Central Bank of Nigeria Communiqué No. 78 of the Monetary Policy
Committee Meeting, September 19, 2011
The Monetary Policy Committee (MPC) met on 19th September, 2011
to review domestic economic conditions during the first eight months
of 2011 and the challenges facing the Nigerian economy against
the backdrop of developments in the international economic and
financial environment in order to reassess the challenges facing
monetary policy for the rest of 2011.
On the global scene, the
Committee noted that current
international
developments
presented
substantial
economic
uncertainties, clouding the outlook for global growth and inflation.
These developments included: increasingly weak and volatile global
financial markets, deepening debt crisis in the Eurozone, global
implications of slow growth at a time of limited fiscal flexibility, rising
commodity and food prices, and costly natural disasters. There is a
general expectation that there would be a slowdown in almost all
advanced economies in the near term, raising fears of a second
recession. These developments, in the Committee’s view, affect the
domestic economy through trade and financial flows. Also,

international financial markets present a very volatile and uneven
picture, reflecting a high degree of uncertainty.
The Committee also noted that, there is increasing concern about
the sustainability of public debt globally. The high fiscal deficits
suggest that policies to usher in fiscal discipline are critical for
restoring
public confidence in
Government finances. The
Committee welcomed the Federal Government’s expressed intent
to contain fiscal deficits within credible limits over the medium term.

On the domestic front, the MPC noted that inflationary pressures
faced by the domestic economy had slightly moderated following
the series of monetary policy tightening measures adopted by the
Bank, complemented by a favourable harvest. The output growth
remained robust, although the current security challenges could
undermine investors’ confidence and output in the near term.
Nonetheless, the inflation outlook appears uncertain despite the
expected
favorable
agricultural
production,
the
stability
in
expectations engendered by the imminent conclusion of the
banking sector reforms, and the prospects for a return to a regime of
fiscal prudence in the medium-term following the reconstitution of
the Federal Government of Nigeria (FGN) Economic Management
Team. It is against this backdrop that the Committee considered the

monetary policies required to attain the objectives of price and
financial stability in the short to medium term.


Key Domestic Macroeconomic and Financial Developments
Output and Prices
The Committee observed that the output growth rate for the second
quarter 2011 remained robust. Provisional data from the National
Bureau of Statistics (NBS) indicated that real Gross Domestic Product
(GDP) grew by 7.72 per cent in the second quarter of 2011, which is
above the 7.69 per cent recorded in the second quarter of 2010.
Overall GDP growth for 2011 is projected at 7.85 per cent which is
slightly lower than the 7.87 recorded in 2010. The non-oil sector
remained the major driver of growth, recording 8.82 per cent growth
rate compared with 1.81 per cent for the oil and gas sector in the
second quarter of 2011. The growth drivers remained agriculture,
wholesale and retail trade, and services, which contributed 2.48,
1.88 and 2.52 per cent, respectively.

Domestic Prices

The Committee noted that the moderation in inflationary pressures,
which commenced towards the end of the second quarter of 2011,
continued into the third quarter. The year-on-year headline inflation
rate decreased from 9.4 per cent in July 2011 to 9.3 per cent in
August and core inflation decelerated from 11.5 per cent to 10.9 per
cent during the same period. However, food inflation rose to 8.7 per
cent in August 2011, from 7.9 per cent in July.
The harvesting of early maturing crops, especially maize, tomatoes,
vegetables, potatoes and fruits played a key role in the moderation
of headline inflation. The recently announced government policies
and programmes are likely to have a salutary impact on agricultural
output, if speedily implemented. These expectations are however
currently under threat from anticipated fiscal injections, increased
government borrowing to finance the huge fiscal deficit in the 2011
budget, the recent upward revision of electricity tariffs and the
anticipated deregulation of petroleum product prices, among other
factors.

Monetary, Credit and Financial Market Developments
Broad money (M2) grew by 8.55 per cent in the eight months to
August 2011, which annualized to a growth rate of 12.82 per cent.
Aggregate domestic credit (net) grew by 14.72 per cent in August
2011 when compared with the level in December, 2010. On

annualized basis, the growth in net domestic credit translated to
22.08 per cent compared with the growth rate of 15.0 per cent in the
corresponding period of 2010.
The growth in aggregate credit was accounted for by increases in
credit to the Federal Government and the private sector. Credit to
the Federal Government grew by 18.99 per cent, which annualized
to 28.48 per cent, close to the indicative benchmark of 29.29 per
cent for 2011. Similarly, credit to the private sector grew by 10.88 per
cent, which annualized to 16.32 per cent, as against the benchmark
of 23.34 per cent. With the banking crisis approaching a final
resolution with the recapitalization of banks, it is expected that banks
will increase lending once integration issues are concluded.
Interest rates in all segments of the interbank money market rose in
response to the upward review of the MPR at the previous MPC
meeting. The Inter-bank and Open Buy Back (OBB) rates both
opened at 7.49 per cent on July 27, 2011 and rose to 11.0 per cent
and 10.36 per cent on September 15, 2011, respectively. The retail
lending rates which had remained relatively high, however, declined
during the period. The average maximum lending rate declined to
22.27 per cent in August, 2011 from 22.42 per cent in July. The
weighted average saving rate rose to 1.46 per cent from 1.42 per
cent over the same period. The consolidated deposit rate declined
during the period from 2.42 to 2.30 per cent. Thus, the spread
between the average maximum lending rate and the consolidated

deposit rate narrowed marginally from 20.0 per cent to 19.97 per
cent during the period.
The bearish performance of the stock market continued during the
review period as the All-Share Index (ASI) decreased by 15.5 per
cent from 24,980.20 at end-June, 2011 to 21,106.67 on September 16,
2011. Market Capitalization (MC) decreased by 15.7 per cent from
N7.99 trillion to N6.73 trillion during the same period. Despite the
bearish performance, the equity market was more or less fairly
valued as reflected in the NSE Price-Earnings (PE) ratios of 10.82 in
August 2011, which was close to the 10-year 8-month median of
11.57. Moreover, the performance of the NSE during the review
period is consistent with the performance of other stock markets
around the world, and reflects lingering risk aversion and
deleveraging on the part of foreign institutional investors who are key
players on the NSE.

