CBN MPC Communique No. 69 - April 2010
Central bank: cbn | Type: statement | Date: 2010-04-16

Central Bank of Nigeria Communiqué No. 69 of the Special Monetary
Policy Committee Meeting, April 15, 2010
The Monetary Policy Committee (MPC) held a special meeting on April 15,
2010 to, among other things, consider the modalitie s for the injection of
500 billion into the real economy in continuation o f the current
quantitative easing policy. It also reviewed domes tic economic conditions
during the first quarter of 2010 against the backdr op of the global economic
and financial developments with a view to guiding m onetary and financial
sector policies for the rest of 2010.
The MPC noted the persisting tight credit condition s and the continuing
under-performance of key monetary aggregates which had informed its
earlier decision to embark on a quantitative easing policy to be implemented
through investment in debentures to be issued by th e Bank of Industry
(BOI). The Committee commended the co-operation o f key stakeholders in
preparing the modalities for the injection of the N
500 billion financing
facility for the emergency power projects dedicated to industrial clusters and
restructuring/refinancing of DMBs’ exposures to th e manufacturing sector
and SMEs. It stressed the need for even greater co-operation in fast-tracking
on-going reform efforts in the banking sector to en sure the smooth flow of
credit to the real sector of the economy as well as energizing reforms in the
power and other economic infrastructure sectors, to promote private
sector/foreign investment and employment-generating growth. In this regard,
the MPC welcomes the attention to the power sector by the Federal
Government. The Committee emphasized that while eco nomic reforms and
human capital development remain key ingredients fo r economic growth,
the Bank is mindful of the supportive role that ma croeconomic and
financial stability plays in achieving sustainable growth and, will continue to
focus attention on these two areas.
On the global scene, the Committee noted that the r ebound in global
economic activity which started in the second half of 2009, has been
sustained. The rebound was driven largely by the fi scal policy stimuli
undertaken in both the developed and emerging marke t economies in
response to the global financial crisis and the ens uing economic slowdown.
In the wake of the financial and economic crises, m onetary policy was
considerably eased with interest rates down to reco rd levels in most
advanced and emerging markets, and central bank bal ance sheets expanded
considerably to accommodate the stimulus packages. The key concerns,
however, remain the speed and sustainability of the recovery process which
is progressing at varying degrees across the different regions.
The recovery in the advanced economies is still wea k with real output
projected to remain below its pre-crisis level unti l late 2011. However,
growth in the emerging and developing economies is expected to recover
faster given their stronger initial economic condit ions and swift policy
responses.
The MPC also noted the continuing rebound in commod ity prices,
particularly crude oil prices, which is helping to support growth in
commodity producing regions, including Nigeria. However, the inflation risk
of the rebound in energy prices appears to be mitigated by the subsisting low
levels of capacity utilization, weak private demand and well-anchored
inflation expectations.
The MPC further observed that while financial marke ts have recovered
remarkably faster than expected, financing conditio ns, especially for
businesses and firms, were likely to remain weak in the near-term as
financial institutions continue to maintain a cauti ous approach to credit
extension. It noted the relative stability prevaili ng in most segments of the
market and the need for policies to ensure their sustenance.
Key Domestic Macroeconomic and Financial Developments
Output and Prices
The robust output growth recorded in 2009 continued in 2010. Provisional
data from the National Bureau of Statistics (NBS) i ndicates that real Gross
Domestic Product (GDP) grew by 6.68 percent in the first quarter of 2010,
down from 7.44 per cent in the fourth quarter of 20 09, but up from the 4.50
per cent recorded in the first quarter of 2009. The growth was largely driven
by the non-oil sector. Overall GDP growth for 2010 was projected at 7.53
per cent which is higher than the revised estimate of 6.66 per cent recorded
in 2009. Quarterly GDP growth rates of 7.24, 7.36 a nd 8.51 per cent was
projected for the second, third and fourth quarters of 2010, respectively.
The non-oil sector was expected to remain the mai n driver of overall
economic growth, with agriculture, wholesale and re tail trade, and services
contributing 2.01 per cent, 2.10 per cent and 2.09 per cent, respectively. The
Committee noted that the impressive growth forecasts reflected prospects for
moderate rainfall in 2010, which would boost crop production and the
relative peace in the Niger-Delta, which could enha nce crude oil and natural
gas production.
The year-on-year headline inflation rose from 12.0 per cent in the last
quarter of 2009 to stabilize at 12.3 per cent in Ja nuary and February 2010.
Similarly, core inflation stabilized at 10.1 per c ent in January and February
2010, up from 9.7 per cent recorded in the last qua rter of 2009. The stability
in the domestic price level could be attributed to a number of factors,
namely, the continuing monetary contraction, the de lay in the passage of the
2010 federal budget and the improvement in the supp ly of petroleum
products, amongst others. Notwithstanding these dev elopments, the
Committee restated its earlier position that the th reat of inflationary pressure
in the near-to-medium term remains real, but that i t will continue to monitor
price developments in the months ahead with a view to creating an enabling
environment for sustainable growth and employment.
