Money, Credit, Foreign Trade and Exchange Policy Guidelines for Fiscal Years 2016/2017


Monday, June 27 2016 4:18PM /CBN


The conduct of monetary policy by the Central Bank of Nigeria (CBN) in 2016/2017 will remain anchored on the Medium-Term Framework. The justification for such framework is based on the premise that monetary policy impacts its ultimate goal with a lag.

The framework would thus enable the Bank avoid over-reaction to temporary shocks and time inconsistency problems associated with frequent changes in policies. The 2016/2017 Monetary, Credit, Foreign Trade and Exchange Policy Guidelines covers the period January 2016 to December 2017 and is designed to sustain the gains that the Bank has recorded with respect to price stability.

This circular outlines the monetary, credit, foreign trade and exchange policy guidelines applicable to banks and other financial institutions under the supervision of the CBN in 2016/2017.

The guidelines may be fine-tuned by the Bank to take account of new developments in the domestic and global economies in the period without prior notice. Such amendments shall be communicated to the relevant institutions/stakeholders in supplementary circulars. This document is organized into five Sections.

Following this introduction, Section Two reviews developments in the domestic economy in 2015 as a background to the policy measures in 2016/2017. Section Three outlines the monetary and credit policy measures and guidelines for the programme period.

In Section Four, the applicable foreign trade and exchange policy measures are presented, while Section Five focuses on consumer protection issues. The annexure contains prudential guidelines, relevant reporting formats and referenced circulars.

Review of the Policy Environment and Macroeconomic Developments In 2015

The Policy Environment
The World Economic Outlook (WEO) October 2015 revised global output for fiscal 2015 to 3.10 per cent, slightly lower than 3.40 per cent recorded in 2014. Growth in emerging and developing economies is expected to slow to 4.00 per cent in 2015, reflecting the dampening impact of declining commodity prices, depreciating currencies and stiffer external financial conditions.

The outlook for subSaharan Africa suggests a more subdued growth as lower international oil prices weakens activity in oil-exporting economies. Challenges to the domestic economy included heightened insecurity, exchange rate depreciation pressures, rising inflation, declining crude oil prices, leading to lower accretion to reserves and substantial decline in government revenue, fiscal crisis at the sub-national level of governances, others included high production cost, infrastructure deficit, low supply of foreign exchange and hike in electricity tariffs.

Consequently, GDP growth declined from 5.94 per cent as at endDecember 2014 to 3.96 per cent in Q1 of 2015 and further down to 2.35 per cent in Q2 of 2015. It, however, increased to 2.84 per cent at Q3 2015. Monetary policy was restrictive for the greater part of the year.

However, in November 2015, the Monetary Policy Committee (MPC) reduced the Monetary Policy Rate (MPR) from 13.00 per cent to 11.00 per cent with asymmetric corridor of +200 basis points and -700 basis points around the MPR, for the Standing Deposit Facility and Standing Lending Facility, respectively.

Open market operation (OMO) was the main instrument of monetary policy, complemented by cash reserve requirements, standing facilities and discount window operations. Liquidity ratio of 30.00 per cent, 20.00 per cent and 10.00 per cent was retained for commercial, merchant and non-interest banks, respectively, CRR on public and private sector deposits was harmonised to 31.00 per cent from their previous levels of 75.00 and 20.00 per cent, respectively.

The CRR was reduced to 25.00 per cent in September 2015 and further to 20.00 per cent in November 2015. The short term interest rates reflected the liquidity conditions and the monetary policy stance of the Bank in 2015.

The interbank call and Open Buy Back (OBB) rates which stood at 24.30 and 22.28 per cent at endDecember 2014 gradually decreased to 12.59 and 14.41, 10.85 and 10.65, 8.12 and 10.43, and 0.50 and 0.01 per cent, at end-March, endJune, end-September and end-December 2015, respectively. The downward trend in the interbank call and OBB rates reflected the liquidity surfeit in the banking system during the period.

Domestic Macroeconomic Developments
Economic growth in Nigeria slowed from the Q1 2015 level of 3.96 per cent to 2.35 per cent at end-June 2015 and then hinged up to 2.84 per cent at end-September 2015. The non-oil sector grew by 3.46 per cent in the second quarter of 2015 but grew at a lesser rate of 3.05 per cent at end-September 2015.

That was 4.45 percentage points lower from the corresponding quarter in 2014 and marginally lower from the Second Quarter of 2015. In real terms, the Non-Oil sector contributed 89.73 per cent to the nation's GDP, marginally higher than the contribution in the Quarter of 2014 (89.55 per cent), but lower from the Second Quarter of 2015 (90.20 per cent). The major non-oil growth sectors were Agriculture (17.89 per cent), Trade (18.87 per cent), and Information& Communication (13.89 per cent), Manufacturing (9.29 per cent) and Real Estate (8.69 per cent).

