growth remained uneven with tepid short-term outlook. While the pace of
growth in advanced economies, especially the US, remained robust (and could
reach the 2018 projection of 3.9 percent), growth in emerging markets and
developing countries remained fragile with weakening prospects of achieving
the 4.9 percent projected for 2018.
Macroeconomic conditions in the domestic economy lost pace in 2018q2 as
downside risks threaten short-term outlook. Real GDP growth rate slowed from
nearly 2.0 percent in 2018q1 to 1.5 percent in 2018q2. A breakdown indicates
that, at -0.4 percent, the oil sector had a negative contribution to overall
growth rate. In contrast the non-oil sector recorded a more robust performance
and contributed the balance of about 1.9 percent to total growth. Further

analyses show that this was driven by growths in construction, services and
agriculture sectors. With improving conditions in the international oil market and
the expected surge in political related spending, short-term growth outlook
remains somewhat modest. Staff estimates show a slight pick-up in the two
remaining quarters of 2018 with an overall growth rate of 1.8 percent projected
for the year. But, potential exchange market pressure ––due to yield induced
capital reversals–– implies that this growth outlook is fragile.
On domestic prices, I noted in my July statement that the asymptotic decline in
inflation was flattening with an imminent uptick in the near-term. After eighteen
consecutive months of disinflation, year-on-year headline rate rose marginally
to 11.2 percent in August 2018 from 11.1 percent in July. This reflected the rise in
food inflation even as core inflation declined. In the near-term, the upside risks
to inflation include; (i) anticipated budgetary and elections spending, (ii)
disruptions to food supply networks ––due to flooding and farmers-herders
clashes–– and, (iii) diminished base effects. These need to be sufficiently
mitigated so as to contain the anticipated liquidity injections, anchor inflation
expectations, and revert expeditiously to a path of disinflation.
Analyses of liquidity conditions show an annualised contraction of 9.8 percent
in narrow money supply (M1) in August 2018 accompanied by a less-than-par
annualised expansion of 4.5 percent in broad money supply (M2). Net foreign
assets exhibited an annualised growth of 27.9 percent relative to the target of

18.2 percent. Though net domestic credit contracted, private sector credit
(PSC) increased marginally by 1.2 percent annualised during the review month.
I note that whilst the expansion in PSC is welcome, more still needs to be done
to ensure that the 2018 target of 5.6 percent is achieved. The marginal growth
of PSC reflects, again, the risk aversion of banks in the face of high NPLs.
Consequently, I reiterate the need to innovatively de-risk PSC in order to
enhance its risk perception, strengthen financial system soundness, accelerate
economic diversification and ensure inclusive growth.
Assessment of recent financial systems development in key emerging market
economies indicate considerable vulnerabilities reflected in volatile exchange
rates, reserves, money market interest rates and the capital markets of those
countries. In Nigeria, external reserves declined from US$45 billion in July to
about US$44 billion as at 20 September 2018. While the exchange rate in the
various windows remained largely stable, average interbank interest rate
declined from 9.0 percent in July to 4.0 percent as at 20 September 2018. Key
capital market indicators also exhibited significant declines as the ASI and
market capitalisation, respectively, contracted by over 14 percent between
end-June and 21 September 2018.
In my consideration, I note that the prevailing macroeconomic stability and
short-term prospects are threatened by global and domestic headwinds. On
the global scene, the rising yields in the US and some advanced economies are

triggering capital flows reversals with significant ramifications for our FX reserves,
exchange rate, and inflation. This is further exacerbated by the anticipated
fiscal and political spending over the next few months and its impact on
inflations expectations. While the cyclical recovery of Nigerian economy is still
fragile it is important that inflation expectations are adequately anchored. I am
of the view that the continued benign outcome of oil prices will cushion the
pressure on FX reserves and exchange rate as oil receipts rise. It is important,
nonetheless, to ensure that we protect the economy from the uncertainties of
the oil price fluctuations. At this time, given the recent uptick in headline
inflation and rising expectations, the doctrinal decision is to tighten further. This
is envisaged to curb near-term inflation with a tangential benefit for the
exchange rate stability. Regardless, I am more inclined towards a more
practical and well-balanced decision with considerations for output,
unemployment and poverty.
At the last MPC meeting, the policy to strategically release portions of banks’
CRR for real sector lending was announced. This was to stimulate productivity in
qualifying high-impact sectors (mainly agriculture and manufacturing) so as to
diversify economic growth in Nigeria. I am of the opinion that the aggregate
supply boost from this policy would considerable moderate inflation and
expectations. Since the key mandate of the CBN remains price, monetary and

exchange rate stability, I am committed to driving inflation to single-digit levels
and building sufficient reserves buffers to defend the naira.
Today, my immediate predisposition is to further tighten monetary stance in
order to rein in inflation and exchange rate expectations. Yet, I recognise the
need to allow recent decisions permeate the system. As it is, monetary stance is
sufficiently tight. Further tightening would rightly signal our intention; it could
inadvertently disrupt on-going transmission of recent decisions. While a rate hike
is likely soon, the current level of real policy rate is appropriate to balance the
objectives of exchange rate stability, price stability and output stabilisation
without introducing disruptive policy shocks. Therefore, I vote to:
1. Retain the MPR at 14.0 percent;
2. Retain the CRR at 22.5 percent;
3. Retain the asymmetric corridor at +200/–500 basis points; and
4. Retain liquidity ratio at 30.0 percent

GODWIN I. EMEFIELE, CON
Governor

September 2018