Central Bank of Nigeria Communique No 107 of the Monetary Policy
Committee Meeting of Monday and Tuesday 23rd and 24th May 2016
The Monetary Policy Committee met on 23rd and 24th May 2016 against a
backdrop of challenging global and domestic economic and financial
conditions.
The
Committee
assessed
the
global
and
domestic
macroeconomic and financial developments, the short-to medium-term
prospects for the domestic economy and the outlook for the rest of the
year. In attendance were 9 out of the 12 members.
International Economic Developments
The Committee noted with concern, the tapered growth and continued
decline in global output since 2014. At an estimated 3.2 per cent, global
output in 2016 was only 0.1 percentage point below the 3.1 per cent in the
corresponding period of 2015. The sluggish global output was traced to
weak fundamentals in both the advanced economies and Emerging
Markets and Developing Economies (EMDEs), including increased volatility
in global financial markets, sustained softness in commodity prices,
sluggish global trade, resulting in persistent fragility, particularly in the
EMDEs.

The United States (US) economy slowed to 0.5 per cent in Q1 2016, a
steep decline compared with the 1.4 per cent growth recorded in the last

quarter of 2015. The deceleration in US growth was attributed to
contraction in non-residential fixed investment and energy businesses, a
strong dollar which harmed exports, slowdown in government spending and
moderation in private consumption expenditure (PCE). Japan which is
currently in deflation is projected to grow by 0.5 per cent in 2016, the same
as in 2015, on the back of persistently weak aggregate demand. The Bank
of Japan’s (BoJ) monthly asset purchase of ¥6.7 trillion (US$61.73 billion)
resulted in the Bank holding about one-third of outstanding government
bonds, while the economy remained largely intractable with a credit crunch,
indicating that the programmme may have lost its steam. In response to the
contraction in credit, BoJ since January 2016, adopted a negative interest
rate policy.

Real GDP growth in the Euro area at 0.6 per cent in Q1, 2016 was a
phenomenal improvement compared with the 0.3 per cent achieved in Q4
2015. The European Central Bank (ECB), at its meeting of 21st April, 2016
maintained the soft policy stance by holding its refinancing rate at 0.0 per
cent, lending rate at 0.25 per cent and deposit rate at -0.4 per cent. The
Bank also maintained its monthly asset purchase program of €80 billion
(US$87.2 billion), hoping to further stimulate output growth and achieve its
2 per cent inflation target.

The Bank of England (BoE) also retained its monthly assets purchase
programme, financed through the issuance of reserves at ₤375 billion
(US$543.75 billion). At the end of its April 13, 2016 meeting, BoE retained

its policy rate at 0.5 per cent, with a commitment to raise inflation to its 2.0
per cent long run path.

Weaknesses in major EMDEs, including low capital inflows, rising costs of
funds and continuing geopolitical factors, have been identified as key
constraints to growth. Adverse commodity prices continued to provide
strong headwinds against growth, defining other economic and financial
conditions in the EMDEs. Consequently, the IMF (WEO April 2016 Update)
downgraded the 2016 growth forecast for this group of countries from 4.3 to
4.1 per cent.

Disruptions to oil supply in Canada, Nigeria and Kuwait and, demand
spikes following expectations of a US interest rate hike and buildup of
crude oil inventories, contributed to mild oil price recovery in April 2016.
Inflation remains largely suppressed in the advanced countries but tepid
consumption spending and vulnerabilities in the financial markets continue
to hamper financial intermediation and growth. Consequently, the monetary
policy
stance
in
most
advanced
economies
remained
largely
accommodative and most likely to be maintained throughout 2016. On the
contrary, monetary policy in the EMDEs could continue to diverge
substantially, reflecting the diversity of shocks confronting them.

