January 31, 2012
Central Bank of Nigeria Communiqué No. 81 of the Monetary Policy Committee Meeting of Monday and Tuesday, January 30 and 31, 2012 The Monetary Policy Committee (MPC) met on January 30 and 31, 2012 with all 12 members in attendance to review the domestic economy in 2011 and the nature of current challenges against the background of developments in the international economic and financial environments.
At the outset, the Committee recalled that in a bid to ensure price and financial stability, the Committee, held six (6) regular meetings and one (1) extra-ordinary meeting in 2011 during which it raised the Monetary Policy Rate (MPR) six (6) times, from 6.25 to 12.0 per cent; raised the Cash Reserve Requirement (CRR) three (3) times from 1.0 to 8.0 per cent; and the liquidity ratio (LR) once from 25.0 to 30.0 percent. It also reduced the foreign exchange net open position of DMBs from 5.0 to 3.0 per cent, and adjusted the mid-point of the exchange rate band from N150/US$1 to N155/US$1. These decisions signalled to the market the Committee’s clear and unambiguous commitment to the primacy of price stability as its key mandate.
The Global Economy
Latest projections by the International Monetary Fund (IMF) indicated that global output growth which had slackened from 5.22 percent in 2010 to 3.8 per cent in 2011 could decelerate further to 3.3 per cent in 2012. Advanced economies are expected to record a lower rate of growth of 1.2 per cent in 2012 compared to the estimated 1.6 per cent in 2011. The US economic growth in the coming quarters would depend a great deal on growth of the Euro area. The Euro area is projected to record a negative growth of 0.5 percent in 2012 essentially on account of the burden of high public debt and the fragility of the credit and financial markets. Output growth in emerging and developing economies slowed down in 2011. China, India and Brazil all posted lower growth rates in 2011 than in 2010. Sub-Saharan Africa has been a major exception to the global trend: it is estimated to have grown by 4.9 per cent in 2011 and is expected to record a higher growth of 5.5 per cent in 2012.
Inflation rates in most of the advanced economies trended upward in 2011 with the exception of Japan. In the US, UK, and Germany, inflation rose from 1.4, 3.7, and 1.7 per cent in 2010 to 3.0, 4.2, and 2.1 per cent in 2011, respectively. The Euro-zone debt crisis worsened; leading to credit ratings downgrades, change of governments, and implementation of austerity measures, even as a few nations appeared to have entered into a recession.
The Committee felt that in the light of the expected deceleration in the economies of the country’s major trading partners, and the absence of adequate commitment of most advanced economies to effectively address the fiscal imbalances and to reform their financial systems, there would be continued pressure on Nigeria’s external sector in 2012. The anticipated slack in external demand would, in the view of the Committee, have to be offset by generating the needed domestic demand. This, however, would require a shift in the economic development strategy that allows greater diversification of the economy without losing sight of the need to pursue sound demand management policies.
Key Domestic Macroeconomic and Financial Developments Output and Prices
Provisional data from the National Bureau of Statistics (NBS) indicated that real Gross Domestic Product (GDP) grew by 8.68 per cent in the fourth quarter of 2011 up from 6.64, 7.72, and 7.40 percent in the 1st, 2nd and 3rd quarters, respectively. The overall GDP growth rate in 2011 was estimated by the NBS at 7.69 per cent, marginally lower than the 7.87 per cent recorded in 2010. This projection is based on the estimated Quarter III and Quarter IV growth rate of 7.40 per cent and 8.68 per cent respectively. The 2012 Budget proposal assumed a growth rate of 7.2 per cent. This is in line with the latest World Bank forecast of 7.1 per cent growth for Nigeria in 2012. The Committee noted with satisfaction, the good performance of non-oil activities including agricultural and services sectors as well as the recovery in crude oil output in 2011, particularly in the fourth quarter. In the Committee’s view, the opportunity to build on the robust non-oil growth with further investments in infrastructure and manufacturing and processing activities should be utilized in order to mitigate any negative impacts from the likely external shocks during the year.
The Committee also noted the NBS survey data on the rise in the unemployment rate to 23.9 per cent in 2011 from 21.4 per cent in 2010. The latest unemployment rate is considerably higher than the 12.3 per cent recorded in 2006 by the NBS survey, which suggests that the consistently high output growth during this period had failed to create adequate employment for the growing labour force.
In view of this, the Committee recommends that in addition to the structural reforms being currently pursued, emphasis should be placed on technical and vocational education in order to produce a labour force that is compatible with the current stage of the country’s development.
