Communique for MPC Meeting of March 21 22 2011_ 21st Mar_

8/7/2019 Communique for MPC Meeting of March 21 22 2011_ 21st Mar_

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Central Bank of Nigeria Communiqu No. 75 of the Monetary Policy

Committee Meeting, March 21-22, 2011

The Moneta ry Polic y Co mm ittee (MPC) m et on the 21st a nd 22nd March, 2011 to

assess the current domestic and international economic and financial

deve lop ments as we ll as the c halleng es tha t lie a head o f the Nigerian ec ono my

in the short to med ium term.

On the international scene, the Committee noted the continuing recovery in a

number of de velop ed ec onom ies but observed that unemp loyment ra tes

c ontinue to be high a nd threa ts of infla tion strong in the light o f the rising g loba l

c om mo dity and ene rgy pric es. In emerging ma rket ec ono mies, g row th has

been robust but inflationa ry p ressures are strong and on the rise. The negative

impact of the political crises in the oil-producing Middle East and North Africa

(MENA) reg ion on o il prices and the d isrup tions and destruc tions assoc ia ted with

the ea rthqua ke a nd tsunami in Jap an ha ve adde d to unc ertainty about the

susta inab ility of g lob al ec onomic rec ove ry and grow th. There a re also c onc erns

in the European periphe ry of inc reasing interest ra tes. The imp lic a tions of the se

developments together with the likelihood of sharp increases in international

interest rates for the Nigerian economy need to be kept under continuous

watch.

With regard to the domestic economy, the Committee noted the continuing

good output performance, the rising external reserves, the moderation in the

inflation rate and the steady movement towards realization of banking sector

stability. Monetary indicators have not picked up sufficiently while money

ma rket ra tes were g ene rally high. The fisca l stanc e c ontinues to b e unduly

expa nsiona ry. The Co mm ittee therefore em phasized the nee d to pursue sound

policies, including exchange rate stability in order to ensure price stability


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without losing sight of the imperative of maintaining the current growth

momentum.

Key Domestic Ma croeconomic and Financial Developments

Domestic Output

The Co mm ittee note d tha t the imp ressive output g row th in 2010 was susta ined in

QI 2011. Provisiona l da ta from the Nationa l Bureau o f Sta tistics (NBS) ind ic a ted

tha t rea l Gross Domestic Produc t (GDP) wa s pro jec ted to g row by 7.43 per c en tin the first quarter of 2011, compared with the 7.36 per cent recorded in the

c orrespond ing period of 2010. The ove rall GDP grow th for 2010 wa s estima ted to

be 7.85 per ce nt, higher than the g row th ra te o f 6.96 per ce nt rec orded in 2009.

The non-oil sec tor rema ined the ma jor driver of overall g row th, with a griculture,

wholesale and retail trade, and services contributing 2.39, 2.04 and 2.08 per

c ent, respec tive ly. The Co mm ittee c onsiders the out loo k for 2011 to b e g enerally

good, given the expected improvement in the oil economy and the growing

em phasis on the de velopment o f non-oil sec tor and key infrastruc ture.

Domestic Prices

The yea r-on-yea r hea d line infla tion in Feb ruary wa s 11.1 pe r c en t c om pared to

12.1 per cent recorded in January 2011 and 12.8 per cent in December 2010.

Core inflation was 10.6 per cent in February 2011, down from 12.1 per cent in

January and 10.9 per cent in December 2010. Food inflation however, rose to

12.2 per cent in February from 10.3 per cent in January but was lower than the

12.7 pe r cent in Dec ember 2010. The rise in food infla tion was c onsistent w ith the


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seasonal pattern. In addition, the increase in the costs of imported food items,

transportation and energy prices contributed to food inflation. With the output

performance being good, the challenge to inflation control lies, therefore, in

containing aggregate expenditure and moderating the impact of imported

inflation via exc ha ng e rate cha nnel. This is where the role o f fisc a l p rudenc e

bec om es very c ritica l.

Monetary, Credit and Financial Market Developments

Provisional data showed that the growth in broad money (M2) in the first twomonths of 2011 relative to December was moderate. Credit to private sector

c ontinued to b e slugg ish partly be c ause o f the d elay in the passage o f the 2011

Fed eral budget a nd ongoing b anking sec tor refo rms. Net foreign assets in the

first two months have posted positive growth, the first time since January 2009.

Pick up in credit to private sector should be possible given the high potential for

ac c elera ted grow th, the fac t tha t the banking sec tor stab ility is la rgely restored

and the intensifica tion of the op erations of the Asset M anagem ent Corpora tion

of Nigeria (AMCON).

The inte rbank ma rket rate s fluc tua ted a t the va rious segme nts sinc e the

beginning of the year. Key interbank rates moved in tandem with the upward

revision of the monetary policy rate (MPR) to 6.5 per cent from 25th January,

2011. Between January 25 and March 17, 2011, the inter-bank call and open

buy-back (OBB) rates showed increases mainly in response to the MPCs

increase of the MPR and a more effective implementation of monetary policy

decisions. Consequently, inter-bank call and OBB rates rose from 4.93 and 4.75

pe r cent on 26th Janua ry, 2011 to 8.44 and 8.04 per cen t, respec tive ly, on Ma rch

17, 2011.