Average crude oil output from January to December 2015 was 4 Central Bank of Nigeria January 2016 Monetary, Credit, Foreign Trade and Exchange Guidelines for Fiscal Years 2016/2017 estimated at 2.04 million barrels per day (mbd), representing a decrease of 7.69 per cent, compared with an average of 2.21 mbd recorded in 2014. Consequently, total crude oil production was estimated at 515.7 million barrels (mb), while allocation for domestic consumption was 0.45 mbd or 164.25 mb.

The average spot price of Nigeria's reference crude, the Bonny Light (370 API), fell from US$100.40 per barrel in 2014 to US$50.80 per barrel in 2015, representing a decrease of 49.40 per cent. Inflationary pressures in the first half of 2015 continued through much of the year.

The year-on-year headline inflation, which stood at 8.00 per cent at end-December 2014, persistently rose to 9.55 per cent at endDecember 2015. The year-on-year core and food inflation for endDecember 2015 stood at 8.75 and 10.59 per cent, respectively. The provisional cumulative Federal Government retained revenue (Jan – Nov, 2015) was N2,844.97 billion while the cumulative aggregate expenditure for the period stood at N3,979.61 billion, resulting in a deficit of N1,134.64 billion for the period. Money supply grew at end-December 2015 relative to end-December 2014.

The broad measure of money supply (M2), at N20,029.83 billion, rose by 5.90 per cent at end-December 2015, reflecting the 12.13 and 1.08 per cent increase in domestic credit assets (net) and other assets (net) of the banking system, which was moderated by the 18.71 per cent decline in forienn assets (net). Also, narrow money (M1) rose by 24.14 per cent to N8,571.70 billion, as against the decline of 1.82 per cent to N6,904.79 billion at end-2014.

Aggregate banking system credit to the domestic economy grew by 12.13 per cent at end-December 2015, to N21, 612.45 billion from the level of N19, 273.76 billion at end-December, 2014. The increase in net domestic credit reflected the significant growth of 151.56 per cent in net claims on the Federal Government and the 3.29 per cent growth in claims on the private sector.

Reserve money, at N5, 812.74 billion at end-December 2015, fell by 1.99 and 18.08 per cent below its level at end-December 2014 and the indicative benchmark of N7,095.49 billion for the fourth quarter 2015. The development reflected wholly, the 18.71 per cent decline in net foreign assets of the CBN as net domestic assets grew significantly.

The external sector deteriorated from its position in 2014 as reflected in the overall and current account balance deficit of 3.50 and 3.90 per cent of GDP. The development was attributed to the continued decline in crude oil prices, capital reversals due to uncertainties that surrounded the 2015 general elections.

External debt stock rose to US$10.32 billion or 2.30 per cent of GDP as at June 2015, representing an increase of 6.20 per cent above the level at end-December 2014. The external sector remained highly susceptible to shocks due to the continued exposure to huge inflow of short-term capital and non-diversification of the economy.

As a result of demand pressure in the foreign exchange market, reduced portfolio inflow and the low accretion to external reserves, the exchange rate of the naira depreciated during the review period, reflecting largely, the adverse effect of low accretion to external reserves. Consequently, the Bank closed the retail Dutch Auction System (rDAS) window of the foreign exchange market in February, 2015 and all demand for foreign exchange were channeled through the interbank market.

In addition, the Bank reviewed downwards, the limit on the usage of naira denominated cards for transactions abroad, and excluded 41 items that could be produced locally, from being funded at the foreign exchange interbank market.

Exchange rates at the interbank and BDC segments of the foreign exchange market at endDecember 2015 averaged N196.10/US$ and N226.04/US$, representing 18.32 and 31.55 per cent depreciation, respectively, compared with the levels at end-December, 2014, respectively.

Gross external reserves as at end-December, 2015 stood at US$28.29 billion compared with US$34.24 billion recorded at end-December 2014. The observed decrease in foreign reserves was due mainly to a fall in crude oil receipts occasioned by the fall in the price of crude oil at the international market.

Macroeconomic Issues and Policy Challenges in 2014/2015

Policy Challenges

The moderation in global output growth witnessed in the first two quarters of 2015 is expected to continue in 2016, as key drivers of the slowdown, notably; sluggish recovery in the euro area with modest performance in Japan and China. The IMF projected global output growth at 3.10 per cent for 2015, lower than the 3.40 per cent projected in 2014.

