The Monetary Policy Committee (MPC) met on 23rd and 24th May, 2011 to assess current domestic and international economic and financial developments as well as the challenges facing the Nigerian economy in the short- to medium-term.
On the international scene, the Committee noted the recovery in some of the major developed economies along with improvements in stock market indices, although unemployment remained high.
Inflationary threats, however, still persisted following sharp increases in international oil and commodity prices. In addition, there are serious concerns about debt sustainability in many developed countries, particularly the Euro-zone, requiring strong fiscal adjustment with attendant risk of economic slowdown in the medium-term.
Emerging market economies have become the engine of the global economic recovery, with their output levels above those recorded during the crisis years. It is expected that growth in Asia’s exports in 2011, though below the very high rates of 2009 and 2010, will be supported by the slow but gradual recovery in the industrial countries. Sub-Saharan African countries are projected to record moderate growth and to face inflation threats. Weak economic recovery in industrialized countries may also affect exports from the region.
With regard to the domestic economy, the Committee noted the estimated high output growth in Q1 2011, improvement in stock market indicators, modest accretion to external reserves since the beginning of 2011 reflecting in part the high crude oil prices, stable naira exchange rate and rise in interbank rates in response to the tightening of monetary policy stance. Notwithstanding the recent monetary policy tightening measures implemented since January 2011, the Committee observed that inflation rate remained at the double digit level, indicating the apparent role of structural factors and supply bottlenecks in the elevated inflationary pressures in Nigeria. The Committee, therefore, urged that economic reforms be fast-tracked to ensure that the downside risk of inflation to growth is minimized.
Key Domestic Macroeconomic and Financial Developments
The Committee noted that the impressive output growth in 2010 was sustained in QI 2011. Provisional data from the National Bureau of Statistics (NBS) indicated that real gross domestic product (GDP) was projected to grow by 7.43 per cent in the first quarter of 2011, compared with the 7.36 per cent recorded in the corresponding period of 2010. The non-oil sector grew by 8.46 per cent while the oil sector output growth was estimated at 2.90 per cent. Thus, the overall output growth was driven mainly by the non-oil sector with significant contributions from services, wholesale and retail trade, and agriculture. The Committee considers the outlook for 2011 to be generally good, underpinned bythe favourable conditions for increased agricultural production, encouraging outcomes of the banking sector reforms and measures to channel credit to the real economy, as well as other initiatives by governments to stimulate the economy.
The year-on-year headline inflation rate declined to 11.3 per cent in April 2011 from 12.8 per cent in March 2011. Food inflation also declined to 10.7 per cent in April from 12.2 per cent in March and February 2011. However, core inflation at 12.9 per cent in April was slightly higher than the 12.8 per cent in March 2011. The decline in headline inflation rate was primarily due to the decline in the prices of some food items and non-alcoholic beverages, imported food items, transportation, and clothing and footwear. Notwithstanding the decline in the inflation rate in April, inflation expectations remain high owing to the subsisting high fiscal spending, the recent increases in public sector wages, the possible removal of subsidy on petroleum products in the near-term, and further liquidity injection due to AMCON activity.
Monetary, Credit and Financial Market Developments
Provisional data showed that the growth in broad money (M2) during the first four months of 2011 was 3.24 per cent, or 9.72 per cent when annualized. Aggregate credit continued to decline largely as a result of reduction in credit to the core private sector, and to state and local governments. Net foreign assets, which posted positive growth in February and March, declined in April 2011. The huge growth in credit to government against the backdrop of continuing decline in private sector credit clearly indicates that government borrowing is crowding-out private sector credit. Besides, in the post-crisis period banks in their bid to rebuild their balance sheets have become increasingly risk-averse, and have preferred to channel their funds into the relatively risk-free government sector. The Committee, therefore, urged that efforts be sustained to de-risk the real economy through appropriate reform measures.