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The C ommittee noted tha t the Ce ntral Bank of Nigeria (CBN) ha s rec ently fine -

tuned its monetary policy implementation framework using reserve averaging

ove r a reserve ma intenanc e p eriod extended to 4 weeks. The Com mittee urged

continuous monitoring of the developments and taking appropriate measures

nec essary for imp roving the imp lementa tion framework in the mo nths to c om e.

Retail lending rates remained relatively high in the first two months of 2011 while

the spread between the average lending rate and the consolidated deposit

rate widened to 19.83 percentage points in February 2011 from 19.52

perce ntage p oints in January. The Committee no ted tha t a polic y c ha lleng e is

to ensure tha t the inte rest ra te sprea d is significantly moderate d .

In 2011 thus far, share prices and market capitalization recorded significant

decline due to both domestic and international developments. However, with

the ong oing reforms by the reg ula tory authorities and rob ust g row th p rospec ts,

the o utlook in the medium te rm ap pea rs ge nerally go od .

External Sector Developments

The Co mm ittee note d the re-emergenc e o f de ma nd pressures in the foreign

exchange m arkets during the review period . The tota l supp ly to the wDAS

seg me nt b y the C BN amo unted to US$5.145 b illion from Janua ry through Ma rc h

16, 2011, wh ile demand stood a t US$6.815 billion d uring the same period . The

Co mm ittee e xpressed c oncern tha t, of the amo unt supp lied , US$1.34 b illion was

spent on importing refined petroleum products alone, which has adverse

implications both for the reserves position and government finances as a result

of the huge subsidy imp lic a tions.


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The wDAS seg me nt o f the foreign e xchange ma rket, how ever, rem a ined

rela tively stab le. The Naira / Dolla r exc hange rate opene d o n February 1, 2011 a t

N151.85/US$ and c losed a t N152.52/US$ on Marc h 17, 2011, represent ing a slight

dep rec ia tion o f 0.44 per cen t (or 67 kob o). How eve r, the p rem ium b etw een the

ra tes a t the WDAS and othe r seg ments of the ma rket widened tow ards the e nd

of the review period , reflec ting a sha rper de prec ia tion in no n-wDAS seg me nts of

the fo reign exchange ma rket. The Co mmittee , how eve r, ob served tha t g iven

strong o il sec tor fund amenta ls, this trend is likely to be temporary. The

Committee urged the CBN to continue to pursue the strategy of maintaining

exchange rate stab ility to c on ta in infla tion.

The Committee we lcome d the rec ent build -up o f foreign excha nge reserves

ow ing to inc rea se in outp ut and rising c rude o il rec eipts. Foreign excha nge

reserves increased by US $2.82 billion to US$35.16 billion on March 16, 2011 from

US $32.34 b illion rec orde d a t the end o f Dec em ber 2010. How ever, the

Committee welcomed the reserve build up and reiterated that the solution to

reserve depletion lies in the implementation of appropriate reforms with regard

to industrial a nd trad e polic ies a ime d at red ucing imp ort-de pe nde ncy.

The Committees Considerations

The MPC no ted the p ositive g row th outloo k in the nea r to m ed ium te rm b ut

expressed serious conc ern o ver the he ightened risk of inflation fo llow ing from the

proposed high expenditure outlay of the Federal Government as contained in

the 2011 Approp ria tion Bill rec ently pa ssed by the Nat ional Assemb ly, espec ia lly

in the w ake of rising g loba l food and e nergy pric es. In this reg a rd , the

Co mm ittee rec alled that in the past few MPC m ee tings, it ha d stressed the nee d

for fiscal retrenchment and drawn attention to the unsustainability of the rising


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trend of do mestic d eb t. How ever, the p rop osed expend iture outlay neg a tes the

initia l sentiment for fisc a l retrenchme nt which w ould have supp orted mo neta ry

polic y effec tiveness. The c urrent fisca l sta nc e is inc onsistent with the ob jec tive

of ma inta ining sta b ility in excha nge ra tes, p rices and interest ra tes. The

Committee, therefore, believes that unless the fiscal stance is reversed, the

economy would have to bear a high cost in terms of pressure on foreign

reserves, high inte rest ra tes and / or highe r leve l of inflation.

Against the foregoing, the MPC is of the view that a further tightening of

mo netary p olicy is imp erative. This stanc e nee ds to be app rec ia ted in the

c onte xt of the fac t tha t resolution of the prob lem s in the banking sec tor has no t

yet been completed. However, a number of banks have signed a

me morand um o f unde rstand ing with c ore investors and public announc em ent

will be made this week. In the light of this, the inter-bank guarantees and

guarantees of foreign credit lines will need to be extended beyond the

dead line of June 30, 2011. The MPC, how ever, rec og nizes tha t any ac tion tha t is

taken at this point in time should not serve as a disincentive to the current high

growth impulses. It, however, recognizes that the principal problem is access to

fina nc e in c ritic a l sec tors like a gric ulture and ma nufac turing . This should remain

the foc us of C BN in the short to med ium term.

