The Monetary Policy Committee met on May 21 and 22, 2012 with all members in attendance. The Committee reviewed the conditions and challenges that confronted the domestic economy during the first five months of 2012, against the backdrop of international economic and financial developments; to reassess the monetary policy options in the near-to-medium term.

The International Economic Situation
The Committee noted that the global economy continued to experience sluggish recovery as the downside risks remained elevated owing to the lingering euro zone debt crisis, weak balance sheet positions of euro zone financial institutions, rising unemployment in most advanced economies, geo-political uncertainties affecting global oil prices and the legacy effects of the global financial crisis. Growth in the advanced economies is estimated to decelerate from 1.6 per cent in 2011 to 1.4 per cent in 2012. US output slowed from an annual rate of 3.0 per cent in Q4 2011 to 2.2 per cent in Q1 of 2012. The slow US recovery was attributed to the fall in business spending from 5.2 per cent in Q4 of 2011 to 2.1 per cent in Q1 of 2012.

In the Euro area, real GDP growth is projected to contract from 1.4 per cent in 2011 to -0.3 per cent in 2012, owing to the lingering effects of the sovereign debt crisis and the attendant fragility of the financial system. Although the effects of the high commodity prices and supply disruptions from the Japanese earthquake had diminished, the effect of the Greek bailout and the failure of fiscal retrenchment have been magnified by the political impasse associated with the discussions on Greek debt exit strategy. A domino effect on other debt-ridden euro zone members and possible bank runs should not be ruled out entirely in the euro area, if political support is not provided for the already agreed fiscal compact. European Governments are confronted with uncertainties that are coloured by both political and economic realities. The UK, Denmark and Czech Republic, with own national currencies outside the 17-nation Euro zone have been declared to be officially in recession. There are no immediate plans in the UK for abandoning austerity, and it is not yet clear if the tight fiscal stance is compatible with growth aspirations.

In the leading emerging economies, there are indications of a significant slowdown in economic activity. China has revised its growth targets for 2012 downwards, from 8.0 per cent to 7.5 per cent, compared with 9.2 per cent in 2011. Growth in Indonesia was projected to decelerate to 6.10 per cent from 6.50 per cent in 2011; while growth in Malaysia would remain unchanged at 4.40 per cent. India’s GDP growth in 2012 may not be significantly higher than the 6.50 per cent in 2011. On balance, growth in the BRICS countries is projected to decelerate as asset and currency markets reflect price fluctuations while banks and other financial institutions are under increased stress. Reflecting the slowdown in economic activities, crude oil prices in the international market have shown signs of declining as supply in 2012 is forecast to exceed demand.

In sub-Saharan Africa, inflation is trending upward while growth prospects are optimistically measured on the back of the resilience of the domestic economy in recent times. However, the new risks posed by the recession in the euro area and Chinese slowdown, in addition to the lag impact of the legacy factors associated with the financial crisis, could somewhat dampen the growth prospects. In addition, military coup d’états in some West African Countries and continuing pockets of political instability remain a source of concern.
The Committee noted the general slowdown in the global economy and the attendant softening in commodity prices which present uncertainties to the fiscal outlook, trade, and financing flows to the domestic economy, noting the very dark clouds over global economic recovery in 2012. The growing trade imbalances and threats to financial flows could weaken the external and fiscal positions.

Domestic Economic and Financial Developments
Output
Indications are that the robust output growth recorded in 2010 and 2011 may not be replicated in 2012. Provisional data from the National Bureau of Statistics (NBS) indicate that real gross domestic product (GDP) in Q1 grew by 6.17 per cent, down from 7.68 per cent in the fourth quarter of 2011 and 7.13 per cent in the corresponding period of 2011. This continues a disturbing and unbroken trend of decline in growth going back to Q1 2010. Overall, real GDP growth for fiscal 2012 is projected at 6.50 per cent, down from 7.45 per cent in 2011. Crude oil production was estimated to have declined by 2.32 per cent in Quarter 1, 2012 compared with a marginal increase of 0.05 per cent in the corresponding period of 2011. Non-oil real GDP growth estimated at 7.93 per cent in Q1 of 2012 was much lower than the 8.73 per cent recorded in Q1 of 2011. Growth in agriculture decelerated in Q1 to 4.15 per cent compared with the 5.54 per cent in Q1 of 2011 and 5.74 per cent in Q4 of 2011. Agricultural growth rate has not been this slow in the last seven years at least.

In general, the paradox of rising poverty incidence in the face of impressive economic growth further reinforces the Committee’s call for the implementation of the appropriate structural reforms in the key sectors notably agriculture, power and petroleum sectors, to stimulate productivity.