External Sector Developments
At the wDAS, the exchange rate, during the period (July 27 –
September 15, 2011) opened at N150.00/US$ and closed at
N153.52/US$ ,representing a depreciation of N3.52 or 2.35 per cent.
At the inter-bank segment, the selling rate opened at N151.80/US$
and closed at N156.30/US$, representing a depreciation of N4.50 or
2.96 per cent during the period. The exchange rate recorded a

modest appreciation at the BDC segment where the selling rate
opened at N163.00/US$ and closed at N158.00/US$, representing an
appreciation of N5.00 or 3.07 per cent. The appreciation recorded in
the BDC segment of the market was attributed to the increased
supply of foreign exchange by the CBN and the removal of ceilings
on DMBs’ sales to BDCs.
The Committee noted that the premium between the rates at the
WDAS and the interbank stabilized towards the end of the review
period, while that of the BDCs narrowed significantly, suggesting the
need to sustain existing measures to improve the efficiency of the
market.
The Committee also noted the modest accretion to external reserves
during the period. Gross external reserves stood at US$34.85 billion
on 15th September, 2011, representing an increase of US$1.12 billion
or 3.32 per cent above the level of US$33.73 billion attained on July
21, 2011. The increase was mainly accounted for by increased
inflows of royalties into the federation account, reflecting the
upward trend in international oil prices and stable oil production in
the Niger Delta. Besides, foreign direct and portfolio investments
increased over the last eight months. Foreign capital inflows for the
first eight months of 2011 stood at US$5.66 billion which is US$1.06
billion or 23.04 per cent higher than the US$4.60 billion recorded in
the corresponding period of 2010.

The Committee’s Considerations
The key concerns noted by the Committee were:
1. Continuing expansionary fiscal stance and high
component of recurrent expenditure;
2. Liquidity surge expected from AMCON intervention,
following conclusion of bank recapitalization;
3. Sharp rise in month-on-month headline inflation rate
despite falling headline inflation rate on year-on-year
basis;
4. Need to have positive real interest rates; and
5. Persisting demand pressure in the foreign exchange
market, driven by significant liquidity injections and
reflecting
structural
deficiencies
that
have
perpetuated the import dependence of the economy.
The Committee considered that given the difficult and uncertain
international environment, it is important to ensure that the current
trends in growth are sustained and price stability is maintained. The
recent data on inflation showed that the headline inflation rate has
been maintained within single digit for two consecutive months.
However, concerns remain about sustaining the present inflation
trend. The Committee viewed the rise in the monthly headline
inflation rate in August which, while justifiable from the point of view

of the large household expenditures on account of festivities, was
sharp and out of line with the trend in the preceding 11 months.
Besides, the anticipated high liquidity in the near future would have
a bearing on inflation. The fiscal stance continues to be
expansionary. The announcement of a target of one (1) per cent
annual reduction in government recurrent spending when viewed in
the context of the anticipated injections associated with the
implementation of the new national minimum wage, suggests that
the fiscal retrenchment is likely to be drawn-out. In addition, there is
the weight of structural factors such as the announced hikes in
electricity tariffs and the expected removal of petroleum subsidy.
Moreover, the AMCON injection of N3.0 trillion is going to add to
liquidity surge with attendant adverse impact on prices. It is for these
reasons that the Committee felt the need for further tightening of
monetary policy.
On the other hand, the Committee noted that rates have been
increased in the last four consecutive MPC meetings and that high
lending rates increase the cost of finance for SMEs and this has an
adverse consequence for growth and job creation. However, having
considered the arguments for and against tightening, the
Committee voted for maintaining the stance of tightening in the
short term.
The Committee emphasized that for monetary policy to be effective
it would need to be complemented by other policies, both structural

and fiscal. Monetary policy can only address the monetary aspects
of inflation while fostering growth and financial stability. The need for
accelerating fiscal retrenchment and structural adjustment can
therefore not be overemphasized.
Decisions:
In the light of the above considerations the Committee decided as
follows:
1. A majority of 8 to 3 members voted for a tightening of
monetary policy.
2. Seven (7) members voted for a 50 basis-point increase in MPR
from 8.75 to 9.25 per cent. One (1) member voted for a 100-
basis-point increase in MPR. The 3 remaining members voted to
maintain the MPR at the current rate.
3. A Unanimous decision to:
a. maintain the current symmetric corridor of +/-200 basis
points around the MPR; and
b. retain the current CRR of 4.0 per cent


Sanusi Lamido Sanusi, CON
Governor
Central Bank of Nigeria

September 19, 2011

PERSONAL STATEMENTS BY MPC MEMBERS:


1.0 ALADE, SARAH
Headline inflation declined marginally to 9.3 percent in August 2011 from 9.4
percent recorded in July, but food price inflation increased from 7.9 to 8.7 in
spite of the favourable harvest. The monetary tightening effected so far by
the Central Bank of Nigeria (CBN) has helped to contain inflation; however,
inflation expectations need to be firmly anchored. Base on this, I believe that
a moderate increase in monetary policy rate is needed at this point as a
premature change in the policy stance could harden inflationary
expectations, thereby diluting the impact of past policy actions.

While both headline and core inflation declined, food inflation increased
from 7.9 percent in July to 8.7 percent in August. Headline and core inflation
declined to 9.3 and 10.9 percent respectively; however, food inflation
increased reflecting global volatility in food prices. This should come as a
surprise as the usual seasonal effect during harvest did not help to moderate
food price inflation in the middle of harvest season. The outlook on food
price inflation will be hinged on the trend in global commodity prices.

