CENTRAL BANK OF NIGERIA COMMUNIQUÉ NO 114 OF THE MONETARY
POLICY COMMITTEE MEETING OF 24th AND 25th JULY, 2017
Background
The Monetary Policy Committee met on the 24th and 25th of July
2017, against the backdrop of a relatively improving global
economy. However, protectionism in trade and immigration;
fragilities in the financial markets, remain the key risks to global
economic stability.
On the domestic front, the economy is on a path to moderate
recovery with a positive short- to medium-term outlook, premised
largely on fiscal stimulus and a stable naira exchange rate. Inflation
expectations also appear sufficiently anchored with the current
stance of monetary policy.
In attendance were 8 out of 12 members of the Committee. The
Committee examined the global and domestic economic and
financial environments in the first half of 2017 and the outlook for the
rest of the year.

External Developments
The momentum witnessed in the global economy in Q1 2017
continued through the second quarter, driven by a generally
accommodative monetary policy stance in most advanced
economies, moderation in energy prices and improved global
demand. The emerging markets and developing economies, are
experiencing
positive
spillovers
from
somewhat
improved
commodity prices and developments in the advanced economies.
The growth prospects for this group of countries in 2017 are expected
to rise to about 4.6 per cent from 4.3 per cent in 2016.
Complemented by the momentum in other blocks and a potential
positive prospect for expansion in world trade, the IMF in its July
edition of the World Economic Outlook (WEO) projected global
output growth in 2017 at 3.5 per cent from 3.1 per cent in 2016.
The MPC, however, noted some headwinds confronting the
optimistic outlook to global growth arising mainly from receding
market expectations of expansionary U.S. fiscal policy, weaker than
expected growth in the U.K due to difficult BREXIT negotiations and
geo-political risks associated with the forthcoming German general
elections. In addition, the Committee noted the downward trend in
global inflation after earlier indications of an uptick as the U.S.
continues to build up inventories in shale oil, while emerging

economies such as Brazil, Russia and South Africa witness strong
economic headwinds leading to sharp downturn in output.

Domestic Output Developments
Data from the National Bureau of Statistics (NBS) showed that the
contraction in the economy moderated to 0.52 per cent in Q1 2017
from 1.30 per cent in Q4 2016. The data further revealed that fifteen
economic activities recorded positive growth in Q1 2017, showing
strong signs of recovery. The Purchasing Managers Index (PMI) for
manufacturing and non-manufacturing activities stood at 52.9 and
54.2 index points in May and June 2017, respectively from 52.7 and
52.5 index points in May 2017, indicating an expansion for the third
consecutive month. Similarly, the Composite Index of Economic
Activities (CIEA) rose from 55.85 to 59.50 index points between April
and June 2017. The Committee noted the continuous positive effects
of improved foreign exchange management on the performance of
manufacturing and other economic activities. Non-oil real GDP grew
by 0.72 per cent in Q1 2017, reflecting growth in the agricultural
sector by 0.77 per cent in the same period. Provisional data also
showed that the external sector remained resilient in Q2 2017, as the
overall Balance of Payments (BOP) position recorded a surplus of
US$0.65 billion, equivalent to 0.8 per cent of GDP. The Committee
hopes that the implementation of the 2017 budget and the

Economic Recovery & Growth Plan (ERGP) will further strengthen
growth and stimulate employment.

Developments in Money and Prices
The Committee noted that money supply (M2) contracted by 7.33
per cent in June 2017, annualized to a contraction of 14.66 per cent,
in contrast to the provisional growth benchmark of 10.29 per cent
expansion for 2017. The development in M2 reflected a contraction
of 7.45 per cent in net foreign assets (NFA) in June 2017. Similarly, M1
contracted by 7.98 and 10.70 per cent in May and June 2017,
respectively, consistent with the directive of the MPC that expansion
in narrow money should be controlled. On the other hand, net
domestic credit (NDC) grew modestly by 1.02 per cent in June 2017,
(annualized at 2.04 per cent), driven mainly by net credit to
government, which grew by 5.91 per cent. Credit to the private
sector, however, declined relative to end-December 2016 by 0.02
per cent. The MPC noted the widening fiscal deficit of N2.51 trillion in
the first half of 2017 and the growing level of government
indebtedness and expressed concern about the likely crowding out
effect on private sector investment. The constrained growth in the
monetary aggregates provides evidence of
weak financial
intermediation in the banking system arising from the constraints
imposed by developments in the macroeconomy.