Prices
As anticipated by the Committee in earlier meetings, inflationary threats re-emerged in Q1 2012, having moderated in Q4 2011. The year-on-year headline inflation which was 12.6 per cent in January 2012 moderated to 11.9 per cent in February but rose to 12.1 and 12.9 per cent in March and April 2012, respectively. Similarly, food inflation which was 13.1 per cent in January 2012 fell to 9.7 per cent in February but increased to 11.8 per cent in March before declining slightly to 11.2 per cent in April 2012. Core inflation, which declined to 11.9 per cent in February from 12.7 per cent in January, rose sharply to 15.0 per cent in March before moderating to 14.7 per cent in April 2012. On a month-on-month basis, inflationary pressure was rather benign between March and April, and the rise in year-on-year figures largely reflects the base effects in January from fuel subsidy removal. Overall inflation numbers remain within our forecast range.

The proposed upward review of electricity and import tariffs on wheat and rice as well as the rising global food and energy prices could further put upward pressure on prices in the near-term. Notwithstanding this, the lingering impact of the aggressive monetary tightening measures undertaken since 2011 and the general slow growth in monetary aggregates and the impact of rising fuel prices in consumer spending, may moderate the pressure on domestic prices in the near term. Staff projections indicate that headline inflation is projected to peak around 14.5 per cent in July 2012 before moderating steadily till the end of the year.

Monetary, Credit and Financial Markets’ Developments
Broad money supply (M2) grew by 0.01 per cent in April 2012 when compared with the level at end-December 2011. Relative to the level at end-December 2011, aggregate domestic credit (net) declined by 2.04 per cent in April 2012, translating to a decline of 6.12 per cent on annualized basis. The decline in aggregate credit during the period was mainly due to the decline in credit to the core private sector. Credit to the core private sector declined by 0.22 per cent or 0.66 on annualized basis while credit to Government (net) declined by 58.03 per cent in Q1 of 2012. Despite the decline in credit to core private sector, overall credit to the private sector rose marginally by 0.06 per cent or 0.18 per cent on annualized basis. This is indicative of a disturbing trend of growth in lending to States and Local governments at the expense of the core private sector.
Following these developments, the Committee reiterated its earlier advice that the Bank should put in place appropriate measures that would enhance the flow of credit to the private sector, in particular to those activities that have the potential of inducing growth in a relatively short period of time.

The Committee noted that since its meeting in March 2012, money market interest rates remained anchored around the upper band of the interest rate corridor.
The interbank opened in March at 15.42 and 14. 00 per cent, closed at 14.66 and 14.34 per cent, respectively, on May 17. The medium to long term yields have also eased moderately during the period. The Committee further noted a slight reduction in the spread between the deposit and lending rates. The average maximum lending rate rose to 23.31 per cent in April 2012 from 23.21 per cent in March while the consolidated deposit rate rose to 3.93 per cent from 3.79 per cent during the same period. Thus, the spread between the average maximum lending rate and the consolidated deposit rate narrowed further to 19.38 per cent in April 2012 from 19.42 per cent in March 2012.

External Sector Developments
Foreign exchange reserves stood at US$36.66 billion at end-April 2012, representing an increase of US$4.02 billion or 12.32 per cent above the level of US$32.64 billion at end-December 2011. Reserves increased to US$38.72 billion as at 17th May 2012, representing 18.63 per cent increase over the level in December 2011. This increase reflected generally favourable commodity prices and inflows of capital in response to the removal of restrictions on repatriation and high domestic interest rates, as well as stable exchange rates. The Committees noted the assurances that total “hot money” in the system is under strict surveillance and the Bank is satisfied that the figure of US$5 billion does not pose a threat to financial stability in view of the current level of reserves. The exchange rate at the wDAS-SPT opened at N157.62/US$ on March 20, 2012 and closed at N157.26/US$, on May 17, 2012 indicating an appreciation of N0.36k or 0.23 per cent. At the interbank segment, the selling rate opened at N157.70/US$ and closed at N158.80/US$, representing a depreciation of N1.10k or 0.7 per cent. At the BDC segment of the foreign exchange market, the selling rate opened at N160.00/US$ and closed at N159.00/US$, representing an appreciation of N1.00k or 0.06 per cent during the same period.