In 2011, the Inflation rate fluctuated within the lower double-digits range during the early part of the year, but moderated thereafter. The year-on-year headline inflation rate, which was 12.1 per cent in January 2011 rose to 12.8 per cent in March, before moderating to 10.2, 10.3, and 10.3 per cent in June, September, and December, respectively. Similarly, food inflation rose from 10.3 per cent in January 2011 to 12.2 per cent in March and thereafter moderated to 9.2, 9.5, and 11.0 per cent in, June, September, and December, respectively. Core inflation also rose from 12.1 per cent in January to 12.8 per cent in March stabilizing at 11.5, 11.6, and 10.8 per cent in June, September and December, respectively.
The headline inflation rate stood at 10.3 per cent in December 2011, by far the lowest since December 2008 and lower than the average of 12.75 per cent during the period 2001-11. Food inflation, at 11.0 per cent in December 2011, was lower than its level in the preceding three years. Similarly, the year-on-year core inflation declined in 2011. At 10.8 per cent in December 2011, core inflation was marginally lower than the 10.9 per cent in December 2010 and 11.2 per cent in December 2009. The Committee noted that both food and core inflation have remained high exerting immense pressure on the headline inflation rate. The Committee was therefore of the view that while the focus on growth continues to be a key imperative, the containment of inflation equally deserves immediate attention. It noted that the inflation outlook in the short- term will be impacted by the anticipated fiscal injections in relation to the proposed 2012 budget, the recent partial deregulation of pump price of PMS, and new tariff regimes on certain food imports. The Committee has also noted comments indicating possible plans by the National Assembly to revise the budget benchmark price of oil from $ 70 per barrel to $75 or even $80 per barrel. Such a measure would significantly increase expenditures especially given the already high oil output assumptions. In addition, it would reduce accretion to the Excess Crude Account (ECA) and increase the inflationary pressure already in place on the supply-side.
In the event of this happening, the likelihood of further tightening during 2012 increases. The Committee would like to reaffirm its commitment to price and exchange rate stability and its determination not to pursue an accommodative policy stance. The Committee therefore, strongly supports the recommendations of the Executive for a benchmark price of a maximum of $70 per barrel.
Monetary, Credit and Financial Market Developments
Broad money supply (M2) growth was sluggish up to May, 2011, accelerated thereafter to 5.66, 9.50 and 15.40 per cent in June, September, and December 2011, respectively. When annualised, M2 grew by 11.32, 12.67, and 15.40 per cent in June, September and December, respectively, which hovered around the indicative growth benchmark of 13.75 per cent for 2011. Thus, M2 growth of 15.4 per cent in 2011 was higher than the 6.9 per cent growth in 2010. The significant increase in credit to the private sector as result of loan to AMCON to finance its activities was a major factor underlying growth in monetary aggregates in 2011.
The Committee noted that money market rates moved upward in 2011. The average OBB rate increased to 15.50 per cent in December from 6.22, per cent in January. Similarly, the average call rate rose to 14.09 per cent in December from 6.42, per cent in January. The rise in money market rates should be viewed in the overall context of monetary tightening stance of the Bank in 2011 through hikes in the monetary policy rate (MPR) as well as the sharp increase in the cash reserve ratio (CRR) from 4 per cent in September to 8 per cent in October. The Committee observed that monetary tightening was also used to restore stability in the foreign exchange market. In January 2012, money market rates have been hovering within a range of 12.85-15.70 per cent. Long term bond yields have tended to move in the range of 14-15 per cent.
Responding positively to the hike in policy rates, both the lending and deposits rates of deposit money banks also moved up in 2011, although substantially less in the case of the latter. The maximum lending rate increased to 23.21 per cent in December from 21.75, 22.02, 22.02 and 22.09 per cent in January, March, June and September, respectively. Also, the prime lending rate rose to 16.75 per cent in December from 15.73, 15.81, 15.76 and 15.87 percent in January, March, June and September, respectively. The spread between the maximum lending rate and the average deposit rate which was at 19.22 percentage points in June moved up to 20.12 percentage points in December.
External Sector Developments
Foreign exchange reserves amounted to US$ 32.64 billion as at end December 2011, more or less flat relative to the US$32.34 billion as at end December 2010, despite the higher oil price in 2011. Notwithstanding the high prices of Nigeria’s reference crude oil (Bonny Light) which averaged US$106.32 per barrel for the year, the limited accretion to external reserves was due to the high demand for foreign exchange in the market. The Committee noted that pressure on the exchange rate emanating from the high demand reflected the import-dependent nature of the economy, probably compounded by the activities of speculators. The reduction in arbitrage opportunities in the oil marketing sectors combined with stronger controls in foreign exchange practices have already led to a noticeable moderation in foreign exchange net demand.