Decisions

In the light of the foregoing analysis, Members of the Committee votedunanimously for further tightening of monetary policy because of heightened

risk of inflation. The Members spec ific a lly po inte d out the rising inte rna tiona l food

and energy prices, the impact of import costs on domestic prices, the

challenges that fiscal stance posed to the external value of the Naira and the


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likely front-loading of public expenditure in the election period. Against this

bac kground , the fo llow ing dec isions we re ta ken:

1. A majority of 9 to 3 Members voted for an increase in MPR by 100 basispoints from 6.50 per ce nt to 7.50 per ce nt. The 3 Mem bers vo ted for a 50

basis po ints inc rease;

2. A una nimo us dec ision to,

a . Reta in the symmetric corridor of +/ - 200 basis po ints;b . Reta in the curren t CRR of 2.0 per c en t a nd the liquid ity ra tio of 30.0

pe r c ent; and

c . Extend the CBN guarantee on interbank transactions andguarantee o f foreign c red it lines by three months from June 30, 2011

to September 30, 2011.

Sanusi Lamido Sanusi, CON

Governor

Central Bank of Nigeria

Ma rch 22, 2011


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PERSONAL STATEMENTS BY MPC MEMBERS:

1.0 ALADE, SARAH

Although headline inflation declined from 12.1 in January 2011 to 11.1 in

Feb ruary 2011, wh ich c ould suggest mo neta ry policy ea sing , howeve r, the sha rp

rise in global commodity and fuel prices have heightened upside risks to

dome stic inflation. This would suggest tha t the b a lanc e o f risk would b e tilted

towards intensification of inflation, thus continued monetary tightening is

necessary.

The surge in global food and fuel prices posses a heightened inflationary risk to

the Nigerian economy. As an imp ort d ep end ent econom y, the likelihoo d of the

country being affected by the global food and fuel crisis is very high and if

action is not taken to mitigate the effect, the inflationary impact could be

serious. Foo d inflation ha s rema ined a t an eleva ted level as our ma jor food items

such as rice are imported and year-on-year imported food inflation surged to

20.2 percent in Feb ruary from -5 percent in the p revious mo nth. Ma ny countries

are already experiencing high consumer price inflation due to the high global

food prices. In Nigeria, Composite Food Index increased by 12.2 percent year-

on-yea r and b y 2.9 percent be twe en January and Feb ruary of 2011. The

forecast for the current food and fuel price increase is that it will stay for awhile

as a result of many factors, the event in the Middle East and North Africa

(MENA), and the rising global trend in general food prices. As high food prices

persists, the prospect of it spilling over to the general inflation process is rapidly

becoming a rea lity. All these w ill put upward pressure o n dom estic inflation, thus

justifying the tightening of m oneta ry p olicy to mitiga te the se risks.


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The 2011 Federal Government budget of N4.9 trillion is expansionary and in an

election year, the amount could further increase through supplementary

budgetary allocation. The Fed eral Gove rnme nt subm itted a budget of N4.9

trillion which is higher than the N4.6 trillion for 2010 and 20 percent higher than

the initia l budget p rop osed in Dec em be r of 2010. This expansiona ry budget

poses risk to inflation. In addition, to pre-election expenditure, there is high

likelihood of a supp lem enta ry b udg et in the nea r future. Therefore to mitiga te

the impac t of such expa nsiona ry fisca l injec tion in the econo my and to m a inta in

the objective of single digit inflation, continued monetary tightening is

necessary.

The effect of AMCON BOND Purchase and foreign investment in intervened

banks. The liquid ity injec tion to the banks from the transac tion w ill inc rea se

mo ney supp ly and put add itiona l pressure on the infla tion dynam ic s.

Reserve money has remained close to target in recent times, but the forecast is

that it could rise. In the past two (2) months reserve money has been very close

to the target benchmark of N1775.15 billion, but projection is that it could riseabove the b enc hmark in the short term. Sta ff estimates suggest an inc rea se

c ompa red to indic at ive b enc hma rk in the short to m ed ium te rm. Dep end ing in

mo ney multip lier, this c an result in rap id inc rea se in m oney supp ly.

Monetary tightening is needed to contain the recent pressure on exchange rate.

While the fund ame nta ls do no t supp ort de p rec ia tion of the na ira (high o il prices,

increased oil output, high GDP growth rate), the naira has depreciated by 3.3

percent y-o-y against the dollar. Although a number of factors could be

responsible, one of such factor is the supply side effects of fiscal injection.

Tightening mone ta ry po licy will ea se the pressure on the fo re ign excha nge

market.


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Based on the above , mo neta ry polic y should tilt towards c onta ining the sp ill-over

of high food and fuel prices into general inflation and anchor inflation

expectation, while standing ready to respond to any further build-up of

infla tiona ry p ressure. Therefore to b alance the g oa l of ec onomic g row th and

price sta b ility, I will rec om mend a mo derate tighten ing not more than 100 ba sis

po int b ased on the follow ing:

a ) The full imp ac t o f the 2011 fisc a l expa nsion will not b e immedia te;the refore, I00 ba sis point is adequate .

b ) Although growth in private sector credit is picking up, policy should begeared at nurturing this trend and full tightening could crowd-out private

sec tor grow th.

Extension of the guarantee is necessary for continued financial stability. I a lso

agree with the extension of g ua rantee t ill Sep temb er 30, 2011 to allow fo r the

full and complete resolution of the intervened banks as Mergers and

Ac q uisition (M&A) are still a t c ritica l sta ges.

2.0 BARAU, SULEIMAN

The c halleng e o f mone tary polic y formula tion a nd imp lem enta tion in the rec ent

pa st a nd inde ed sinc e the last MPC has be en the c ontinued fisca l dom inance.