Domestic Economic and Financial Developments
Output
In the first quarter of 2016, the economy suffered from severe shocks
related to energy shortages and price hikes, scarcity of foreign exchange
and depressed consumer demand, among others. Consequently economic
agents could not undertake new investments or procure needed raw
materials. Shortage of foreign exchange arising from low crude oil prices
manifested in low replacement levels for raw materials, other inputs as well
as new investments. In addition, the energy crisis experienced in the first
five months of the year, resulted in increased power outages and higher
electricity tariffs, as well as fuel shortages; which led to factory closures in
some cases. The prolonged budget impasse denied the economy the
timely intervention of complementary fiscal policy to stimulate economic
activity in the face of dwindling foreign capital inflows. Aggregate credit to
the private sector remained highly tapered while credit to government grew
beyond the programmed benchmark for the period. The Committee,
however, noted that many of the prevailing conditions in the economy
during the review period were outside the direct control of monetary policy,
but hopes that the implementation of the 2016 Federal Budget, supported
by relevant sectoral policies and easing supply shocks in energy and
critical inputs, would provide the needed boost to the economy.
Against this backdrop, data from the National Bureau of Statistics (NBS) for
May 2016, indicated that domestic output in Q1, 2016 contracted by 0.36
per cent, the first negative growth in many years. This represents a drop of
2.47 percentage points in output from the 2.11 per cent reported in the last

quarter of 2015, and 4.32 percentage point lower than the 3.96 per cent
recorded in the corresponding period of 2015. Aggregate output contracted
in almost all sectors of the economy, with the non-oil sector declining by
about 0.18 per cent in Q1 2016, compared with 3.14 per cent expansion in
the preceding quarter. Only agriculture and trade grew by 0.68 per cent and
0.40 per cent, respectively, while Industry, Construction and Services
recorded negative growth of -0.93, -0.26 and -0.08 percentage point,
respectively.

Prices
The Committee noted a further increase in year-on-year headline inflation
to 12.77 per cent and 13.72 percent in March and April 2016, respectively,
from 11.38 per cent in February 2016. The increase in headline inflation in
April reflected increases in both food and core components of inflation.
Core inflation rose sharply for the third time in a row to 13.35 per cent in
April from 12.17 per cent in March, 11.00 per cent in February and 8.80 per
cent in January having stayed at 8.70 per cent for three consecutive
months through December, 2015. Food inflation also rose to 13.19 per cent
from 12.74 per cent in March, 11.35 per cent in February, 10.64 per cent in
January and 10.59 per cent in December, 2015. The rising inflationary
pressure continued to be traced to legacy factors including energy crisis
reflected in incessant scarcity of refined petroleum products, exchange rate
pass through from imported goods, high cost of electricity, high transport
cost, reduction in food output, high cost of inputs and low industrial output.

The Committee observed that in an economy characterized by high import
dependence, the shortage of foreign exchange provided some basis for
price increases as currently being experienced. The Committee noted that
the economy needed to aggressively earn and build up its stock of foreign
reserves in order to avoid distortions when faced with severe shocks. The
Committee further noted that the current inflation trend, being largely a
product of structural rigidities and inadequate foreign exchange earnings
would continue to be closely monitored, and in coordination with fiscal
policy, with a view to addressing the underlying drivers of the upward price
movements.

Monetary, Credit and Financial Markets Developments
Broad money supply (M2) grew by 3.49 per cent in April 2016, a 1.29
percentage growth from the March level of 2.20 per cent and compared
with the 3.67 per cent in April 2015. When annualized, M2 grew by 10.47
per cent in April 2016 against the provisional growth benchmark of 10.98
per cent for 2016. Net domestic credit (NDC) grew by 7.87 per cent in the
same period and annualized at 23.61 per cent. At this rate, the growth rate
of NDC was above the provisional benchmark of 17.94 per cent for 2016.
The development in NDC essentially reflected the significant growth in
credit to government of 35.97 per cent in the month, annualized to 107.91
per cent. Credit to the private sector grew by 3.52 per cent in April 2016,
which annualized to a growth of 10.56 per cent, below the benchmark
growth of 13.28 per cent.

