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CBN Communiqué No. 69 of the Special Monetary Policy Committee Meeting, April 15, 2010




The Monetary Policy Committee (MPC) held a special meeting on April 15, 2010 to, among other things, consider the modalities for the injection of N500 billion into the real economy in continuation of the current quantitative easing policy. It also reviewed domestic economic conditions during the first quarter of 2010 against the backdrop of the global economic and financial developments with a view to guiding monetary and financial sector policies for the rest of 2010.
The MPC noted the persisting tight credit conditions and the continuing under-performance of key monetary aggregates which had informed its earlier decision to embark on a quantitative easing policy to be implemented through investment in debentures to be issued by the Bank of Industry (BOI). The Committee commended the co-operation of key stakeholders in preparing the modalities for the injection of the N500 billion financing facility for the emergency power projects dedicated to industrial clusters and restructuring/refinancing of DMBs’ exposures to the manufacturing sector and SMEs. It stressed the need for even greater co-operation in fast-tracking on-going reform efforts in the banking sector to ensure the smooth flow of credit to the real sector of the economy as well as energizing reforms in the power and other economic infrastructure sectors, to promote private sector/foreign investment and employment-generating growth. In this regard, the MPC welcomes the attention to the power sector by the Federal Government. The Committee emphasized that while economic reforms and human capital development remain key ingredients for economic growth, the Bank is mindful of the supportive role that macroeconomic and financial stability plays in achieving sustainable growth and, will continue to focus attention on these two areas.
On the global scene, the Committee noted that the rebound in global economic activity which started in the second half of 2009, has been sustained. The rebound was driven largely by the fiscal policy stimuli undertaken in both the developed and emerging market economies in response to the global financial crisis and the ensuing economic slowdown. In the wake of the financial and economic crises, monetary policy was considerably eased with interest rates down to record levels in most advanced and emerging markets, and central bank balance sheets expanded considerably to accommodate the stimulus packages. The key concerns, however, remain the speed and sustainability of the recovery process which is progressing at varying degrees across the different regions.
The recovery in the advanced economies is still weak with real output projected to remain below its pre-crisis level until late 2011. However, growth in the emerging and developing economies is expected to recover faster given their stronger initial economic conditions and swift policy responses.
The MPC also noted the continuing rebound in commodity prices, particularly crude oil prices, which is helping to support growth in commodity producing regions, including Nigeria. However, the inflation risk of the rebound in energy prices appears to be mitigated by the subsisting low levels of capacity utilization, weak private demand and well-anchored inflation expectations.
The MPC further observed that while financial markets have recovered remarkably faster than expected, financing conditions, especially for businesses and firms, were likely to remain weak in the near-term as financial institutions continue to maintain a cautious approach to credit extension. It noted the relative stability prevailing in most segments of the market and the need for policies to ensure their sustenance.
Key Domestic Macroeconomic and Financial Developments
Output and Prices:
The robust output growth recorded in 2009 continued in 2010. Provisional data from the National Bureau of Statistics (NBS) indicates that real Gross Domestic Product (GDP) grew by 6.68 percent in the first quarter of 2010, down from 7.44 per cent in the fourth quarter of 2009, but up from the 4.50 per cent recorded in the first quarter of 2009. The growth was largely driven by the non-oil sector. Overall GDP growth for 2010 was projected at 7.53 per cent which is higher than the revised estimate of 6.66 per cent recorded in 2009. Quarterly GDP growth rates of 7.24, 7.36 and 8.51 per cent was projected for the second, third and fourth quarters of 2010, respectively.
The non-oil sector was expected to remain the main driver of overall economic growth, with agriculture, wholesale and retail trade, and services contributing 2.01 per cent, 2.10 per cent and 2.09 per cent, respectively. The Committee noted that the impressive growth forecasts reflected prospects for moderate rainfall in 2010, which would boost crop production and the relative peace in the Niger-Delta, which could enhance crude oil and natural gas production.
The year-on-year headline inflation rose from 12.0 per cent in the last quarter of 2009 to stabilize at 12.3 per cent in January and February 2010. Similarly, core inflation stabilized at 10.1 per cent in January and February 2010, up from 9.7 per cent recorded in the last quarter of 2009. The stability in the domestic price level could be attributed to a number of factors, namely, the continuing monetary contraction, the delay in the passage of the 2010 federal budget and the improvement in the supply of petroleum products, amongst others. Notwithstanding these developments, the Committee restated its earlier position that the threat of inflationary pressure in the near-to-medium term remains real, but that it will continue to monitor price developments in the months ahead with a view to creating an enabling environment for sustainable growth and employment.
Monetary, Credit and Financial Market Developments:
Provisional data showed that relative to end-December 2009, broad money (M2) declined by 0.23 per cent at end-February 2010, which, when annualized  represented a decline of 1.38 per cent, compared to the indicative growth target of 29.26 per cent for 2010 and the annualized M2 decline of 5.16 per cent in the corresponding February of 2009. The reserve money (RM), which stood at N1,668.50 at end-December 2009, declined to N1,574.33 and N 1,636.60 billion in January and February 2010, respectively, but rose to N 1, 782.21 billion in March 2010. As at April 8, 2010, the RM level of N1, 710.0 billion was just below the provisional 2010 second quarter indicative benchmark of N1, 872.80 billion by N162.76 billion or 8.69 per cent.
Available data showed that in February 2010, aggregate domestic credit (net) grew by 2.66 per cent over the December 2009 level, and by 15.96 percent when annualized, which is higher than the annualized decline of 55.6 per cent recorded in the corresponding period of 2009, but below the 2010 indicative target of 55.54 per cent. Credit to government (net), which grew by 17.84 per cent, was the major contributor to the growth in aggregate credit (net) in February 2010, as credit to the private sector declined, by 1.97 per cent. The annualized growth rate of credit to the private sector as at February 2010, was -11.82 per cent, as against the provisional benchmark of 31.54 per cent for 2010. The substantial growth of credit to government (net) reflects the risk aversion of the DMBs and suggests the possible crowding out of private sector credit.
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