This and a few other fac to rs duly rec og nized during the last Moneta ry Policy

Co mm ittee (MPC) ha ve heightene d my p erce ption of susta ined infla tion risk.

The me asures taken a t the last Mo neta ry Policy Co mm ittee have had som e

sa luta ry effec t on this threa t as de monstra ted by the la rgely dow nward trend of

som e inflation num bers. The Hea d line Infla tion Rate for exam ple trended from


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11.8% in Dec ember, 2010 to 11.1% in Februa ry 2011. Core Inflat ion a lso trended

downw ard from 12.1% in Janua ry 2011 to 10.6% in Februa ry 2011.

In sp ite of this mo dest suc c ess, I m c onvinc ed tha t susta ined inflation rema ins a

threa t for the following reasons:

We have not w itnessed the c om plete mop up o f liquid ity injec ted into theec onomy from the yea r end festive ac tivities of 2010.

This is an e lec tion yea r and the susta ined spend ing assoc ia ted w ithpolitic a l ac tivities have c om p lic a ted the liquid ity surfeit.

The b iggest threa t ha s emerged from the Harmo nized Budg et p assed bythe Nationa l Assembly. In the first insta nc e, the budget itself is a d efic it

one and therefore is expansionary. Second ly and more signific antly, the

recurrent component of N2.467 trillion is about 50% of the total budget of

N4.970 trillion. These fac to rs would aggressive ly exac erbate the

infla tionary p ressures.

Co ntinued threa t of imp orted infla tion from inc rea ses in foo d and energyp ric es in the international market. Being an imp ort dep end ent ec ono my,

this fac to r ha s ha d signific ant e ffec t on the build-up of inflation numb ers in

the rec ent p ast.

Liquidity is manifested by the substantial liquidity position of Deposit Money

Banks, the recent increased demand for foreign exchange and the huge

spe nding b y the Government.

Recommendation

In the light o f the foreg oing, I rec om mend;


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The c ontinuation of tight mo neta ry stanc e; The inc rease in the Mone ta ry Policy Rate (MPR) by 100 bps to 7.50% for the

following reasons;

Movement in Polic y Rates are usua lly gradua l and should b e so. Butthe more radical increase is the right response to the renewed

inflation risk.

Impact on banking sector reforms and financial stability isresponsib le for the mod erate inc rea se be ing rec om mended . We

have to be careful not to shock the money markets, yields, the

fortunes of b anks and ultima te ly the stab ility o f the fina nc ia l system.

The c om plem enta ry and perhap s mo re e ffec tive mea sures a lrea dyin p lac e whic h should be continued. These inc lude the inc rea se in

CRR to (2%), MPR to (30%) and the c orrid or of +2% around the MPR

which should be ma intained .

Frequency of MPC meeting provides window for further review(even if throug h a n eme rgenc y MPC) for further tightening if c urrent

me asures are not effec tive.

The CBN Guarantee for inte rbank lend ing should be extend ed toSep tem be r 30th to cushion the possible effect of the above policy

me asures on the banking system.


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3.0 GARBA, ABDUL GANIYU

FOUNDATION

1. Review of the MPDs Economic Report a nd the BSD/ FPR Banking SystemSta b ility Review and the d isc ussions tha t followed.

2. Ana lysis of the imp ac ts of the dec isions of the 218th MPC o n (a) d iscount rates(OBB and Ca ll Rate ); (b) Inte rest Rates; (c ) Asset Pric es; (d ) Inflation Rates

and (e) Exchange Rates using available data and, the framework for

Moneta ry Polic y in Nigeria .

3. Commitment to (a) reducing inflation rates; (b) a stability in the foreignexchange market in 2011 and (3) a gradual return to normalcy in the

financial system as AMCON completes the cleaning up of the Balance

Sheets of DMBs.

4. My co nc erns:a .Inflationary pressured driven by mainly by fiscal operations and rising

import prices of food and petroleum product: government remainscommitted in 2011 to an expansionary fiscal policy that will raise

deficits, the public debt and crowd-out private sector investments,

employment and growth [for example, the January figured for

government spending overshoots budget by 0.2% and is 97%

rec urren t. The outlook for pric es of imp orted food and petroleum

prod uc ts po int to imp ort pric e infla tion.

b .Major trade-offs either imposed or strengthened by expansionaryfiscal policy: credit to government and credit to the private sector;

growth and inflation; current expenditure and capital expenditure;


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excha nge ra te stab ility a nd reserves; assets p ric es (bond s/ stoc ks and

money).

c .Fina nc ia l System stab ility e ffec ts of move me nts in bond prices.DECISION

I vote to :

1. extend the C BN Guarantee o n interba nk transac tion to Sep tem ber 30,2011; and

2. an inc rea se in MPR by 50 Basis Po int: from 6.5% to 7%.

JUSTIFICATIONS

5. I vote to extend the guarantee on interbank transactions (a) to sustainconfidence in the financial market and (b) to promote stability of the

banking system as AMCON completes its assignment of cleaning up the

ba lanc e sheets of DMBs.