The Committee observed with concern, the continuous dismal performance
of growth in credit to the private sector, noting that in spite of the Bank’s
efforts, DMBs continued to direct credit largely to low employment elastic
sectors of the economy, a phenomenon that had significantly contributed to
the low performance of the economy.
Money market interest rates reflected the continuing liquidity surfeit in the
banking system. Average inter-bank call rate, which stood at 4.50 per cent
on 21st March 2016, closed at 8.67 per cent on March 18, 2016. Between
March 25th and 14th April 2016, interbank call rate averaged 2.00 per cent.
The Committee noted a decline in activity in the inter-bank market in the
period under review, which was due to the payment of FAAC statutory
allocations and the maturity of CBN securities.
The Committee also noted a further improvement in the equities segment
of the capital market as the All-Share Index (ASI) rose by 3.34 per cent
from 25,899.91 on March 24, 2016 to 26,763.86 on May 18, 2016.
Similarly, Market Capitalization (MC) rose by 3.14 per cent from N8.91
trillion to N9.19 trillion during the same period. However, relative to endDecember 2015, the indices declined by 6.56 per cent and 6.70 per cent,
respectively. Globally, however, the equities markets were generally
bearish.

External Sector Developments
The average naira exchange rate remained stable at the inter-bank
segment of the foreign exchange market during the review period. The
exchange rate at the interbank market opened at N197.00/US$ and closed

at N197.00/US$, with a daily average of N197/US$ between March 25 and
May 13, 2016. The Committee, therefore, remains committed to its
mandate of maintaining a stable naira exchange rate. The MPC noted the
level of activity in the autonomous foreign exchange market especially,
following the deregulation of the downstream petroleum sector with
attendant increased demand in the interbank market, thus further exerting
pressure on the naira.

The Committee recalls that over the last two consecutive meetings, it had
signaled the imperative of reform of the foreign exchange market. In the
intervening period, the Committee interrogated the issues around the
current foreign exchange market regime, tracing them to the low foreign
exchange earnings of the economy. Consequently, in the Committee’s
opinion, the key issue remains how to increase the supply of foreign
exchange to the economy. The Committee observed that while the Bank
has been working on a menu of options to ensure increased supply of
foreign exchange, there was no easy and quick fix to the foreign exchange
scarcity problem as supply remained essentially a function of exports and
the investment climate.
The Committee is aware that a dynamic foreign exchange management
framework that guarantees flexibility could not replace the imperative for
the economy to increase its stock of foreign exchange through enhanced
export earnings. Consequently, such a structure must evolve to provide
basis for radically improved investment climate to attract new investments.
The Committee recognizes the exchange rate as a very important
macroeconomic variable, which must be earned by increased productive

activity and exports, noting with satisfaction that the Bank had made very
significant and satisfactory progress with the reforms framework.
The Committee was of the view that the current adverse global and
domestic economic and financial conditions and the imperative imposed by
the demand and supply shocks to the domestic economy and considering
the express intensions of Government as enunciated in the 2016 budget,
policy must respond appropriately as the market continues to demonstrate
confidence in the Bank’s ability to deliver a credible foreign exchange
market. Accordingly, the MPC decided that the Bank should embrace some
level of flexibility in the foreign exchange market. Given the imperative for
growth, the Management of the Bank has been given the mandate to work
out the modalities for achieving the desired flexibility that is in the overall
interest of the Nigerian economy and when the implementation of the new
framework would begin.

The Committee’s Considerations
The Committee acknowledged the severely weakened macroeconomic
environment, as reflected particularly in increased inflationary pressure,
contraction in real output and rising unemployment. The Committee recalls
that in July 2015, it had hinted on the possibility of the economy falling into
recession unless appropriate complementary measures were taken by the
monetary and fiscal authorities. Unfortunately the delayed passage of the
2016 budget constrained the much desired fiscal stimulus, thus edging the
economy towards contractionary output. As a stop-gap measure, the
Central Bank continued to deploy all the instruments within its control in the
hope of keeping the economy afloat. The actions, however, proved

insufficient to fully avert the impending economic contraction. With some of
the conditions that led to the contraction in Q1, 2016 still largely
unresolved, the weak outlook for growth which was signaled in July 2015
could extend to Q2. To this effect, today’s policy actions have to be
predicated on a less optimistic outlook for the economy in the short term,
given that, even after the delayed budgetary passage in May 2016, the
initial monetary injection approved by the Federal Government may not
impact the economy soon, as the processes involved in MDAs finalizing
procurement contracts before the disbursement of funds may further delay
the much needed financial stimulus to restart growth.