Global commodity prices have been volatile and can put undue pressure on
headline inflation. Food price shocks tend to have large second-round
effects especially when food component is high in the consumption basket
and where inflation expectations are not firmly anchored. Therefore the

possibility that commodity price swings can make it hard to meet a headline
inflation target is a reason for continued tightening.
Minimum Wage increase, electricity tariff increase the removal of petroleum
subsidy could pose upside risk to inflation in the short-run. The planned
policy to remove the subsidy on fuel product by the Federal government of
Nigeria and the minimum wage increase could further aggravate
inflationary pressure in the economy and monetary tightening is needed to
counter the effects of these policy actions which are good for long-run
economic growth.
Real interest rate continues to be negative. To remain competitive and
benefit from the increased investment inflows to emerging markets as a
result of uncertainties in advance countries, real interest rate needs to be
corrected for inflation with monetary policy.
AMCON activities in the recapitalized banks are injecting liquidity in the
system. As AMCON tries to conclude the resolution of the troubled banks by
bond issues, more liquidity will be injected into the system, putting additional
pressure on the inflation dynamics. A loose monetary policy stance could
further push inflation up.
Monetary tightening is needed to preserve the value of the domestic
currency. Despite strong fundamentals (high oil prices, increased oil output,
high GDP growth rate), the naira continues to depreciate against the US
dollar. Although a number of factors could be responsible, one of such
factor is the supply side effects of money supply. Tightening monetary policy
will ease the pressure on the foreign exchange market and help stabilize the
foreign exchange market.

While there are still pockets of downside risks in the domestic banking sector,
the resolution action taken by the Central Bank is helping to restore
confidence in the banking sector. The return in confidence needs to be
solidified by concrete action, such as giving the banks the space to
consolidate their position play in the market. There are indications that
foreign direct investment inflow has resumed and a well anchored inflation
would help attract foreign investors to the country. However, this will require
a balancing act: while abrupt easing could encourage banks to take on
more risks, further monetary tightening could squeeze liquidity conditions in
the market with adverse impact on economic activities.
Based on the above, I would support a moderate increase in monetary
policy rate as a premature change in the policy stance could harden
inflationary expectations, thereby diluting the impact of past policy actions.

2.0 BARAU, SULEIMAN
A.
KEY DEVELOPMENTS SINCE THE LAST MPC
A.1
It is remarkable to note that year-on-year headline inflation rate
moderated to 9.3% in August from 9.4% in July, 2011. The major drivers for
the decline being clothing, footwear and healthcare costs. Food
inflation, however, increased from 7.9% to 8.7% over the same period
driven by adjustments in processed food, fish and seafood, oil and fats,
potatoes and other tubers. Clothing, footwear and healthcare costs were
also responsible for the decline in core inflation from 11.5% to 10.9% during
the review period.
A.2
It is also significant to note that Gross Domestic Product (GDP) grew
modestly from 6.64% to 7.72% for quarter one and two respectively.

A.3
In the foreign exchange markets, the Naira depreciated between July
and September in the WDAS market by N3.57 or 2.36% and interbank
market by N4.50 or 2.96%. However, the Naira appreciated in the Bureau
De Change (BDC) segment by N5.00 or 3.16%. The premium between
WDAS and BDC rates narrowed positively to below 2% in August from 9%
that was earlier witnessed.
A.4
Developments in respect of foreign reserves management have also
been positive. Net flows have been positive, with foreign reserves
increasing by 3.32 per cent to US$34.85 billion from US$33.73 billion on
September 15, 2011 and on July 21, 2011 respectively.
B.
CONTEXT – Pressure points
In order to make a recommendation for policy, it is important to critically
examine the above developments and to form a view on the direction of
issues that are important and critical.
Inflation - It is true that inflation rate has trended down, but the upside risk
to inflation going forward are real for the following reasons;
• Increased fiscal spending arising from the rush to comply with yearend budgetary spending. Capital expenditure performance
currently at less than 30% gives room for radical increase in
spending in the next few months.
• Month-on-Month headline inflation actually inched upward during
the review period, suggesting that the year-on-year inflation rate
needs to trend downward on a sustained basis over time.
• Threats of imported inflation is still real,

• The declining trend in year-on-year headline inflation needs to be
observed beyond two months that we witnessed to give comfort,
that the trend is sustained.
• Liquidity from activities of AMCON is also a threat.
• The need to bring MPR to positive real rate territory is a compelling
one that commends further tightening.
• Likely removal of petroleum subsidy is a political decision that could
be implemented at very short notice.
• Compliance with minimum wage demands at all tiers of
government, could potentially exacerbate the liquidity situation.
Foreign Exchange Market
In spite of the recent tight monetary stance, speculative demand for
foreign exchange at all segments of the market has not abated. This is a
major indicator of systemic liquidity surfeit. Meanwhile, it will be unwise to
depreciate the Naira based on speculative demand given the potential
impact of unguarded depreciation on prices and inflation.
Market rates and Growth
Even though market volatility has reduced, market interest rates have
trended upwards to reflect recent adjustments in MPR. The challenge is
how to achieve positive real rates of interest (low inflation and higher
lending rates) without negatively impacting credit and GDP growth. It is
important to note, however, that we recorded GDP growth in the last
quarter inspite of our tightening stance, underscoring the huge liquidity still
left in the system.