6. I vo te for a 50 basis po int rise in inte rest rate for the follow ing reasons:a .Preference for a gradual path to normalization in the banking system

to minimize the risks of vo latilities.

b .Analysis of the impacts of the decisions of the 218th MPC on targets(operating, intermediate and goals) indicates that targets were being

rea lized also, in rec og nition of p olic y lags and tha t a 50 ba sis point can

ac hieve the right am plitude .

c .The need to strike the right ba lance be twe en key tradeo ffs: grow th-inflation; exchange rate stability and reserves and assets prices

(bonds/ stoc ks and m one y).


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d .To mo derate g row th in d isp rop ortiona te imp ac ts on interest rates andto moderate the positive effects of an MPR increase in interest rate

spreads.

4.0 YAHAYA, SHEHU

I vote for a tightening of monetary policy. My position is predicated on the

evidence of increases in price levels in January and particularly food inflation in

February, which, in addition to the continuing increase in election spending,

expansionary budget and rising international food and energy prices, threatento stoke inflationary pressures in the coming months.

Furthermore, and notwithstanding the high crude oil prices in the international

ma rket, there is a lrea dy signific ant p ressure on the va lue of the na ira in February-

Marc h , which c an a dd to the infla tiona ry p ressures. The c om bina tion of these

factors, particularly the risk of significant naira depreciation and its inflationaryeffects on an import dependent Nigerian economy necessitate a sharper

response than envisaged in the last MPC meeting but balanced to avoid an

exce ssive b rea k on lend ing to the prod uc tive sec tor of the economy. I therefore

vo te for an inc rease in the MPR of 100 basis po ints.

5.0 KIFASI, DANLADI

The 2011 Federal Government Budge t, which ha s now b een p assed, reflec ts

Governments desire to create more jobs, maintain existing infrastructures and

fina nc e othe r c ap ita l projec ts. This would result in inc reased fisca l de fic it, which


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in turn w ill lead to exce ss liquidity in the system. This poses a g rea t c ha llenge to

the a c hievement of low infla tion and e xchange ra te stab ility.

2. In order to mitigate the attendant inflationary pressure and achieve theobjective of exchange rate stability, I support that there is need for a tight

moneta ry polic y.

3. The appropria te instrume nt to use is the Moneta ry Policy Rate (MPR) whic h

should b e a d justed upw ard . I therefore supp ort that the MPR be increased by

100 basis po ints from 6.5% to 7.5%.

6.0 LEMO, TUNDE

The fisca l ac tivities in m y view are expa nsiona ry a nd no t in line with fisc a l

c onsolida tion a dvoc a ted by MPC in January 2011. The Fed eral Government

budget of N4.9 trillion as well as the total budgets of the 36 states may result in

signific ant g row th in p ublic deb ts with the resultant c row d ing out o f the priva te

sec tor. The benchmark pric e of USD75 per barrel adop ted in the Fed era lBudget may be too ambitious as oil price is volatile and significant shock may

result in inc rease in go vernment s domestic borrowing . Alrea dy, sta ff rep orts

revealed a decline in aggregate credit to the private sector in January 2011

whereas c red its to Fed eral, Sta tes and Loc a l Governme nts g rew by a lmost 60%.

The grow th plan of 2011 ma y therefore be impa ired .

Infla tion rem a ins a ma jor threa t a s a result of the fisc a l ac tivities and the p roblem

has been exacerbated by the rising food and energy prices globally. With the

present a dministra tion ha ving less tha n 10 wee ks to go, money supp ly resulting

from heightene d e xpend iture in the run-up to Ma y 29 is expe c ted to b e high.


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It is a lso imp ortant to c hec k exce ssive liquid ity injec tion throug h mo neta ry policy

tightening if the objective of building foreign reserve will be realised, given the

po sitive c orrelation be tween money supp ly and de ma nd for foreign exchange .

Growth in reserve level should be pursued, especially now that crude oil prices

are high in the international market.

Furthermore, interest rate adjustment is important at this juncture to correct the

negative real interest rate which has in the last few years heightened the risk of

d isinte rme d ia tion . The slugg ish g row th o f de posits and savings in the past few

yea rs is a pointer to the nee d for significa nt a d justments in savings/ deposit rate s.

Long-term growth can only be guaranteed with efficient domestic savingsmo b iliza tion and this c an on ly be done through positive rea l inte rest reg ime .

In the light of the foregoing therefore, I am in support of an increase in MPR by

100 basis points from the present level of 6.5% to 7.5%. This w ill resto re the MPR

rate c lose to the p re Qua ntitative Easing period . I am a lso in support of the

maintenance of the symmetric corridor as well as the extension of the CBN

Gua rantee on banks interba nk and foreign o bliga tions to Sep tember 30, 2011.

7.0 MOGHALU, KINGSLEY CHIEDU

The Mone tary Polic y Co mm ittee a t its last mee ting had identified a numb er of

fac to rs tha t were likely to lea d to a rise in inflation in 2011 and vo ted to ra ise the

Moneta ry Policy Rate by 25 basis points from 6.25 pe rc ent to 6.50.

Purchases of non-performing loans of CBN-intervened banks by the AssetManagement Corporation of Nigeria (AMCON), election-related spending in

2010, and the possibility of a removal of subsidies on imported petroleum

prod uc ts were seen a s potent ia l inflationa ry fac to rs.


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All these factors remain true today. And a most important additional factor has

emerged: the Harmonized 2011 Budget adopted by the National Assembly on

Ma rc h 16, 2011, by w hich to ta l ap proved expend iture is 4.9 trillion na ira , just o ver

50 pe r cent of it ded icate d to recurrent e xpend iture.