The Committee noted the decline in the premia between the rates at the wDAS and the interbank and between the wDAS and the BDCs towards the end of the review period. While noting the need to put in place policies that would attract capital inflows necessary to build up adequate external reserves, the Committee urged the Bank to sustain and complement existing measures to discourage speculative demand for foreign exchange. The Committee commended the Bank for taking proactive steps to intervene in the interbank market to maintain the exchange rate within the target band.
The Committee also commended the efforts of the Bank in monitoring the foreign exchange demand and capital inflows into the economy with a view to ring fencing the economy from external shocks and other vulnerabilities; and in building the stock of reserves to meet genuine demand for foreign exchange. The Committee expressed satisfaction over the orderliness in the foreign exchange market and the stability of the exchange rate. It also encouraged the Bank to continue its close surveillance of activities in the foreign exchange market, given the current developments in the international currency and financial markets.

The Committee’s Considerations
The key concerns noted by the Committee were:
1.Slowdown in global economic activities, particularly, in the US, Europe and China
2.Slowdown in domestic output, especially, sharp decline in agricultural output and oil and gas sectors
3.Possible softening of crude oil prices in international markets with potential fiscal revenue loses and the likely pressure on the foreign exchange market and exchange rate
4.The inflationary threat that has re-surfaced in the first quarter of 2012, after having moderated in the fourth quarter of 2011
5.Imminent increase in electricity tariff which may lead to inflationary pressures
6.High interest rates in the face of declining GDP output; and
7.Security concerns in the country
8.Slow pace of structural reforms induced by failure to improve power supply, establish and implement reliable PPP framework that can attract funding for infrastructure, and delay in passing the PIB

The Committee noted that since its meeting in March 2012, the uncertainty surrounding the global economy remained elevated owing to continued economic slowdown in advanced and major emerging economies as well as the financial stress in key advanced economies. These developments will impact the domestic economy through the trade and financial flow channels, weakening the external and fiscal positions. Monetary policy on its own has limitations with respect to inducing long-term growth which is dependent on fiscal and structural measures relating to petroleum, power and infrastructure sectors. This Committee reiterates the need to recognize the short-term nature and limits of monetary policy. The growth and development of the Nigerian economy will continue to be at risk so long as progress is not made in structural reforms.

Furthermore, the Committee reassessed the recently released provisional output data which indicated a slowdown in GDP growth. It noted that the huge drop in agricultural output was traced to the following factors: displacement of farmers in the northern part of the country owing to security situation, inadequate rainfall and increased production cost due to the partial removal of fuel subsidy in January 2011. It also noted the decline in oil and gas production and the recent revelation by the oil Minister of the loss of over US$7 billion of revenues due to oil theft. It concluded that the interest rate movements will not be effective in stimulating growth under such circumstance and urged government to fast-track the agricultural transformation initiative and to strengthen fiscal controls over the oil industry.

The Committee also noted that while the lingering impact of the aggressive monetary tightening measures undertaken since 2011 served to moderate the pressure on domestic prices in the near term, the effect of the global economic and financial developments on exchange rate and domestic prices could be significant in the coming months. The international oil price output and the lag in oil supplies in relation to demand seemed to indicate the onset of additional pressures on foreign exchange reserves, exchange rates and prices. These developments require that the power and petroleum sector reforms as well as infrastructure investments need to be scaled up as quickly as possible. These should complement measures to enhance credit flows to the private sector, in particular to growth inducing activities, so that the likely pressures on interest rates are addressed.

The Committee welcomed the efforts being made to improve fiscal consolidation. Government revenues have improved in Q1 in relation to government expenditures, resulting in notional fiscal surplus. The Committee encourages that these efforts are furthered, especially in view of the growing domestic public debt stock. The Committee also noted the very healthy collaboration that has been established between the fiscal and monetary authorities and urged the Bank to continue supporting the fiscal authorities in their pursuit of very difficult reforms. The Committee evaluated the policy options available to it and the analysis of alternative scenarios and agreed that monetary policy should contribute to the consolidation of a positive and stable longer-term macroeconomic environment conducive for growth and development. It was in the Committee’s view that at this point in time, the trajectory of prices and output is dependent on fiscal and structural policies than on the monetary stance. The sluggish growth in credit, stable exchange rate, healthy reserve position and benign month-on-month inflation do not suggest a need for further tightening at this point. Also, the underlying reasons for slowdown for agric and oil GDP growth will not be addressed by monetary easing.
Decision

The Committee, therefore, decided by a unanimous vote to maintain the current stance of monetary policy without discounting the possibility of changing it, should economic and financial conditions warrant so in the near term. As such, the Monetary Policy Rate (MPR) is retained at 12.0 per cent with the symmetric band at +/- 200 basis points. The Cash Reserve Requirement (CRR) and Liquidity Ratio (LR) also remain unchanged.
Sanusi Lamido Sanusi, CON Governor, Central Bank of Nigeria