C.
Recommendations

In view of the foregoing, I make the following recommendations;
• Continuation of the tightening stance of monetary policy
• Upward adjustment of MPR by 50bps from 8.75 to 9.25 per cent
• Maintenance of the corridor of +/- 2 per cent around the MPR
• Cash Reserve Ratio to remain at 4 per cent


3.0 GARBA, ABDUL GANIYU
Decision
I vote for:
I. Holding the MPR at 8.75%
II. Maintaining the Asymmetric Corridor for SLF and SDF
III. Quantitative Tightening through more aggressive OMO to keep operating
targets (OBB and Call Rate) around MPR+200 basis point. As observed from
available data, the OBB and Call Rate averaged 8.13% and 8.6% respectively
in the period between July MPC and September MPC meetings. Clearly, the
operating targets were well below desired targets leaving ample room for
further tightening using OMO.
Justification
I. First, I am convinced that a more aggressive OMO to achieve the upper limit
of the symmetric corridor (MPR+200 Basis Point) will substantially tighten
liquidity without the unintended consequences of a higher MPR.
II. Second, I expect inflation to trend downwards driven mainly by expected fall
in food prices in September and October as food crops are harvested and
marketed. I am mindful of the multi-dimensional global crisis with vortex in

the US, EU, Japan and the BRICs and the possible implications for commodity
prices. The pass through effects will depend largely on (a) the exchange rate
and (b) domestic production and demand. There are speculations about
imminent removal of subsidies on petroleum products and increase in
electricity tariffs. However, both policies are more likely to cause shifts in the
general prices (a correction) than a sustained increase in prices.
III. Third, in an inflation-unemployment trade-off, I give greater weight to
employment creation for economic, social and security considerations. While
SMEs which tend to have high employment elasticities have limited access to
credit in the retail end of the money market, higher interest rates will limit
access further and, increase the likelihood of current loan portfolio’s
becoming non-performing: a threat to jobs, growth and stability.
IV. Fourth, while a positive real rate of interest is desirable to attract foreign
investment, achieving it through MPR hikes generates a trade-off: between
foreign capital inflows (FDI and Portfolio) on one hand, and local businesses
growth and jobs on the other hand. I vote in favor of local businesses and
jobs. I am not convinced that given the volatility and instabilities in the global
economic system and the declines in the Nigerian capital market that
portfolio
flows
is
good
for
the
economy.
Furthermore,
with
the
competitiveness challenges of Nigeria vis a vis its needs to create decent
jobs, I am not convinced that Nigeria will attract the right FDI inflows with the
highest growth (output and productivity) and employment elasticities.
V. Fifth, between January and August, the Capital market has lost about two
Trillion Naira and Staff projections estimate a bottoming up at 15,000 All Share
Index (ASI). It is of course rational to expect that asset prices will fall as interest
rate rises. Consequently, there is a strong chance that the likely effects on the
equities market, the bond market and, indeed, the forex market will be
incompatible with policy goals (growth, job creation and stability).

VI. Sixth, I am not convinced that interest rate hike at this point will address some
of the core challenges such as (a) the likely AMCON effects; (b) the FAAC
Effects; (c) banking system risks of exposure to government debts (FGN Bonds
and Treasury Bills); (c) excessive Federal Debts and distortions in spending
structures or (d) subsisting inefficiencies in the financial system indicated by
the excessively high overheads and, high interest rate spreads.
VII. Seven, I am convinced that many of the challenges are institutional and, to a
lesser extent structural. The implication being that such institutional and
structural challenges require institutional changes, new incentive systems and
outcome inspired and outcome-oriented fiscal actions.
VIII.
Finally, harmony between the fiscal system and monetary system is
critical to the medium to long term success of fiscal and monetary policies
and indeed, macroeconomic management. It is of the outmost necessity,
that the fiscal system be brought into harmony with monetary policy and to
be bounded

by the requirements for price stability, sustained growth in
investment, employment, productivity and output. It is also, important that
monetary system is similarly, bounded.
4.0 LEMO, TUNDE
The global economy continues to grow sluggishly as USA now grapples with the
effects of a downgrade and the impact on the yield on her bonds. The risk
exists of another global recession arising from the growing sovereign debt crises
in Europe as well as the concern about the excess capacity in the Chinese real
estate market. This has implication for the sustainability of the existing high
community prices.

The National Bureau of Statistics (NBS) projected a growth rate of 8.39 per cent
for the Nigerian economy during the fourth quarter of 2011. Overall, GDP
growth for 2011 was projected at7.80 per cent in 2010. This is a welcome
development in spite of the consistent increase in MPR in the last few months as
well as not-too-impressive growth in the credit to the private sector. The modest
increase in External Reserves which stood at USD34.85b as at September 15,
2011 is a welcome development but additional reserve accretion is required to
build up robust external reserve to cushion the possible effect of a crash in crude
oil price in the near future. Exchange rates remain fairly stable and generally
within the 3% band with a near convergence of WDAS and BDC rates. This
equilibrium may however be threatened by the build-up of liquidity pressure
resulting from the repayment of NNPC debt, implementation of new minimum
wage, fiscal activities resulting from the implementation of 2011 Budget at the
benchmark price of USD75 per barrel as well as additional injection resulting
from
AMCON
activities
following
conclusion
of
intervened
banks’
recapitalization.
INFLATION:
Developments up to the third quarter of 2011 indicate that the inflationary
pressures are moderating following the series of monetary policy tightening
measures adopted by MPC at the last 4 meetings. However, estimates from the
National Bureau of Statistics indicate that year-on-year core inflation is expected
to hit 10% in November 2011. The possibility of fuel subsidy removal as well as
increase in electricity tariff may also exacerbate the pressure. Short-term money
market rates have moved up in tandem with our tightening mode in the last few
months and whereas negative real interest persists in Nigeria, it is heartwarming
to note that the gap has narrowed substantially. This, in addition to the relatively
stable exchange regime has led to a significant increase in capital flow in the

last few months. MPC should push harder towards positive real interest regime
to enhance Nigeria’s competitiveness as an attractive portfolio and FDI
destination.
DECISION:
In view of the foregoing therefore and in order to consolidate on the gains of
the past, I vote for the continuation of the tightening mode and recommend an
upward adjustment of MPR by 50 basis points i.e. from 8.75% to 9.25% while the
existing symmetric corridor of +/- 2% around the MPR remains unchanged. This
stance will help to fight the expected surging inflation resulting from the increase
in fiscal activities, stem expected elevated demand for foreign exchange and
accelerate our march towards positive real interest rates.