The Committee noted that the CBN had implemented accommodative
monetary policy from July 2015, with the hope of achieving growth, up until
March 2016, when the MPC switched into a tightening mode. However,
while the underlying conditions necessitating tight monetary policy
remained largely in place, sundry administrative measures implemented by
the Bank and recent macroeconomic conditions on the back of the 2016
Budget are expected to significantly dictate a key policy preference in the
dilemma now faced by monetary policy - stagflation. Given the current
limited policy space, it is imperative to balance stability with growth stance
while working on options that in the short term, are certain to isolate
seasonal and transient factors fuelling the current price spiral.

Other than credit to government, growth in all monetary aggregates
remained largely below their indicative benchmarks, yet; headline inflation
spiked in April 2016, far above the upper limit of the policy reference band.

Inflation has continued to be driven mainly by supply side factors such as
fuel scarcity, increase in tariff and deterioration in electricity supply,
increase in the price of petrol, higher input costs as a result of scarcity of
foreign exchange, persistent security challenges and exchange rate passthrough to domestic prices of import. While the Committee believed that the
recent deregulation of the downstream sector of the petroleum sector was
in the right direction and would lead to increased supply, the pass-through
effect of prices to other products has to be factored in policy
considerations. Mindful of the limitations of monetary policy in influencing
structural imbalances in the economy, the Committee stressed the need for
policy coordination with the fiscal authorities in order to effectively address
the identified pressure points.
The Committee noted that the continued excess liquidity in the banking
system was responsible for the low level of activity in the interbank market.
This is in addition to contributing to the sustained pressure in the foreign
exchange market. The Committee expressed hope that efficient
implementation of the recently passed 2016 Federal Budget, especially; the
capital expenditure portion, would help invigorate growth in the economy as
business confidence rejuvenates.
The Committee expressed concern over sustained pressure in the foreign
exchange market and the necessity of implementing reforms to engender
greater flexibility of rate and transparency in the operation of the inter-bank
foreign exchange market. Accordingly, the Committee noted that it was
time to introduce greater flexibility in the management of the foreign
exchange market. The Committee reaffirmed commitment towards

maintenance of price stability and reiterated the need to reappraise the
coordination mechanism between monetary and fiscal policy and initiate
reforms, for the purpose of more efficient policy synchronization and
management.
The Committee’s Decisions
The Committee, in its assessment of the relevant risk profiles, came to the
conclusion that although, the balance of risks remains tilted against growth;
previous decisions need time to crystalize. Consequently, in a period of
stagflation, the policy options are very limited. To avoid complicating the
conditions, the Committee decided on the least risky option to hold. The
foreign exchange market framework, now ready, the MPC voted
unanimously to adopt greater flexibility in exchange rate policy to restore
the automatic adjustment properties of the exchange rate. Consequently,
all 9 members voted to hold and introduce greater flexibility in managing
the foreign exchange rate. The Bank would however, retain a small window
for funding critical transactions. Details of operation of the market would be
released by the Bank at an appropriate time.

In summary, the MPC voted to:
(i) Retain the MPR at 12.00 per cent;
(ii)
Retain the CRR at 22.50 per cent;
(iii) Retain the Liquidity Ratio at 30.00 per cent; and
(iv) Retain the Asymmetric Window at +200 and -500 basis points
around the MPR

(v) Introduce greater flexibility in the inter-bank foreign exchange
market structure and to retain a small window for critical
transactions.

Thank you for listening.

Godwin I. Emefiele
Governor, Central Bank of Nigeria
24th May 2016