Headline inflation (year-on-year) declined for the fifth consecutive
month in June 2017, to 16.10 per cent from 16.25 per cent in May,
and 18.72 per cent in January 2017. Core inflation moderated to
12.50 per cent in June from 13.00 per cent in May 2017 while the
food index rose marginally to 19.91 per cent in June from 19.27 per
cent in May 2017. This development was traced to intermittent
attacks by herdsmen on farming communities, sporadic terrorist
attacks in the North-East and other seasonal farming effects. The
Committee was particularly concerned about the unabating
pressure from food inflation but hopeful that the situation will
dampen in the third quarter as harvests begin to manifest.
The Committee also attributed the moderation in inflation to be
partly due to the effects of the relative stability in the foreign
exchange market, stemming from improved management, which
promoted increased inflows. Against this backdrop, the Committee
reiterated its commitment to sustain and deepen flexibility in the
foreign exchange market to further enhance foreign exchange flow
in the economy. The Committee, however, noted the protracted
effects of high energy and transportation costs as well as other
infrastructural constraints on consumer price developments and
expressed hope that government will fast-track its reform agenda to
address these legacy issues. The Committee noted that while
responding to the current tight monetary policy stance, inflation still
had a strong base effect which is expected to wane by August 2017.

Money market interest rates moved in tandem with the high level of
liquidity in the banking system. The interbank call rate opened at
16.13 per cent on May 25, 2017 and closed at 4.43 per cent on June
29, 2017. However, the average inter-bank call rate during the
period stood at 12.49 per cent. The movement in the net liquidity
position
reflected
the
effects
of
OMO,
foreign
exchange
interventions, statutory allocation to state and local governments,
and maturity of CBN Bills.
The Committee noted the improvements in the equities segment of
the capital market as the All-Share Index (ASI) rose by 33.33 per cent
from 25,516.34 on March 31, 2017, to 34,020.37 on July 21, 2017.
Similarly, Market Capitalization (MC) rose by 32.84 per cent from
N8.83 trillion to N11.73 trillion during the same period. Relative to endDecember 2016, capital market indices rose by 26.59 and 26.81 per
cent, respectively, reflecting growing investor confidence due to
improvements in foreign exchange management. The Committee
however, noted the seeming bubble in the capital market and
cautioned on the utilization of the inflows.
Total foreign exchange inflows through the Central Bank of Nigeria
(CBN) increased by 35.41 per cent in June 2017 compared with the
previous month. Total outflows, on the other hand, decreased by
12.73 per cent during the same period, as a result of reduced CBN
intervention in the interbank foreign exchange market, which also
reduced TSA (dollar) payments balances by 61.4 per cent in the

period under review. The positive net flows resulted in an
improvement of gross external reserves to $30.30 billion at end-June
2017, compared with $29.81 billion at end-May 2017.
The Committee noted the emerging convergence between the
bureau-de-change
(BDC)
and
Nigeria
Autonomous
Foreign
Exchange (NAFEX) segment rates and the stability of the average
naira exchange rate at the inter-bank segment of the foreign
exchange market during the review period.

2.0. Overall Outlook and Risks
Available forecasts of key macroeconomic indicators point to a
fragile economic recovery in the second quarter of the year. The
Committee cautioned that this recovery could relapse in a more
protracted recession if strong and bold monetary and fiscal policies
are not activated immediately to sustain it. Thus, the expected fiscal
stimulus and non-oil federal receipts, as well as improvements in
economy-wide
non-oil
exports,
especially
agriculture,
manufacturing, services and light industries, all expected to drive the
growth impetus for the rest of the year must be pursued relentlessly.
The Committee expects that timely implementation of the 2017
Budget, improved management of foreign exchange, as well as
security gains across the country, especially, in the Niger Delta and

North Eastern axis, should be firmly anchored, to enhance
confidence and sustainability of economic recovery.
The Committee identified the downside risks to this outlook to include
weak financial intermediation, poorly targeted fiscal stimulus and
absence of structural programme implementation.

