The Monetary Policy Committee (MPC) met on the 24th and 25th January, 2011 to review domestic and international economic and financial developments in 2010 and the challenges facing the Nigerian economy in the year ahead.
On the global scene, the Committee noted the divergence in the economic performance of advanced and emerging economies in 2010. Economic uncertainties contributed to the weak recovery in advanced economies. As a result, growth was sluggish and concerns about inflation were dominant on account of the rising oil and commodity prices in the international markets and fears of fiscal stress in the years ahead. On the other hand, robust economic growth was recorded in emerging markets based essentially on strong domestic demand which offset weak export demand.
Financial market conditions in advanced economies were, however, more stable than in the preceding two years while some emerging economies were confronted with challenges posed by large volatile capital inflows. With regard to the domestic economy, the Committee noted with satisfaction the impressive economic growth, the continuing recovery of the capital market and the progress made towards restoring stability in the banking sector. It, however, observed that inflation had continued to be relatively high and reiterated the need for it to be reined in and for Government to further strengthen and deepen economic and structural reforms.
Key Domestic Macroeconomic and Financial Developments Domestic Output
The Committee noted the sustained output growth recorded in 2010. Provisional data from the National Bureau of Statistics (NBS) indicated that real Gross Domestic Product (GDP) grew by 8.29 per cent in the fourth quarter of 2010, up from 7.86 per cent recorded in the third quarter. The overall GDP growth for 2010 was estimated to be 7.85 per cent, compared to the revised growth rate of 6.96 per cent recorded in 2009. The non-oil sector remained the major driver of overall growth, with agriculture, wholesale and retail trade, and services contributing 2.39, 2.04 and 2.08 per cent, respectively. The outlook for 2011 is projected to be generally favourable in view of the continued improvement in 2 the international oil market and emphasis on the development of the non-oil sector.
The year-on-year headline inflation, as measured by the percentage change in the all-items consumer price index (CPI, November 2009=100), trended downwards during most periods of 2010. It declined to 11.8 per cent in December 2010 from 13.6 per cent in September. Similarly, core inflation declined to 10.9 per cent in December 2010 from 12.8 per cent in September.
Food inflation also, dropped to 12.7 per cent in December 2010, from 14.6 percent recorded in September. The Committee noted that although inflation has been trending downwards, the single digit benchmark was not achieved in 2010, despite the relatively good harvest, improved supply of petroleum products and lower growth in monetary aggregates. This, according to the Committee underscores the need to address both supply and demand side factors that determine inflation dynamics in Nigeria. One of the ways to keep aggregate demand in check is to restrain debt-financed government spending in the medium-term.
This calls for a review of subsidies and other recurrent expenditure categories that constitute a drain on the national budget as well as improving the revenue base. However, the Committee commended the government for recognizing the existence of these issues in the 2011 budget proposal especially the reduction in the proposed level of total spending. Although there has been a strong emphasis on capital expenditure and infrastructure development, the Committee noted that recurrent expenditure remained high at over 70 per cent of the total budget.
For this reason, the MPC believes that the risk to price stability posed by fiscal operations will need to be constantly monitored if inflation is to be brought down to single digit levels in the short to medium term. However, the Committee noted that the general thrust of fiscal policy pronouncements is in the desired direction.
Monetary, Credit and Financial Market Developments
Provisional data showed that the growth in broad measure of money supply (M2) was generally below the indicative benchmark throughout 2010 when compared with the level at end-December 2009. Specifically, at end-December 3 2010, M2 growth was 6.70 per cent compared with the indicative benchmark of 29 per cent for 2010.
Available data indicated that growth in aggregate credit to the domestic economy (net) was similarly sluggish at 6.13 per cent in December 2010 compared with 59.6 per cent recorded in the corresponding period of 2009.
This development is connected to the damaged balance sheets of the DMBs in the wake of the global financial and economic crises. However, aggregate credit to the Federal, as well as State and local governments grew by 67.83 per cent and 19.17 per cent, respectively, in 2010. Credit to the private sector contracted by 4.92 per cent in contrast to the indicative benchmark growth of 31.54 percent for 2010. However, this outcome would need to be considered in the context of the purchase of non-performing loans with face value of over N 2 trillion from the DMBs by the Asset Management Company of Nigeria (AMCON) in 2010.