The ma in implic a tion of the 2011 budg et is tha t, at a time when all the ind ic a tors

call for a tight fiscal stance, the approved budget is bound to markedly

increase liquidity and feed inflationary pressures.

A sharp increase in tightening monetary policy in response is called for, and I

be lieve the Monetary Polic y Co mm ittee should p rov ide this response. I the refore

vo te for an inc rea se in the Moneta ry Policy Rate by 100 ba sis po ints as op posed

to the incremental approach to monetary tightening that the MPC

c om me nc ed a t its last m eet ing . The transmission c orridor should rema in

symmetric a t +/ -200 basis po ints.

While a return to higher interest rates has certain potential downsides, mainly

that of a negative impact on bank lending, (in particular the availability and

ma nag eme nt of cred it) every ec onomic cho ic e ha s a c onseq uence, and the

consequence of not tightening money supply through monetary policy action

wo uld be a lot wo rse. The pote ntia l ad verse imp ac t on financ ia l system stab ility,

considering that the CBN-intervened Banks are still returning to stability, should

be obviated by the CBN extending its guarantee of deposits and credit lines

beyo nd the d ea d line o f June 30, 2011.

A d ep rec ia tion o f the na ira a t this time in response to p ressures on the currenc y

an alternative approach would in fact increase inflation considering the

struc tura l de fic ienc ies of Nigeria s imp ort-dep end ent e conomy. Such a n

approach is not supported by the prevailing economic fundamentals; on the


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policy in accordance with its mandate, and that the Government reflect that

advic e in its formulat ion of fisc a l po lic y.

8.0 OLOFIN, SAM

From the facts and figures that we have before us at this meeting there is every

ind ica tion tha t if anything has c hanged sinc e o ur last me eting, it is the fac t tha t

infla tiona ry pressure ha s been further ac c entua ted . This is due largely to rising

energy prices and imported food that impact significantly on the CPI despite

the prospects of improved harvests that may have ameliorating effects on

domestic food prices. On the fiscal front with elections just around the corner, it

is a difficult period to preach the virtues of fiscal discipline. It is equally unlikely

that there would be any significant adjustment in government expenditure

pattern that has been highly inflationary, given the preponderant emphasis on

rec urrent, ra ther cap ita l expe nd iture. In the short to med ium te rm the refo re,

there is the need to sustain the monetary tightening stance that has been in

p lac e sinc e the last tw o MPC meetings.

The mo st obvious polic y instrume nt a va ilab le for this purpose would b e the

upward ad justment of the MPR. The desta b ilizing e ffec ts of alternat ive polic y

me asures such as ad justing the exc ha nge ra te, ma y be highly destab ilizing a nd

c ounterproduc tive in a highly imp ort de pend ent ec onom y like ours; bo th

dema nd for imp orts and supp ly of exports a re ine lastic . The signa ling

me c hanism of a d justing the MPR and related anc illa ry me asures how ever nee d

not be such as to suggest panic for two reasons. First it is likely that after the

elec tions in Ap ril, the fisc a l autho rities would be more op en to the need for fisca l

tightening if not voluntarily, possibly as the consequences of massive inflation

induc ing deficit spend ing beg in to ma nifest. Sec ond ly there is nee d for a

gradual adjustment of rates to pre-crisis levels, as opposed to rattling jumps or


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spikes that may be suggestive of destabilizing panicky measures. A slight

upw ard ad justme nt in the MPR ma y be a ll tha t is nee ded for now, to signa l our

continued commitment to combating inflation, as stability gradually returns to

the financ ia l sec tor.

There is however an imm ed ia te p olic y cha lleng e, whic h is tha t of c om bating

spec ula tive d em and fo r foreign excha nge as a w ay of hed g ing a ga inst the risks

and uncertainties surrounding the elections. If this is not tackled immediately, it

could accentuate the rate of decumulation of already dwindling foreign

reserves. A sp ike in the MPR by 100 basis points from 6.5 to 7.5 pe rc ent m ay

therefore be justifiab le as a way of raising the c ost o f borrow ing to financ e thespe c ula tive d em and for foreign e xc hange.

9.0 OSHILAJA, JOHN

The orig ins of to days c om para tively loo se moneta ry and p ro-cyc lic a l, or

complementary, fiscal policies lay in a series of extraordinary economic and

financial events that threatened to cripple an already fragile Nigerian

ec ono my. Oil expo rt prod uc tion bec ame inc rea sing ly vulnerab le to disrup tions

oc c asione d b y po litica l ag ita tion a nd outright militanc y, in p rod uc ing reg ions of

the c ountry. Resulting revenue shortfa lls und ermined the fisca l c apac ities of

Fed eral and Sta te g ove rnments to pursue their respec tive deve lopm ent

imp era tives. At about the same time , a g lob a l fina nc ia l systems c risis (of

confidence) precipitated stunning reversals, in strategically vital investment

flow s within and to wards the c ountry. This exposed signific ant reg ulato ry,

governa nc e and structural weaknesses in host Nigeria s banking system. To

such a n e xtent, tha t o ffic ia l intervention wa s urgently nee ded , in seve ra l of the

countrys banks, to avert the potentially devastating and contagious effects of


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a dom estic financ ia l me ltdow n. The polic y rem ed ies adop ted were

unavoida ble, and c am e a t no mea n cost.