5.0 MOGHALU, KINGSLEY CHIEDU
I had hoped that I would vote at this meeting of the Monetary Policy Committee
in favour of holding the Monetary Policy Rate steady at the rate of 8.75 per
cent, or at the most voting for further tightening by 25 basis points. My
expectation was based on the reports that following a series of rate increases by
the MPC, inflation was moderating.
The nuances evident in the staff reports and projections, however, lead me to
support another rate increase by 50 basis points, bringing the MPR to 9.25 per
cent. Two main factors in my view account for the need to continue tightening.
The first is the current and anticipated liquidity injections into the financial system
through Asset Management Corporation of Nigeria (AMCON) and fiscal
expenditure by the Federal Government in the last quarter of 2011. AMCON
bonds of about 3 trillion naira covering purchases of non-performing loans in

banks and the recapitalization of the CBN-intervened banks will result in
enhanced liquidity over the medium term. While one is encouraged by the
commitment of the fiscal authorities to fiscal retrenchment, as evidenced by the
policy stance of the reconstituted Economic Management Team, this goal will
take a number of budget cycles to attain. In the short term, monetary policy
tools must be deployed to contain the consequences of an expansionary fiscal
stance until fiscal and monetary policy converge on measures to control
inflation. Moreover, increases in electricity tariffs and the anticipated – and
necessary - deregulation of petroleum product prices are likely to have an
inflationary impact.
Secondly, while interest rates have been moving in a real positive direction
given rate increases and the moderation of inflationary threats, it remains
necessary to accelerate and sustain this process in order to increase Nigeria’s
competitive advantage as an investment destination, which is presently at a
disadvantage when compared to countries such as Ghana and South Africa.
Moving real interest rates into positive territory relative to inflation will also
contribute to increased deposit and savings rates when, as expected, the CBN
withdraws its interbank guarantee on December 31, 2011 and commercial
banks have to compete more actively for deposits.

For the reasons above, combined with the staff projections of increased
inflationary trends before a return to reduced inflation over the next six months, it
is necessary to increase the MPR by 50 basis points as a precautionary measure
to obviate the inflationary factors that still lie ahead and to consolidate the
evident gains of the monetary tightening stance maintained by the MPC over
the past several months.

I also vote for maintaining the symmetric corridor at plus/minus 2 per cent and
retaining the cash reserve ratio at 4 per cent.
I conclude by noting a need to maintain a more cautionary stance about
tightening going forward in light of an uncertain global economic outlook in
which a return to global recession cannot be ruled out.

6.0 OLOFIN, SAM
It is cheering news that headline, year-on- year, inflation rate has declined to 9.3
percent in August, 2011, and core inflation rate has fallen to 10.9 percent, even
if food inflation has risen slightly to 8.7 per cent compared with the figures that
were before us at the last meeting. This development can be partly attributed to
monetary policy tightening measures that have been in place over the last two
quarters or thereabout. We have over the last couple of months been
wondering whether a single digit inflation rate is attainable in 2011 or not, and if
so, would it be sustainable and for how long. Going by the reports we have
before us at this meeting, we can answer the first part of the question in the
affirmative. However as to whether the observed declining trend in inflation rate
is sustainable over the medium term remains debatable if not out-rightly no, for
a number of reasons. First, the observed decline in inflation rate is also partly
attributable to a seasonal factor of improved harvests and consequent decline
in domestic food prices. There is however no evidence that the prices of
imported food which account for nearly 50 percent of food inflation are
declining. Secondly, with respect to developments in the financial sector, there
have been significant developments, indicative of the resolution of the crisis
which threatened the stability of the sector and which has been receiving
attention since August 2009. The recapitalization measures taken by AMCCON
to rescue some of the intervened deposit money banks that were gravely in

danger will continue to exert some measure of inflationary pressure through
additional liquidity injection into the financial system.
Thirdly on the fiscal side, there is strong evidence that the Finance Ministry under
the leadership of the new minister would be strongly committed to fiscal
discipline and fiscal consolidation from now onwards. However as much as this
may be true, there is very little that can be achieved by way of one percent
reduction in recurrent expenditure in the 2012 federal budget. The inflationary
pressure of current level of fiscal deficit is likely to be further exacerbated by the
ongoing implementation of the new minimum wage policy; very imminent
removal of subsidy on petroleum products, and the proposed increase in
electricity tariffs among others. In the light of the foregoing it is doubtful if it is yet
‘Uhuru’, and that the time has come for a major review of the monetary
tightening policy stance that the Committee has pursued over the last couple of
meetings. There is yet much to be done to bring the inflation rate to a
sustainable one digit level over the short to medium term.
It may be true that we do stand the risk of stifling growth in SMEs if the rate of
interest continues to rise beyond what they can afford to make their businesses
profitable, and this may be capable of having negative impact on the level of
employment. However there is no strong available evidence to suggest that the
level of economic activity of SMES depends heavily on borrowing from the
money or capital market to finance their businesses. As for large scale
enterprises, the observed and predicted robust performance of over-all GDP
growth, which continues to hover around 7-8 percent, tend to suggest that the
tight monetary policy measures introduced over the last three to four meetings
have not had significant negative impact on their performance. We may
therefore still have some leverage room for further tightening by way of raising
the MPR to hedge against what appears to be non-abating inflationary
pressures over the short to medium term. In addition to this, the observed

decline in the rate of inflation over the last two months notwithstanding, the MPR
still remains negative in real terms. There may be other factors which contribute
to overall business climate that would need to be attended to if we are to
attract significant inflow of foreign capital. However, our negative MPR puts the
country at a less than competitive position relative to comparable other African
economies such as South Africa and Ghana. If we are to become more
competitive in attracting net-flow of external funds, be they portfolio investment
or FDI which would be needed for boosting growth as well as our external
balance position, we would need to further raise the MPR towards the goal of
achieving a more competitive positive rate. There is therefore a strong
argument for continuing with our current tightening stance by way of upward
adjustment of the MPR, albeit, at a steady gradual rate rather than through an
aggressive potentially disruptive upward spike. I would therefore vote a 50 basis
point upward adjustment in the MPR rate.