Monetary, Credit and Financial Market Developments
Provisional data showed that relative to end-Decemb er 2009, broad money
(M2) declined by 0.23 per cent at end-February 2010 , which, when
annualized represented a decline of 1.38 per cent, compared to the indicative
growth target of 29.26 per cent for 2010 and the an nualized M2 decline of
5.16 per cent in the corresponding February of 2009 . The reserve money
(RM), which stood at N 1,668.50 at end-December 2009, declined to
N1,574.33 and N 1,636.60 billion in January and February 2010,
respectively, but rose to N 1, 782.21 billion in March 2010. As at April 8,
2010, the RM level of N1, 710.0 billion was just below the provisional 201 0
second quarter indicative benchmark of N 1, 872.80 billion by N 162.76
billion or 8.69 per cent.
Available data showed that in February 2010, aggreg ate domestic credit
(net) grew by 2.66 per cent over the December 2009 level, and by 15.96 per
cent when annualized, which is higher than the annu alized decline of 55.6
per cent recorded in the corresponding period of 20 09, but below the 2010
indicative target of 55.54 per cent. Credit to gove rnment (net), which grew
by 17.84 per cent, was the major contributor to the growth in aggregate
credit (net) in February 2010, as credit to the private sector declined, by 1.97
per cent. The annualized growth rate of credit to t he private sector as at
February 2010, was -11.82 per cent, as against the provisional benchmark of
31.54 per cent for 2010. The substantial growth of credit to government
(net) reflects the risk aversion of the DMBs and su ggests the possible
crowding out of private sector credit.
During the first quarter of 2010, the downward slid e in interest rates in the
domestic money market, which began in July 2009, fo llowing the Bank’s
decision to guarantee interbank transactions, conti nued. The low rates
provide ample evidence of the surplus funds in the banking system that
resulted from the huge volume of funds injected thr ough fiscal operations.
The weighted average interbank call rate, which was 2.89 per cent as at end-
December 2009, declined to 2.48, 2.17, and 1.50 per cent in January,
February, and March, 2010, respectively. Similarly , the securitized open-
buy-back (OBB) rate, which was 2.64 per cent at end -December 2009,
declined to 2.46, 2.20, and 1.31 per cent in Januar y, February, and March
2010, respectively, compared with the monetary poli cy rate (MPR) of 6.00
per cent and Standing Deposit Facility rate of 1.0 per cent.
Notwithstanding the falling interbank rates, the DM Bs’ interest rates
structure failed to reflect this trend as the high retail lending rates persisted.
The average maximum lending rate increased to 23.32 percent in February,
2010 from 23.18 per cent in the preceding month com pared with 23.45 and
23.1 per cent in December and November 2009, respec tively. The average
prime lending rate, on the other hand, declined mar ginally to 18.28 per cent
in February 2010 from 18.38 per cent in January. It was 19.03 and 18.93 per
cent, respectively, in December and November, 2009.
The weighted average savings rate rose to 3.38 per cent in February 2010
from 3.33, 3.36 and 3.35 per cent in January 2010, December and November
2009, respectively. The consolidated deposit rate, which remained
unchanged at 6.13 per cent in December 2009 and Jan uary 2010 dropped to
5.53 percent in February 2010. Thus, the spread bet ween the average
maximum lending rate and the average consolidated d eposit rate widened to
17.79 per cent in February 2010 from 17.05 per cent in January 2010 and
17.34 per cent in December, 2009. The Committee not ed that the key policy
challenges remain the negative growth in credit to the private sector, high
lending rates and widening interest rate spread des pite the declining
interbank rates and relative surplus liquidity in the banking system.
Compared to the last quarter of 2009, the Nigerian capital market is showing
signs of recovery. The All-Share Index (ASI) incre ased by 30.7 per cent
from 20,827.17 as at end-December 2009 to 27,216.03 on 7
th April, 2010.
Market Capitalization (MC) also increased, by 32.1 per cent, from N 4.98
trillion at end-December 2009 to N 6.58 trillion on 7 th April 2010. The
number of deals, volume and value of shares traded increased by 115.6,
134.6 and 326.1 per cent, respectively, during the review period. The
increase in ASI and MC was partly due to share pric e increases in the
Banking, Food & Beverage and Oil/Gas sectors.
The Committee welcomed the improvements in the stoc k market, and noted
further prospects for continuing recovery with the passage of the Asset
Management Corporation Bill. It, however, emphasize d that the recovery of
the capital market does not necessarily translate t o economic recovery as the
reforms initiated in the other sectors of the econo my needed to be carried
through in order to grow the economy. The Committee , therefore, called for
the political will and commitment to see these reforms through.
External Sector Developments
The foreign exchange market remained relatively sta ble in the first
three months of 2010. At the WDAS, the review period opened with an
exchange rate of N149.08/US$1 (1% commission inclus ive) and closed at
N149.78/US$1, with an average closing rate of N149. 94/US$1 for the
quarter. When compared with the average closing rat e of N146.87/US$1
recorded during the first quarter of 2009, this rep resented a depreciation of
N3.07 (2.05 percent). The average exchange rate dep reciated marginally at
the inter-bank market from N150.35/$ in the fourth quarter of 2009 to
N150.43/$ in the first quarter of 2010. In the same vein, the premium
between the WDAS average exchange rate and the inte r-bank market rate
remained low at N1.98/$ (1.31%) in the first quarte r of 2010, while that
between the WDAS average exchange rate and the BDCs rate narrowed
from N4.58 (3.0%) in the fourth quarter of 2009 to N4.02 (2.63%) in the
first quarter of 2010.