Frankly, in marshalling resources needed to cushion the impact of theseextraordinary events on economic activity, and their knock-on effects on

vulnerable actors and public service institutions Nigeria once again borrowed

from its future. And if this future is to b e secured , i.e ., anc hored to the c ountry s

positive attributes and natural endowments, such loans and investments must

be rep a id . This is one context in which curren t Moneta ry Policy can be

understood.

Export earning s ha ve reg a ined funda me nta lly favorable foo tings. Sound ness

and stab ility are b eing restored to o ur fina nc ia l system. Polic y-wise, we are

engaged in norma liza tion i.e. rea sserting base, pre-c risis Moneta ry cond itions

and ob jec tives.

At issue is the pace of normalization, against the fundamentally fragile nature of

the Nigerian e c ono my, continuing struc tura l de fic ienc ies (whic h still need to be

decisively tackled), and trade-offs to be made in achieving constructiveba lanc es betw ee n Consumption a nd Investment. In simp ler terms, aggressive

normalization expresses strong signals for investment, while less strident

rec a lib ra tions signa l ca lls for inc rea sed ra tes of Consump tion. Inc rea sed ra tes of

Co nsumption a re no t ad visab le at this time. At a m inimum, inflationa ry pressures

nee d to be chec ked in order to sa feguard ge neral p ric e stab ility. Expend ed

saving s need to be reb uilt to streng then fina nc ia l buffers and inc entives essentia l

for promoting rea l g row th. It is unfortuna te tha t ma jor force s in Nigeria s Pub lic

and Priva te Sec tors do no t a lwa ys ac t in c onc ert, pulling in the same , desired

d irec tions. None theless, it rem ains imp ortant tha t the Moneta ry Autho rities

continue to promote appropriate financial conditions for those with a mind and


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will to save and invest. This is the bac kground aga inst whic h I ha ve c ast my vote

today.

10.0 SALAMI, ADEDOYIN

Notw ithsta nd ing the slight easing of the inflation rate in Feb ruary, the imm ed ia te

prospect for continuing moderation of prices looks bleak. Dependence on

import to meet supply of significant components of food and refined petroleum

produc ts c ontinue to c rea te cha lleng es for ma nag em ent of price stab ility and

excha nge rates. The fo regoing d iffic ulty is c om pound ed by the unw illingness of

managers of the fiscal space to align expenditure, reflected in the budget to

which the National Assembly has assented, with the objectives of moderating

prices and ma inta ining a stab le ma c ro-eco nomic environme nt.

Unlike January, when the CPI show ed the c ost of imp orted food d ec lined , da ta

for February indicates that rising global food prices are being transmitted to

Nigeria. Notwithstanding the subsidy on the pump price of petrol, risinginternational energy prices are already manifested in the price for Diesel and

Kero. Imp lica tions of the b udg et numbers offe r the b iggest source of c onc ern

for infla tion m anagement. The c ase fo r higher pub lic spend ing c ould ha ve

hinged on the need to begin the recovery of private consumption spending

which declined in 2010 by 26.66 percent and has declined almost 50percent

relat ive to leve ls a tta ined in 2007. Similarly, busine ss inve stment - a d justed for

inflation - shrank by 3.56 pe rcent respec tive ly in 2010. Co nsump tion b y the Sta te,

in contrast, rose by 17.8pe rcent!!

Two c omponents of the b udg et ha ve b ee n raised Ca pital spe nding a nd

Sta tutory Transfers. Ra ising Ca p ita l spend ing , which past evide nc e suggests


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11.0 UCHE, CHIBUIKE

From the evidence before the MPC, the environment for the formulation and

imp lementa tion of m one tary polic y in Nig eria is be ing ma de inc rea sing ly d ifficult

by activities within the government fiscal arena and to a lesser extent

developments in the international economic environment. Governments

inability or unwillingness to curtail its budget deficits coupled with rising global

foo d and oil p ric es ha ve c ontinued to put p ressure o n infla tion . The result is tha t

all indicators show that inflation is on the rise and indeed is expected to rise

even further with the recent passing of the 2011 budget of N4.97 trillion which

represents a 17 percent increase over what President Jonathan proposed. I find

it particularly troubling that the recurrent expenditure (N2.47 trillion) exceeds

c ap ita l expend iture (N1.56 trillion) by N 0.91 trillion.

In o rder to curta il the above inflationa ry p ressures, I believe there is need to ra ise

MPR a t this po int. Unfo rtunate ly, this a lso ha s costs. Spec ifica lly, an inc rease in

MPR w ill ra ise lend ing ra tes. This portend s grea t d anger no t just to the real sec torbut also for the banking system which is still recuperating from a major crisis.

Policies that distort the growth of the real sector will have long term negative

c onseq uenc es on the e cono my. It is in m y view , diffic ult to achieve and susta in

price stability, which is the core mandate of monetary policy, without growing

the real sec tor of the ec onom y. In light o f the a bo ve, I am of the op inion that

MPC should adopt a g radua list app roac h to increa sing the MPR. Spec ifica lly, I

recommend that MPR should be raised by 50 basis points to 7.0 percent at this

stag e. I also recommend that the Central Bank should a do pt a more c om ba tive

posture in its ro le a s fina nc ia l ad viser to the gove rnment. This ha s bec om e

nec essary bec ause unless the fisca l managem ent o f the e cono my improves, we


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will soon ge t to the p oint whe re moneta ry po lic y will bec ome an ineffec tive to ol

for stemming inflation and ensuring stable exchange rates both of which are

c entral to the a tta inment of p ric e stab ility.