7.0 OSHILAJA, JOHN
My vote today is based on recognition of the increasingly likely need, in the near
to intermediate term, for Nigeria’s Monetary Authorities, to begin contemplating
credible and persuasive “supply-side FX initiatives”; i.e. sustainable initiatives
aimed at stimulating increased capital flows to the economy. Such flows, when
also attracted from external markets, enhance a Central Bank’s ability to
accumulate currency reserves, i.e. reserves the country will need to maintain
exchange rate stability well into future periods. Nigeria’s governments spend
too much on, and get far too little value for, their Recurrent Expenditures or
running costs; with not enough focus and accountability placed on Capital or
Investment Spending and Execution. One may conceptually argue that Nigeria
habitually “eats” or consumes Capital earnings that could be justifiably directed

towards critical Public Investment needs. It is clear to me that, in the absence of
meaningful adjustments to this historical pattern of spending priorities, Monetary
Policy likely becomes one of the few credible tools left available to policy
makers for taking up the slack in promoting investment. Given prevailing and
foreseeable domestic and international conditions, I would advise that
measures for augmenting Nigeria’s reserve buffers be seriously considered, and
established sooner – rather than later.
A clear first step towards this end entails ensuring that Nigerian portfolio
investments, fixed income instruments in particular, at least offer competitive,
real returns to domestic and international savers. I refer to private and public
actors and institutions, whose surplus capital could then be redeployed, by
capable players and agencies, for productive investments in much-needed
physical and social infrastructure. Power, transportation, and communication
systems, health-care delivery, learning institutions, financial services and so on. I
believe it is time aggressive steps are taken in this direction, especially now that
rates of inflation seem to be abating. In my opinion, this possibly fleeting ease
(or pause) in inflation presents the opportunity an import-dependent, singleexport country like Nigeria, simply cannot afford to ignore or be complacent
about. There are urgent investment needs, and wide ranging public work
projects to be completed. Frankly, I would have preferred that the MPC today
took more assertive steps towards encouraging inflows of externally domiciled
funds.
Fiscal authorities, at all levels of government in Nigeria, increasingly recognize
that current rates of spending – on Recurrent Line Items and Consumables in
their budgets – are fundamentally imprudent. The liquidity created by recurring
fiscal operations of this nature feeds into the general economy and generates
high demands for imported consumables and services. This demand is
invariably reflected in exchange rates for the Naira, which fundamentally should

not be weakening against high international prices for the country’s principal
export i.e., oil. Excessive import demand (including growing demands for
imported oil derivatives) offers the only believable explanation for what
ordinarily should be an embarrassing paradox.
Unless this inordinate fiscal bias towards Consumption is constructively reoriented
towards productivity-enhancing Investments, aimed at curbing the domestic
economy’s unfettered appetite for imports, the long-run macroeconomic
stability needed to jump-start revenue diversification, job growth and other
desirable outcomes will remain elusive. I believe the authorities are aware of
these challenges, and are beginning to appreciate the dangers inherent in
prevaricating on the issue.
However, I am not encouraged by current official expressions of intent. I am
concerned that reductions in Recurrent Spending planned for future Budgets
are too weak. I am also concerned that Benchmark Oil Prices, to be set for
budgeting purposes, will prove to be too high for what may be truly required to
effectively accumulate redeployable domestic capital. I fear that while
Nigeria’s Fiscal Authorities are talking the “talk”, they may in reality be once
again prevented from “walking” the talk.
Moreover, to the extent that real rates of interest tend to be more easily
achievable during periods of disinflation than during periods of rising inflation,
the MPC might have missed a singular opportunity in not being more assertive in
the stance maintained today. A larger increase in the MPR today would likely
have commensurate effects on investment and lending rates tomorrow.
However, the largest, most frequent, and most conspicuous credit consumers in
Nigeria today i.e. its governments, do not reside in the country’s demonstrably
productive sectors. Agriculture reportedly consumes less than 3% of all available
credit, SME’s vainly struggle for access to highly-priced credit, while large

domestic and international firms either tap into foreign currency denominated
bank facilities (at lower nominal rates) or extract finely priced terms from risk
averse bankers for short term Naira credits.
So who’s behavior would more assertive Monetary tightening really impact? As I
see it, certainly not the farmer, small business man or woman who wasn’t getting
much credit in the first instance. Depositors, savers and investors provide
borrowers an implicit cost-subsidy when they accept investment returns that do
not match or exceed annual rates of inflation. They get repaid in effectively
depreciated currencies with diminished purchasing power. Given the Nigerian
record so far, and in the prevailing global economic climate, it is hard to see the
efficacy in continuing to provide cost-subsidized funding to predominantly
consumption-oriented government operations.