The official wDAS rate (inclusive of 1 per cent commission) moved up from N151.62 per US$1 in January 2011 to N154.45/US$1 in June and further to N158.21/US$1 in December 2011. The volatility in the official rates, however, was limited with the coefficient of variation being 1.28 per cent for the year as a whole compared to 0.32 per cent in 2010. The Committee commended the CBN for its efforts at establishing stability in the market. It also urged the CBN to strive to eliminate speculative demand for foreign exchange. The Committee also noted that as at January 24, 2012, the exchange rate was N158.57/US$1, while the foreign exchange reserves amounted to $34.18 billion on January 27, 2012, which could finance over 6 months of imports of goods and services. The outlook for oil prices in the short-term as well as the forecast demand/supply balance, suggest that the current exchange rate band should be retained while still achieving moderate continuous accretion to reserves
The Committee’s Considerations
The Committee is pleased that ahead of most African countries, Nigeria had been proactive by responding to the threats of inflation induced by fiscal spending and global food, fuel and other commodity prices as well as to the challenges of financial stability.
The Committee observed that the mandate of the Bank was largely achieved, as inflation was contained within tolerable levels and the exchange rate was generally stable throughout 2011. The resolution of the banking crisis during the year was also commended. Against this background, the Committee welcomed the stated fiscal stance of the Federal Government as part of its programmed movement towards fiscal consolidation. The increased share of capital expenditure in the proposed total expenditure in 2012 is an important signal of the commitment of the Federal Government to improve the productive capacity of the economy. The Committee finds the current environment to be conducive for improved cooperation and coordination between fiscal and monetary authorities.
The Committee acknowledged that the decision to remove the fuel subsidy was a major development that took place since its last meeting in November 2011. It commended the Federal Government on the partial removal of subsidy on Premium Motor Spirit (PMS), which it noted will have salutary effects on the external reserves and exchange rate as well as on investment in oil and gas downstream sector. It further commended the Federal Government for the commitment towards the passage of the Petroleum Industry Bill (PIB) which, it believes, would further complement the benefits of the fuel subsidy removal. On the other hand, it recognized the possible negative impact of the partial removal of fuel subsidy on the general price level and hence inflation in the short run. In this regard, it underscored the need for the speedy implementation of the palliative measures and entrenchment of social safety nets for the more vulnerable groups. However, the long-term benefits far outweigh the likely short term costs as far as inflation is concerned.
Furthermore, the Committee commended the fiscal authorities for the benchmark crude oil price of $70 per barrel as proposed in the 2012 budget and advocated for its retention as any upward revision would tend to undermine macroeconomic stability.
The Committee considered the need to sustain the high output growth that the country has seen in recent years partly because of the slowdown in the advanced and other emerging economies and partly because of the need to generate employment in the economy. However, to help generate new jobs, it would be essential for the Federal Government to move quickly with the structural reforms such as (a) power sector reforms, (b) implementing the agricultural sector transformation programmes and the associated value chain, and (c) refocusing attention to the provision of technical and vocational training to bring about skills development that would match the needs of the economy.
The Committee underscored the need for maintaining price stability in a manner conducive to the achievement of employmentgenerating growth. In this connection, it observed that the announced increase in import duties on some food items by the end of June 2012 would exert further pressure on food prices which would compound the effect of increased transportation costs induced by the partial removal of the fuel subsidy on the general price level and the associated inflation expectation.
The Committee noted that historically, upward adjustments in the price of PMS have tended to have a short-term impact on the rate of inflation. A review of previous instances of adjustment in fuel prices shows that without exception, each instance is accompanied by an increase in the rate of inflation followed almost immediately by a moderation in the short - to - medium term. Staff estimates indicate that inflation in the first two quarters of 2012 would range between 11.0 per cent and 14.5 per cent, and then moderate steadily towards the single digit zone by late 2013. Real interest rates are therefore likely to remain positive on a trend basis, even if the rate of inflation were to rise briefly above the MPR in the second quarter.
Finally, the Committee recognized the current security challenges and Government’s efforts to find a lasting solution through dialogue, economic measures and enhanced intelligence. It expressed confidence on the ability of Government to resolve the problem.
In the light of the above, and considering the clear impact of previous tightening on the rate of inflation and exchange rates up to December 2011, the Committee unanimously decided as follows:
1. Retain MPR at 12.0 per cent with interest rate corridor of +/- 200 basis points;
2. Retain CRR at 8,0 per cent;
3. Retain minimum liquidity Ratio of 30.0 per cent; and
4. Retain the Mid-point of exchange rate at N155/US$1 with a band of +/-3.0 per cent.
The Committee also resolved to watch closely developments with respect to the fiscal stance and to respond appropriately if, and when, the need arises.
Sanusi Lamido Sanusi, CON
Central Bank of Nigeria