12.0 SANUSI LAMIDO SANUSI, CON

Governor of the Central Bank of Nigeria and Chairman of the Monetary PolicyCommittee

The Issue

The yea r on yea r (Y-O-Y) inflation rate d ropped to 11.1% in Feb ruary, co mp ared

to 11.8% in December, 2010 and 12.1% in January. However, staff reports note

tha t fo od inflation inc reased from 10.3% in Janua ry to 12.2% in Februa ry. The

Energy ind ex a lso witnessed an upw ard mo vement. The last MPC had

anticipa ted inc rea sed pressure in the Consumer Price Index (CPI) on the bac k of

rising g lobal oil and food pric es. The imported food ind ex rose b y 29.2%

between January and February. In the two months over $1.3billion waspurc hased a t WDAs for the importation of p etroleum prod uc ts a lone . The

increased subsidy burden implied by the huge outlay strengthens the likelihood

of post election pricing reforms to reduce the burden on government finances

and this pose a sho rt-term risk to infla tion.

In addition to the structural factors the 2011 budget that has just been passed

by the Nationa l Assem bly c lea rly ind ic a tes a lac k of c om mitment to e a rly fisc a lretrenchment and consolida tion. This c omm ittee has previously note d that the

loose fiscal stance of government continues to pose a grave risk to price

stability, exchange rate stability, foreign reserves position and domestic debt

susta ina b ility. The b udget of N4.9 trillion which inc lude s rec urrent spend ing o f


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about N2.47trillion a nd a lmost N500billion o f sta tuto ry transfers is a source of

concern especially as we cannot at this point rule out the possibility of a

supp lementa ry bud get d uring the yea r. The e xube ranc e fuelled by rec ent o il

p rice inc rea se as a result of the c risis in North Afric a seem s to ha ve p roduc ed a

raised budget based on rather optimistic assumptions about oil price

($75/ barrel) and outp ut (2.3mbp d) for the yea r. Ra ising the o il p ric e b enc hma rk

upward by $10/barrel facilitated a 20% increase in budget spending without

rec ourse to any o ther reve nue measures suc h a s tax inc reases.

The budget o r, ra the r, this fisc a l stanc e in g eneral, poses a g rave threa t to

infla tion in the med ium to long term throug h the susta ined expa nsion in mone y

supply due to monetization of higher oil revenues. In the short-term, the risk is

posed through increased demand for foreign exchange leading either to

acceleration of inflation via the exchange rate channel or a depletion of

reserves to m a inta in exc hange rate stab ility and mo derate infla tion . How ever it

is viewed, increased government spending creates difficulties for monetary

polic y. Sta ff rep orts have shown a historica l pa tte rn of c orrela tion betw ee n

FAAC releases and naira depreciation of WDAs, indicating tentatively that

inc rea sed gove rnment spend ing d oes fuel de ma nd fo r dolla rs. Pre-elec tion

disbursements and spending therefore add significant naira liquidity to the

system and increase the pressure on the naira with attendant inflation and

reserve management risks.

Decision

It is clear that, in my view, there is a strong risk of rising inflation due to a

c om bina tion of e xternal and struc tura l fac tors (foo d imp orts, fuel imp orts etc ) on

the one hand, and the significant increase in fiscal spending especially in the


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election p eriod , on the o ther. This c ommittee had wa nted a pha sed w ithdrawa l

from QE and a gradual normalization of policy complemented by a similar

mo ve on the p art o f the fisc a l autho rities.

The budget a s p roposed leaves us, in my view, w ith no op tion to the p ursuit of a

much more aggressive timetable for tightening in order to protect foreign

reserves from erosion while maintaining a stable exchange rate and also

mitigate the inflationary impact of spending increases that potentially

c ompound the structural pressures in the CPI. It is a lso importa nt for the

credibility of Monetary Policy that we send a clear signal of our dissatisfaction

with the fisca l stanc e. Fortuna te ly, the signific ant p rog ress on b anking refo rms

g ives us more flexib ility o n the inte rest rate side.

A sharp rise in rates carries the attendant risk of a sharp correction in the bond

markets and possib le losses on fixed inc ome p ositions. It a lso may slow d own the

rec overy of the e quities ma rket. However, in my view , the inflationa ry risk posed

by fisca l expansion a t a time of c onc ern with e xc hange ra te stab ility and rising

globa l food and energy pric es is mo re funda me ntal to our ma nda te.

Finally, the pressure on the naira is driven partly by excess liquidity and cheap

funds. An ove rly acc om mo dative mo neta ry policy stanc e a t this point

heightens the risk of rising inflation through the import and exchange rate

channel.

For all of the above rea sons my vo te is for an a cc elerated normaliza tion of the

MPR. Bec ause most of the liquidity pressure is likely to come in the e lec tion

period, we need in my view, to front load tightening measures rather than

pursue a gradualist approach. I therefore vote for a 100 basis-point increase in


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Communique for MPC Meeting of March 21 22 2011_ 21st Mar_

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