8.0 SALAMI, ADEDOYIN
Welcome as data, showing Headline Inflation in Nigeria stayed under 10
percent in August 2011, is, the Year‐on‐Year inflation rate tells only part of the
story. The most cursory glance at the Month‐on‐Month number shows that prices
between July and August prices rose by 1.7 percent – the highest figure since
August 2011. Beyond the Headline Inflation rate, available data with respect to
the rate of increase in Food prices and the non‐food food elements of don’t
give room for optimism. Food prices rose by 8.7 percent when compared with
the same period last year – higher than the 7.9 percent recorded in the previous
month. Indeed, increasing rate of change in food price is confirmed,
irrespective of the prism (Year‐on‐Year or Monthly rate of change) from which
we choose to view the change in food prices. This raises the question, might the
‘harvest’ effect already be wearing off? As for the non‐food components of the
Consumer Price Index (CPI), the rate of increase, measured Year-on‐Year,

slowed down when compared to the figure for July. At almost 1 percent, the
Month‐on‐Month rate of increased to 0.9 percent – higher than the 0.2 percent
the previous month. Added to these, Central Bank Staff estimates indicate that
Headline Inflation will end the year at 10 percent. While the rate of increase of
Core Inflation is expected to ease in the months before the year end, food
inflation is expected to rise. Staff outlook for inflation can be understood in the
context of a number of domestic factors. I remain concerned about the fiscal
outlook. While the year‐to‐date deficit of the Federal Government of Nigeria
(FGN), at N368.76bn, is lower than the budget estimate, I am unconvinced that
this year will witness any movement towards fiscal consolidation. My expectation
is for a splurge of further spending as Ministries, Departments and Agencies
(MDAs) aim to meet their appropriations – I will be very happy to be wrong!
Furthermore, the announcement that the 2012 budget will be based on a
benchmark oil price of US$75 per barrel – notwithstanding the uncertainties in
the International Economic environment – is a source for concern. Whilst the
declared intention to reduce expenditure by 1 percent each year until
2015, may be politically realistic, it is not the kind of aggressive effort at budget
consolidation required to rein in expenditure driven increases in liquidity.
For quite a while, I have been concerned that both the policy and deposit rates
have remained below the rate at which prices have risen. That headline inflation
has remained under 10 percent in the past 2 months has doubtless reduced the
size of negative ‘real’ interest rates. However, the disincentive
impact on resource mobilisation posed by this situation cannot be understated.
Whilst the high levels of systemic liquidity and the existence of the Central Bank’s
guarantee on interbank market transactions creates difficulties with regard to
indigenous depositors, I believe we should take the present window to create
conditions which will encourage savings when the guarantee is removed. It is
also the case that negative ‘real’ policy rates, a sign of easier conditions,

continues, in my judgement, to jeopardise the ability to attract the foreign
capital.
However, perhaps the biggest challenge to managing prices remains the
exchange rate. Despite the increase in foreign currency inflows – indeed, inflows
exceeded outflows in July and August 2011 by an average of US$400mn in each
month – and higher reserves – US$ 34.85bn as at 15th September, 2011 ‐, the
import cover is only 7.6months. With the Naira already, vis‐à‐vis the US$, trading
at N153.91 today, there is very limited leeway with respect to its upper limit of
N154.5. A number of factors could raise demand for foreign currency and place
further pressure on the Naira. These factors include: (i) Firms placing orders
ahead of year‐end; (ii) Banking system liquidity, presently in excess of 50
percent; (iii) a heightened perception of risk in the Nigerian space; and
evidence of upward concentration of incomes. These need to be carefully
watched and managed! Loss of control over the direction of the currency will
create challenges for price stability into the 1st quarter of 2012.
In recommending continuation of the regime of tightening, I am not unmindful
of the challenges which unemployment poses. However, growth data, provided
by the National Bureau of Statistics, continues to indicate that the economy
enjoys robust growth – albeit without creating jobs. In my view, the spreading
problem of job creation is amply illustrated by National Income data showing
the continuing decline in private consumption. Indeed, provisional figures show
private consumption fell from N18.86trn in 2009 to N17.54trn in 2010. Worse still,
when adjusted for inflation, final consumption expenditure by the Private Sector
is lower than government final consumption!
The challenge of job creation requires a more productive concentration on
easing the binding structural constraints under which the Nigerian economic
space groans.

9.0 UCHE, CHIBUKE U.
I have today voted for the MPR to be retained at the current rate of 8.75
percent. My decision is based on the following points. First, I am concerned
about the fact that the current banking crisis is yet to be resolved satisfactorily.
While substantial progress has been made in this direction, the fact remains that
the CBN inter bank guarantee is still in place. Until the CBN is able to remove this,
it would be difficult to convincingly argue that the current banking distress has
been satisfactorily resolved. Because banks are essentially intermediaries, I
strongly believe that raising MPR at this stage will be inimical to the resolution of
this crisis.
Another point which is related to the above is the fact that raising MPR now will
be unhealthy to the development and growth of the real sector. While it is true
that MPR is still in negative territory especially when compared with inflation, the
fact remains that most real sector borrowers are already paying real interest
rates. The wide spread between deposit and borrowing rates makes it difficult
for depositors to benefit from any real interest rate regime that MPC may be
intending to achieve. Further raising interest rates at this stage will therefore
inhibit the growth of the real sector. It will also increase the quantum of
nonperforming loans in our still fragile banking sector. Although I am
appreciative of the argument that increasing MPR will positively impact on FDI, I
am of the view that there is need to balance this against the negative impact of
such an increase on domestic enterprises. The need to create local jobs, in my
view, outweighs the need to attract FDI. This is especially so in the context of the
questionable utility value of FDI and its established volatility in structurally
defective economies like ours.
Finally, it is important to reiterate that the link between monetary and fiscal
policies is well established. Even the best intentioned monetary policy cannot

achieve price stability in a fiscal environment reputed for its indiscipline.
Admittedly, with the new economic management team that is now in place,
we are hopeful that we will soon begin to witness positive changes in fiscal
planning. Until this happens, however MPC will always have the difficult task of
balancing between increased employment through the development of the
real sector and the attainment of positive interest rates on one hand, and
growing domestic enterprises and attracting FDI on the other.

10.0 YAHAHA, SHEHU
The current meeting of the MPC is being held against a background of
recession concerns in Europe and the US, strong growth recovery in the
emerging markets and Asia and good prospects for growth in Nigeria, albeit
muted by escalating security concerns and continuing infrastructure bottlenecks
Information provided by the Cental Bank has indicated an encouraging
correlation between the MPR and inflation figures in 2011, although without any
evidence of causation.
Currently, the level of inflation, year on year, has trended downward, which is a
positive development. Nevertheless, food inflation is still rising slightly. Moreover,
the inflation figures for August show a rise as compared to the previous two
months, and despite possible attribution to seasonal variations, this means that
there is a question mark on the sustainability of the downward inflationary trend.
In addition, government spending in the current quota of the year, both capital
and recurrent, have been lower than budgeted. The budget deficit has been
correspondingly lower than aniticipated, which means that liquidity effects of
government spending are slighted muted.

