CBN Medium Term Framework Guidelines for 2012/2013 Monetary policy Introduction
Category: Money Market
April 13, 2012
The Central Bank of Nigeria (CBN) adopted the medium – term framework for the conduct of monetary policy in 2010/2011. This impacted the ultimate objective of price stability in the economy. With this achievement on mind, the 2012/2013 Monetary, Credit, Foreign Trade and Exchange Policy Guidelines, anchored on the medium term framework of the two – year period, January 2012 to December 2013, is expected to strengthen the gains of the previous years.
The Monetary, Credit, Foreign Trade and Exchange Policy Guidelines is applicable to banks and other financial institutions under the supervisory purview of the Central Bank of Nigeria in 2012/2013.
Review of Policy Environment and Macroeconomic Development in 2011
The bank’s monetary policy in 2011 shifted from quantitative easing in September 2010 to monetary tightening, against the backdrop of the apparent threats of inflationary build – up. Monetary policy aimed at the moderating the anticipated inflationary pressures, expected to be triggered by the pre – election spending and the high liquidity injections into the banking system through the purchase of non-performing loans (NPLs) by the Asset management Corporation of Nigeria (AMCON).
Data showed that interest rates in 2011 exceeded their levels in the corresponding period of 2010. This development was attributed to steady upward review of the Monetary Policy Rate (MPR) from 6.25 to 12.0 per cent and the increase in Cash Reserve Ratio (CPR) to 8.00 per cent from 2.00 per cent.
As a result of the restrictive monetary policy stance through higher MPR and increased mop-up activities in Open Market Operations (OMO), interest rates rose generally. Consequently, lending was depressed as liquidity conditions became tight until the purchase of the AMCON bonds from the intervened banks, following the suspension of the reserve averaging framework.
The effects of the continued liquidity squeeze are expected to linger through 2012 as banks readjust their portfolios to accommodate prevailing liquidity conditions. Consequently, lending rates are expected to rise.
Developments in both the global and domestic economy influenced the macroeconomic outcomes in 2011. Generally, the economy was vibrant as growth in domestic output was strong and broad based. The need to contain liquidity surfeit in the banking system, while ensuring financial and price stability, was a challenge to monetary policy in 2011. However, growth in the major monetary aggregates was moderate.
Outstanding Policy and Macroeconomic Issues in 2012/2011
Policy Challenges The monetary policy stance of the CBN is expected to be mixed during the programme period. Meanwhile, the tight monetary policy adopted in 2011 would be mixed with monetary easing while the cautious approach to lending by the banks expressed in 2011 is expected to moderate in 2012, thus further easing credit expansion. This would boost credit to the productive sectors of the economy in 2012 and amplify inflationary pressures.
Macroeconomic Issues The sluggish growth in the economies of Nigeria’s major trading partners and the lingering sovereign debt crisis in the Euro area, remain potential threats to domestic economic growth. Given that Nigeria is oil dependent with high imports, the challenge to policy in the programme period remains the management of external reserves and diversification of the economy to reduce the impact of oil price volatilities.
Other macroeconomic issues are: decline in global output and aggregate demand in 2012 could trigger negative shocks to international oil prices; the poor state of infrastructure such as roads, transportation, electricity and water supply; lack of diversification of the economy due to excessive dependence on oil as major source of government revenue.
Outlook for the Domestic Economy in 2012/2013
1. Crude oil prices are expected to continue to be favourable to the domestic economy
2. The agricultural sector is expected to lead growth and remain robust.
3. Nigeria’s external sector is expected to grow moderately in 2012/2013.
4. The exchange rate of naira is expected to be moderate.
Monetary and Credit Policy Measures in 2012/2013
Objectives and Strategy of policy
1. The primary objective of monetary policy in 2012/2013 shall be the maintenance of price stability in compliance with the CBN Act, 2007.
2. Achieve overall inflation objective of government through effective liquidity management.
3. Take necessary steps to ensure banking soundness and financial sector stability.
1. The MPR shall remain the anchor rate
2. The primary channel of monetary management shall continue to be OMO, supported by reserve requirement and discount window operations.
6. Remittance of Value Added Tax (VAT), Custom Duties and Other Collections
7. Framework for determining Banks’ Cost Funds
8. Framework for the Implementation of Risk-Based Interest Pricing Model
9. Federal Government of Nigeria (FBN) Bonds and Nigerian Treasury Bill (NTBs)
10. Maintenance of Savings and Current Accounts
11. Ways and Means Advances
12. The Payments System
13. Publication of Financial Statements
14. Revised Microfinance Policy, Regulatory and supervisory Framework for Nigeria
Other policy measures includes: Financing Small and Medium Enterprises (SMEs), SMEs Credit Guarantee Scheme (SMECGS), Microfinance Development Fund (MDF), Refinancing and Rediscounting Facility (RRF) for SME/Manufacturing Sector, Commercial Agriculture credit Scheme (CACS), Agricultural Credit Support |Scheme (ACSS), Nigeria Incentive-Based Risk Sharing System for Agricultural Lending (NIRSAL), Infrastructure Finance, Entrepreneurship Development centres (EDCs), Financial Inclusion Strategy, Orderly Development of the Banking system, Public Sector Deposits, Commercial Paper and Bankers’ Acceptance for Repo Transactions.
Monetary Policy Measures Retained/Modified in Fiscal Years 2012/2013 Bank Credit Expansion, Prudential Guidelines for licensed Banks, Capital Adequacy, Foreign Guarantees/Currency Deposits as Collateral for naira Loans, Rules for Currency Transactions, responsibilities of Banks’ External Auditors to the Supervisor Authorities, Bank Operating Subsidiary Companies Offering Banking Services, Agricultural Credit Guarantee Scheme (ACGS), Interest Drawback Programme (IDP), Returns from Banks, Statutory regulations/Rendition of Returns, Penalties for Default, Transparency in Financial Transactions, Risk-Based Supervision, Consolidated/ Cross-Border Supervision, Macro-Prudential regulation and Stress Testing, Risk management and Corporate Governance in Nigerian banks, Credit Risk management System (CRMS), Additional Disclosures by Banks, Supervisory Intervention Framework for Banks.
Foreign Trade & Exchange Policy Measures
New Policy measures for 2012/2013
The new policies introduce in this period are:
1. Foreign Exchange market and
2. Form ‘M’ Procedures for Importation of Petroleum Products.
Policy Measures Amended/Retained in 2012/2013
Foreign Exchange market, Form ‘M’ Procedure, Destination Inspection of Imports, Import Duty Payment Procedures, Export and Trade Promotion, Invisible Trade Transactions.