The interbank market rates fluctuated at the various segments since the beginning of the year. Key interbank rates moved in tandem with the upward revision of the monetary policy rate (MPR) to 7.5 per cent from 22nd March, 2011. Between March 22 and May 13, 2011, the inter-bank call and open buy-back (OBB) rates fluctuated, increasing to a high interbank call rate of 11.95 per cent on April 12, 2011. A significant decline in both rates was recorded thereafter, following the enhanced liquidity in the banking system occasioned by the use of AMCON bonds to secure funds and the impact of the new reserve averaging policy. Consequently, interbank and OBB rates softened, with the OBB recording a low of 6.90 per cent on 9th May, 2011.
Retail lending rates, however, remained relatively high with the spread between the maximum lending rate and the consolidated deposit rate widening slightly to 19.64 percentage points in April 2011, from 19.57 percentage points in March.
The All-Share Index and market capitalization recorded increases as the capital market began a gradual recovery since the last MPC meeting. This was due largely to share price increases in the Banking, Food/Beverages and Insurance sectors. With the ongoing reforms by the regulatory authorities and robust growth prospects, the outlook in the medium-term remains generally good.
External Sector Developments
The Committee noted the persisting demand pressure in the foreign exchange market between March 23 and May 18, 2011. The total supply to the wDAS segment by the CBN (including US$160.00 million worth of maturities at the wDAS Forwards) amounted to US$4.32 billion.
The foreign exchange market remained relatively stable owing to a deliberate policy on the part of the CBN to increase supply to the market to maintain the exchange rate within a band of ±3 percentage points, complemented by funding from autonomous sources. At the wDAS segment, the Naira/Dollar exchange rate opened at N152.63/US$ (including 1% commission) on March 23, 2011 and closed at N154.74/US$ on May 18, 2011, representing a slight depreciation of 1.38 per cent (or N2.11k). The interbank rates opened at N155.97/US$ and closed at N156.70/US$, a depreciation of 0.47 per cent. The premium between the rates at the WDAS and other segments of the market narrowed towards the end of the review period.
The Committee noted the modest accretion to the external reserves in recent months. It, however, noted that inflow into the CBN is not consistent with the high oil prices and, this underscores the need for tighter fiscal controls around oil revenues as well as first line charges including JVC deductions and subsidies. A higher rate of retention of oil revenues should facilitate the efforts at maintaining exchange rate stability as an antidote to imported inflation without excessive reliance on monetary tightening measures.
The Committee’s Considerations
The Committee urged that in a highly import-dependent economy with large pass-through effects of import prices on domestic prices, it is necessary to create a climate conducive to larger foreign capital inflows through appropriate fiscal measures, particularly in the light of the gains that could be made in the current context of high crude oil prices. The MPC, therefore, stressed the importance of continuing structural reforms and infrastructural development to enhance domestic production to reduce the import bill and its pass-through effects on inflation. It also noted the inflationary impact of the likely deregulation of petroleum product prices.
The Committee held that it would be prudent to adopt a monetary policy stance that is consistent with the need to address inflationary expectations associated with excessive liquidity and pressure on foreign exchange market. Although the fiscal authorities have declared their intention to fiscal consolidation, the MPC recognizes that time will be required for fiscal adjustment to take place. In the interim, monetary policy will have to bear the burden of adjustment through further tightening in order to rein in inflation to maintain price stability, as well as continuing with the progress toward positive real interest rates.
In the light of the above, Members of the Committee voted as follows:
1.9:1 in favour of further tightening of monetary policy. All nine in favour of tightening voted for an increase in CRR from 2 per cent to 4 per cent with effect from June 8, 2011 to align with the next reserve averaging maintenance period; Six (6) members voted for 50 basis points increase in MPR from 7.5 per cent to 8.0 per cent, three (3) votedfor 25 basis points increase while one (1) voted for no change; and
2.Maintain the symmetric corridor of +/- 200 basis points around the MPR.
Sanusi Lamido Sanusi, CON
Central Bank of Nigeria
May 24, 2011