On the other hand, figures provided by the National Bureau of Statistics has
projected a healthy growth for 2011, which gives greater room for flexibility for
monetary policy. Nevertheless, capital expenditure spending in the budget for
the first half of the year has been less than 25% and domestic consumption has
also been lower. These may negatively affect growth rates.
At the moment, crude oil prices are robust. Unfortunately, threatened
recrudescence of recession in Europe and the US, combined with gradually
improving prospects for oil production in North Africa and the middle East, might
presage a significant downside in crude oil prices in the near future. If this
happens, then the stability of the Naira exchange rate, the improved foreign
reserves situation in the country and the narrowing of the WDAS/BDC gap in
naira exchange rate which have been witnessed in the last few months, may
come under increasing pressure yet again. This is of great concern, considering
the inflationary effects of a significant exchange rate depreciation in a country
that is so import-dependent.
There are also concerns that the activities of AMCON and their positive effect in
stabilising the banking system may translate into significant injections of liquidity
into the economy, which can put pressure on prices and the exchange rate.
Related to this are the possible effects of removal or reduction in oil price
subsidies and raising electricity tariffs. Nevertheless, it not clear as to when these
two will take effect, and the MPC has been taking into consideration the advent
of these two issues for sometime now.
On the whole, there are clear concerns that, despite current downwards trend
in prices, there might be a resurgence of inflation in the near term.
Nevertherless, there are quite a few elements of uncertainty as to the
implementation of a number of policies, their timing and their effects. Moreover,

raising the MPR, through its effects on inter bank rates, may somewhat unsettle
the banking system, especially the new banks and the intervened banks. It can
also, through its effects on interest rates, make it costlier for SMEs and
microenterprises to borrow. Their stagnation or decline can significantly add to
the already serious problem of unemployment in the country. In addition,
problems of excess liquidity can also be tackled through Open Market
Operations by the Central Bank.
In the light of the above arguments, I vote for holding the MPR at its current of
8.75%.

11.0 SANUSI LAMIDO SANUSI
Governor of the Central Bank of Nigeria and Chairman of the Monetary Policy
Committee
The committee is meeting at a time when the deceleration of inflation which
commenced from last quarter continued, albeit at a decreasing rate. In July
and August, 2011 headline inflation fell to single digit for the first time in three
years, reflecting both the structural impact of a good harvest and the impact of
proactive monetary tightening by this committee. Given the adverse impact of
high lending rates on asset quality, production costs and job creation, one
sympathizes with the argument of members who propose that MPC hold rates
steady at existing levels and monitor performance before continuing with further
tightening in November, if necessary.

However, as it is well known monetary policy has to be forward looking and
based on a careful analysis of the balance of probabilities with respect to
inflation outlook. It appears to me that a number of structural and monetary

considerations continue to constitute a risk to price stability. The structural
factors include uncertain outlook of world food prices especially given the spate
of floods and natural disasters and the recently proposed price hike on
commodities like rice by Thailand, cyclical increases in the price of farm
produce as we move away from the unprediator post-harvest season, reflecting
the dearth of storage facilities, cheap transportation and market infrastructure,
anticipated removal of petroleum subsidies lending to increased cost of
production and transportation and likely increase in electricity tariffs as part of
the ongoing purer reforms.

On the liquidity front, AMCON is expected to inject significant amount of money
(in the form of Bonds) into distressed banks as part of the recapitalization
process that is about to be concluded in September, 2011. Also expansionary
fiscal activities are only likely to be reined-in in the medium to long run. A review
of Federal Government spending up to July, 2011 shows that less than 10% was
accounted for by capital expenditure Non-debt recurrent expenditure was
more than 70% while over 10% was spent on debt service. The balance of 10%
was accounted for by statutory transfers.

The Finance Ministry has already announced a target of 1% annual reduction in
recurrent expenditure. On this basis, it is clear that in the short run at least, that
the commitment and best intention of Government on fiscal consolidation will
not translate into concrete results. Excellent initiatives have been announced in
respect to agriculture and industry, and if faithfully executed, these should
address some of the structural issues that exacerbate import-dependency, as
well as diversify the Government’s revenue base. But these policies take some
time to work their way into results.
It therefore appears to me that in the short term, we are faced with the threats
of continued liquidity injection from AMCON and Government spending. When

combined with the concerns raised above on cost push factors, this is not a time
for complacency. Furthermore, real interest rates are still in negative territory
even though they have been increasing over the past few months.
I have weighed the arguments of both sides and am of the firm view that in view
of the outlook and expectations, there is no option than to tightening at this
point. Any sign of complacency will lead to a reversal of our gains so far and
potentially undermine the mandate of this committee of maintaining price
stability, as well as the subsidiary objective of maintaining exchange rate
stability as an integral means to achieving the end to controlling inflation.

I am however of the view that a 100bps increase at this point would be too
aggressive in view of its likely impact on lending rates and also in view of the
need to avoid too many sharp adjustments in the market. Furthermore, I note
that inspite of our 75bps at the last meeting, monetary policy implementation
was a bit off pace and rates did not quite follow suits over most of the
intervening period. A return to a more diligent regime where the OBB rate
closely trails the target of MPR+2 will yield result much stronger than that implied
by a 50bps hike. For all the above reasons, I cast my vote with the majority as
follows:
1. An increase in MPR by 50bps from 8.57% to 9.25%
2. Retention of the symmetric corridor of +/-2%
3. CRR and liquidity ratio to remain current levels.