3.0. The Considerations of the Committee
Notwithstanding the improved outlook for growth, the Committee
assessed the implications of the uncertainties arising from the
continued normalization of monetary policy by the US Fed and the
implications of a strong dollar, the weak recovery of commodity
prices, and the uncertainty of US fiscal policy. The Committee
similarly evaluated other challenges confronting the domestic
economy and the opportunities for achieving economic growth and
price stability in 2017.
The Committee expressed satisfaction with the gradual but
consistent decline in inflationary pressures in the domestic economy,
noting its substantial base effect, continuous improvements in the
naira exchange rate across all segments of the foreign exchange
market, and considerable signs of improved investments inflows. The
Committee welcomed the move by the fiscal authorities to engage
the services of asset-tracing experts to investigate the tax payment
status of 150 firms and individuals in an effort to close some of the
loopholes in tax collection, towards improving government revenue.
However, the Committee expressed concern about the slow
implementation of the 2017 Budget and called on the relevant
authorities to ensure timely implementation, especially, of the capital
portion in order to realize the objectives of the Economic Recovery
and Growth Plan.

The MPC believes that at this point, developments in the
macroeconomy suggest two policy options for the Committee: to
hold or to ease the stance of monetary policy.
Against the backdrop of the outlook for the domestic and global
economy; the enthusiasm around the base-effect which reduced
inflationary pressures and the continuous relative stability in the naira
exchange rate, there is need to maintain cautious optimism, given
the potential ramification of a major deviation from the existing
policy path. The Committee is not unmindful of the high cost of
capital and its implications on the still ailing economy, which
arguably necessitates an accommodating monetary policy stance.
The MPC also noted the liquidity surfeit in the banking system and
the continuous weakness in financial intermediation, but agreed on
the need to support growth without jeopardizing price stability or
upsetting other recovering macroeconomic indicators, particularly
the relative stability in the foreign exchange market.
The MPC thinks that easing at this point would signal the
Committee’s sensitivity to growth and employment concerns by
encouraging the flow of credit to the real economy. It would also
promote policy consistency and credibility of its decisions. Also, the
Committee observed that easing at this time would reduce the cost
of debt service, which is actually crowding out government
expenditure. The risks to easing however, would show in terms of
upstaging the modest stability achieved in the foreign exchange

market, the possible exit of foreign portfolio investors as well as a
resurgence of inflation following the intensified implementation of
the 2017 budget in the course of the year. The Committee also
reasoned that easing would further pull the real interest rate down
into negative territory.
The argument for holding is largely premised on the need to
safeguard the stability achieved in the foreign exchange market,
and to allow time for past policies to work through the economy.
Specifically, the MPC considered the high banking system liquidity
level; the need to continue to attract foreign investment inflow to
support the foreign exchange market and economic activity; the
expansive outlook for fiscal policy in the rest of the year; the
prospective election related spending which could cause a jump in
system liquidity, etc.
The MPC expressed concern over the increasing fiscal deficit
estimated at N2.51 trillion in the first half of 2017 and the crowding
out effect of high government borrowing. While urging fiscal restraint
to check the growing deficit, the Committee welcomed the
proposal by government to issue sovereign-backed promissory notes
of about N3.4 trillion for the settlement of accumulated local debt
and contractors arrears. The Committee, however, advised the
Management of the Bank to monitor the release process of the
promissory notes to avoid an excessive injection of liquidity into the

system thereby offsetting the gains so far achieved in inflation and
exchange rate stability.
On the outlook for financial system stability, the Committee noted
that, in spite of the resilience of the banking sector, the prolonged
weak macroeconomic environment has continued to impact
negatively on the sector’s stability. The MPC reiterated its call on the
Bank to sustain its intensive surveillance of deposit money banks’
activities for the purpose of promptly identifying and addressing
vulnerabilities. The Committee also called on the DMBs to support
economic recovery and growth by extending reasonably priced
credit to the private sector.

4.0. The Committee’s Decisions
In consideration of the headwinds confronting the domestic
economy and the uncertainties in the global environment, the
Committee decided by a vote of 6 to 2 to retain the Monetary Policy
Rate (MPR) at 14.0 per cent alongside all other policy parameters.
Consequently, 6 members voted to retain the MPR and all other
parameters at their current levels while two members voted to ease
the stance of monetary policy. In summary, the MPC decided to:
(i) Retain the MPR at 14 per cent;
(ii) Retain the CRR at 22.5 per cent;

(iii) Retain the Liquidity Ratio at 30.00 per cent; and
(iv) Retain the Asymmetric corridor at +200 and -500 basis points
around the MPR.

Thank you for listening.
Godwin I. Emefiele
Governor, Central Bank of Nigeria
25th July, 2017