The prospects for the advanced economies show marginal improvements, mainly due to gradual recovery in aggregate demand while growth in emerging markets and developing economies is projected to be lower, primarily due to falling commodity prices and declining global demand.

The continued decline in the price of oil in the international market, the debt crisis in the Euro area and heightened geo-political tensions in the Middle East and North Africa would remain potential threats to the domestic economy in the near to medium-term.

The lifting of the Iranian oil embargo, shale oil exploration in the U.S and the discovery of new oil fields in commercial quantities in Africa constitute downside risks to crude oil prices with the attendant adverse effects on government revenue in 2015 and 2016.

Monetary conditions are expected to remain loose in most advanced economies in the immediate- to medium-term to support the recovery process. The Bank of England is not considering raising its policy rate until unemployment falls to 7.00 per cent, while the Bank of Japan is likely to continue with its quantitative easing (QE) until inflation rises to 2.0 percent.

The ECB is continuing the QE by increasing the amount of assets purchase and extending the duration to 2018. On the domestic front, containing inflation and demand pressures at the foreign exchange market remain the major challenge to monetary policy during the programme period.

Also, persistent decline in international oil price and its effects on government revenue necessitating continued government borrowing remains a challenge. Other challenges which include poor state of infrastructure such as road network, rail system, electricity, and water supply remained major macroeconomic concerns.

The economy is further constrained by a weak technological base and high cost of domestic manufactured products, coupled with stiff competition from cheap foreign goods, low level of manufactured exports and the low utilization of local raw materials by industries, as well as insecurity of life and property.

Fiscal sustainability remains a major concern, particularly, excessive dependence on oil as a major source of government revenue and continued borrowing to finance recurrent expenditure.

Outlook for the Domestic Economy in 2016/2017

The outlook for the domestic economy in 2016/2017 is expected to be mixed given the sluggish global output growth outlook, which is expected to slow the demand for Nigeria's exports. Nigeria's economic growth is projected to be driven mainly by the non-oil sector.

Government efforts to spur growth in the manufacturing and agricultural sectors are expected to contribute to improved economic performance in the 2016/2017 but this would be tapered by resource constraint.

Specifically, the power sector, tax and import duty reforms are expected to support agricultural and manufacturing value chains, and subdue demand-linked inflationary pressures. Downside risks to the growth outlook are security challenges, low demand for Nigeria's exports due to the crawling global economic growth, and the sovereign debt crisis in the euro area.

The agricultural sector is expected to drive growth in the medium term through increased activities and attainment of self-sufficiency in agricultural production. This is hinged on sustained implementation of appropriate policies, incentives and programmes, favourable climatic conditions, local demand for agricultural produce and increased private sector investment. These would boost agricultural production and moderate inflationary pressures.

Inflation is expected to remain largely stable, as appropriate policy measures continue in 2016/2017. However, demand pressure at the foreign exchange market, high liquidity surfeit, low agricultural output growth and lingering fuel scarcity consititute downside risks to domestic price developments in 2016.

While recovery in the advanced economies is expected to improve the demand for Nigeria's exports, the demand for Nigeria's crude oil is projected to remain weak in 2016/2017, owing largely to gas and shale oil exploitation in the US, which has reduced Nigeria's crude oil exports to that country.

Other factors include Saudi Arabian policy to over supply oil into the market to depress oil prices and make future production of shale oil uncompetitive, the after effect of the Iranian peace deal as well as investment in green energy.

On the supply side, oil production capacity growth is expected to rise on the assumption that the Petroleum Industry Bill (PIB) is signed into law. This legislation is expected to stimulate investment in the upstream and mid-stream of the oil industry.

With the renewed anti-corruption campaign, reduction of leakages in government revenues, fiscal consolidation including the operationalisation of the Treasury Single Account (TSA), among others, the Nigerian economy looks fairly promising in 2016.

Thus, there are prospects for improvement in non-oil tax revenue predicated on expanded tax/revenue base and the efficient collection machinery which will have significant effect on the economy. The power sector reform, culminating in the privatization of the Power

Holding Company of Nigeria (PHCN), is expected to improve efficiency in power generation and distribution, thereby reducing the cost of doing business. This should lead to expansion in production, increased lending, investment growth, employment generation and poverty reduction. In addition, current efforts at improving transport network would enhance economic activities.

Premised on the World Bank forecast for marginal increase in crude oil prices, the outlook for the external sector for 2016 remains promising. Foreign exchange demand pressure is expected to continue through 2016 as the alternatives are few as the economy establishes the necessary framework and adjustments to new realities.

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