The Committee observed that the naira exchange rate has remained stable in
all segments of the market during the first quarter and believes that if the
current exchange rate policy stance of liberalizing the foreign exchange
market, with a view to enhancing foreign exchange supply, remains in place,
the relative stability in the foreign exchange market and the exchange rate, is
likely to be sustained in the near term. The Commi ttee will, however,
continue to monitor developments in the market to e nsure that measures are
taken to eliminate speculative demand.
The gross external reserves stood at US$40.68 billion as at 31
st March, 2010,
representing a decrease of US$0.71 billion or 1.71 per cent relative to the
level of US$41.39 billion as at 28 th February 2010. Although t he
Committee noted that the external reserves were suf ficient to finance 17
months of imports, which were well above the intern ationally recommended
3-months import cover, it believed that with the ri sing price of crude oil in
the international market in recent months, coupled with the improvement in
output with peace in the Niger Delta, there is like ly to be an improvement in
the level of foreign exchange reserves in the near term.
The Committee’s Considerations
The principal concerns of policy at this point in t ime were identified as the
following:
1. Ensuring that the quantitative easing adopted by th e Committee
actually translate to injection of credit to the pr ivate sector players in
the real economy;
2. Establishing some correspondence between the moneta ry policy rate
(MPR) and prime and maximum lending rates of DMBs i n order to
establish a proper transmission channel from policy rate movements
to market interest rates; and
3. Maintaining macroeconomic stability and stimulating growth while
remaining vigilant with respect to inflation and ca pital market asset
price bubbles.
In considering the modalities for the restructuring /refinancing programme,
the Committee was concerned about the need for a pr oper definition of
SMEs that will not exclude many potential beneficia ries thereby limiting the
effectiveness/impact of the intervention. In this r egard, the MPC noted the
existence of several definitions of SMEs, but felt that by providing a limit to
the size of the loan per borrower from an instituti on more potential
borrowers would be covered.
The Committee also reviewed developments in the eco nomy during the first
quarter of 2010. The MPC noted with concern the per sisting high lending
rates despite the current low inter-bank and deposi t rates, and as a
consequence the wide spread between lending and dep osit rates. This, the
Committee attributed to inefficiency in cost manage ment and unrealistic
profit expectations and targets. It believed that promoting transparency in the
pricing and setting of rates by DMBs could help to drive down lending rates.
In this regard, DMBs would be required to regularly publish and submit their
risk-based interest rate pricing model to the CBN. In addition, the banks
would be required to provide a statement showing th e relationship between
the MPR and their prime and maximum lending rates.
For the avoidance of doubt, the MPC will not fix le nding and deposit rates
by fiat. However, every bank will be required to di sclose the maximum
spread it charges above the MPR to its prime custom ers and the risk
premium it charges between prime and maximum lendin g rates. The pricing
model would also disclose the basis for the spread and principal components
covered.
The articulation of the pricing model in this mode and its disclosure to the
general public will serve two purposes. First, by p roviding visibility on
relative efficiency of financial institutions, bank s will be encouraged to seek
profitability by driving down costs and charging co mpetitive rates rather
than charging excessive rates of interest. Second, by explicitly stating prime
and maximum lending rates as a fixed spread over MP R, the policy rate
becomes an effective tool for driving lending rates up or down as policy
stance dictates.
The MPC noted with satisfaction the existing macroe conomic conditions. In
this regard, the Committee restated its commitment to monitoring
developments in the economy and stands ready to tak e appropriate action
when the need arises.
Decisions
In the light of the above, the MPC:
1. Approved the technical committee’s recommendations with respect to
modalities for the Refinancing/Restructuring of DMB s facilities to
manufacturers with N1Billion as the maximum loan si ze a bank may
refinance for a single borrower. The guidelines wil l be released
shortly.
2. Directed that banks be required to submit their Ris k-based Interest
Rate Pricing Model to the Central Bank of Nigeria o n a monthly basis
which will be published. A circular to this effect will be issued
shortly. Loan pricing, henceforth be stated as fixe d spread above
MPR, and shall be adjusted along with MPR movements.
3. Retained the MPR at 6 per cent and existing asymmet ric corridor
around the MPR at +2.0 per cent and -5.0 per cent.
4. Endorsed complementary policies being put in place by the Board of
the CBN, especially the revised guidelines for loan loss provisioning
for preferred sectors, the N200 billion guarantee f or real sector credit
and regulations governing margin lending.
5. Noted with satisfaction the progress of the AMCON B ill through the
National legislature and urged the CBN to continue in its effort
towards expedited passage of the Bill and speedy implementation.
Sanusi Lamido Sanusi
Governor,
Abuja
April 15, 2010