clean/cb_requests/06b007d9fbfe9a2bf49e4ed2370d9068.json

{"doc_id": "06b007d9fbfe9a2bf49e4ed2370d9068", "text": "CBN Monetary Policy Review \n \n \n1 \n \n \nCHAPTER ONE \n \n1.0 \nOVERVIEW \n \nn the first half of 2015, the Bank‘s \nmonetary policy was shaped largely \nby continuing market expectations \nof the normalization of US monetary \npolicy, weak global growth and falling \ncrude oil prices in the international \nmarket with its negative impact on \nforeign exchange reserves and the \nexchange \nrates, \nas \nwell \nas \nthe \nheightened \nrisks \nfrom \ngeopolitical \ntensions in some part of the world. The \nfall in the level of external reserves and \nthe depreciation of the exchange \nrate, as well as the liquidity impact of \nelection-related \nand \npost-election \nspending, put immense pressure on the \ndomestic price level, despite the tight \nmonetary policy stance of the Bank. \nConsequently, headline inflation rose \nto 9.20 per cent in June 2015 from 8.0 \nper cent in December 2014. The price \nof food remained the major driver of \nheadline inflation in the first half of \n2015. Other factors included the prices \nof housing; water; electricity; transport; \nclothing and foot wear. \n \nThe lower oil prices in the international \nmarket, \ncoupled \nwith \nreduced \ndemand for Nigeria‘s crude oil abroad \nled to reduced accretion to the \nforeign \nreserves. \nThe \nsustained \ndemand \npressure \non \nthe \nforeign \nexchange \nmarket \nfollowing \nthe \nreversals of capital flows from the \nnormalization of US monetary policy, \ndespite the increased funding of the \nmarket, led to the depreciation of the \nexchange rate. Data from the National \nBureau of Statistics (NBS) showed that \nthe Gross Domestic Product (GDP) \nmoderated to 2.35 per cent (year-on-\nyear) in the second quarter of 2015, \nfrom 3.96 per cent and 6.54 per cent in \nthe \npreceding \nand \ncorresponding \nquarters of 2014, respectively. The \ndevelopment was partly attributed to \nreduced public spending due to lower \ncrude oil prices and receipts. The \nsectoral contributors to the second \nquarter GDP growth were services, \nagriculture and trade with 1.61, 0.73 \nand \n0.85 \npercentage \npoints, \nrespectively. \n \nThere was intense pressure on the \nexchange rate in all segments of the \nforeign exchange market during the \nreview period as a result of the crash of \noil prices in the international market, \nlower demand for Nigeria‘s crude \nabroad, \ndepletion \nof \nthe \nforeign \nexchange reserves, and expectation \nof monetary policy normalization in the \nUS. Consequently, the Bank in its effort \nto stem speculative activities, closed \nthe official foreign exchange window \nbut continued to intervene at the \ninterbank foreign exchange market. \nThis \nwas \nfollowed \nup \nwith \nadministrative restrictions on access to \nforeign exchange for the importation \nI \n \n \n \n \n CBN Monetary Policy Review \n \n \n2 \n \n \nof a list some items, which could easily \nbe produced domestically. \n \nThe Nigerian financial landscape was \nsignificantly \ninfluenced \nby \nglobal \neconomic developments, such as the \ngradual \nnormalization \nof \nthe \nUS \nmonetary policy, and the declining oil \nprices \nprompted \nby \nweak \nglobal \neconomic growth as well as glut in \ncrude oil supply at the international \nmarket. The tapering of QE3 and its \nconclusion in October 2014, led to a \nredirection of global capital flows out \nof emerging and developing markets, \nowing largely to rising sovereign risk in \nthese countries, and the prospect of \nimproved interest rate regime in the \nU.S. \n \nThe \nchoice \nof \nmonetary \npolicy \ninstruments in the review period was \nguided by the objectives of price \nstability and overall health of the \nmacroeconomy. \nThe \nBank, \naccordingly, deployed a range of \nmonetary policy instruments including: \nthe monetary policy rate (MPR), Cash \nReserve Ratio (CRR), Open Market \nOperations \n(OMO) \nand \nDiscount \nwindow operations. During the period, \nthe MPR was kept unchanged at 13 \nper cent with the symmetric corridor of \n+/- 200 basis points. The Monetary \nPolicy Committee (MPC) harmonized \nthe CRR on both private and public \nsector deposits at 31.0 per cent to \nimprove the efficacy of monetary \npolicy, curtail abuses, stem moral \nhazards \nand \nthe \ntendency \nof \noverheating \nthe \neconomy. \nThe \nLiquidity \nRatio \nwas \nalso \nkept \nunchanged at 30.0 per cent to address \nliquidity surfeit in the banking system. \n \nOMO remained the key tool of liquidity \nmanagement in the review period. \nActual \nOMO \nsales \namounted \nto \nN4,261.72 \nbillion, \ncompared \nwith \nN3,937.76 billion in the second half of \n2014, and N4,484.94 billion in the \ncorresponding period of 2014. As a \ncomplement to OMO, the CRR was \nalso used to manage liquidity in the \nsystem in order to reduce volatility and \npressure on the exchange rate. The \nperformance of monetary aggregates \nin the first half of 2015 was weaker than \nprojected, partly due to the sustained \ntight monetary policy stance and \nlower fiscal injections arising from \nfalling crude oil prices. Also, there was \na significant increase in credit to \ngovernment, invariably crowding out \nprivate sector credit. \n \nThe money market remained active \nwith transactions in CBN bills and \ngovernment securities in the first half of \n2015. Money market interest rates were \nlargely influenced by changes in the \nCRR, FAAC statutory disbursements \nand NTB maturities/auctions. The OBB \nsegment witnessed greater activity \nrelative to the interbank call segment, \ndue to enhanced confidence of DMBs \nin the collaterized segment of the \nmarket from the migration to the new \n \n \n \n \n CBN Monetary Policy Review \n \n \n3 \n \n \nRTGS and Scripless Security Settlement \nSystem (S4). Nigeria‘s reference rate, \nthe NIBOR, was relatively stable across \ntenors in the review period. \n \nThe performance of the capital market \nweakened in the review period when \ncompared with the second and the \ncorresponding halves of 2014. The all-\nShare Index (ASI) decreased by 3.46 \nper cent to 33,456.83 at end-June \n2015, from its level of 34,657.15 at end-\nDecember 2014, and by 21.25 per \ncent, year-on-year. The decline was \nattributable \nto \nuncertainties \nsurrounding the global and domestic \neconomy as well as the outcome of \nthe 2015 general elections, lower oil \nprices, and weak corporate earnings. \n \nThe Federal Government of Nigeria \n(FGN) bonds continued to dominate \nthe fixed income securities market in \nNigeria. Sub-national government and \ncorporate \nbonds \nwitnessed \nsome \nactivities, with the corporate bonds \nsegment having the least share by \nmarket volume. The yield on the 10-\nyear \ndollar-denominated \nbond \ndecreased to 5.91 per cent at end-\nJune 2015, from 6.23 per cent at end-\nDecember 2014 but was 4.80 per cent \nat end-June 2014. The development \nwas attributed to improved investor \nconfidence \nfollowing \na \nsuccessful \ntransition \nprogramme \nto \na \nnew \ngovernment in the country. \n \nHeadline \nInflation \nremained \nwithin \nsingle digit in the first half of 2015. It has \nbeen in single digit for thirty (30) \nconsecutive months since January \n2013, reaffirming the effectiveness of \nthe sustained tight monetary policy \nstance. \nHeadline \ninflation \nwas, \nhowever, projected to accelerate to \n9.6 per cent in 2015 and 10.7 per cent \nin 2016 (IMF). Staff estimates project a \nrise in year-on-year headline inflation \nto \n9.3, \n9.8 \nand \n10.0 \nper \ncent, \nrespectively in August, September, and \nOctober, \nrespectively, \nwhich \nmay \ndecline to 9.9 per cent in December \n2015. \n \nOutput growth slowed to 2.35 per cent \nin the second quarter of 2015 from 3.96 \nand 6.54 per cent in the preceding \nand corresponding quarters of 2014, \nrespectively. Overall, the economy is \nprojected to grow by 5.5 per cent in \n2015 (FGN 2015 Budget), which is \nbroadly consistent with the African \nDevelopment \nBank \n(AFDB) \ngrowth \nforecast of 5 per cent. The IMF and \nWorld Bank, however, have a more \nsubdued growth forecast of 4.5 and 5.0 \nper \ncent \nin \n2015 \nand \n2016, \nrespectively, due to weaker growth \noutlook of the global economy and oil-\nprice volatility. Staff estimates suggest \nthat growth may regain momentum in \nthe third quarter of 2015 with the onset \nof the rainy season that could boost \nagricultural \nproduction. \nFurther, \nimprovement in growth outlook would \nbe hinged on stronger fiscal outlook, \n \n \n \n \n CBN Monetary Policy Review \n \n \n4 \n \n \neffort to stabilize the economy, address \nsecurity challenges and support the \nnon-oil sector. \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n CBN Monetary Policy Review \n \n \n5 \n \n \nCHAPTER 2 \n \n2.0 \nOUTPUT IN THE DOMESTIC \nECONOMY \n \nrowth \nin \nthe \nNigerian \neconomy \ncontinued \nto \nmoderate in the first half of \n2015 \nin \nresponse \nto \nglobal \ndevelopments, notably the continuing \nweakness in oil and other commodity \nprices. Real GDP growth declined by \n1.98 percentage points to 3.96 per \ncent (year-on-year) in the first quarter \nof 2015, from 5.94 per cent in the \npreceding quarter and 6.22 per cent in \nthe corresponding period of 2014. The \ndecrease was partly attributed to \nreduced fiscal receipts arising from \nlower crude oil prices. The key drivers \nof the GDP growth were services, \nagriculture and trade with 2.49, 0.92 \nand \n1.12 \npercentage \npoints, \nrespectively. The drag on growth was \nfrom \nthe \nindustrial \nsector, \nwhich \ncontracted by 1.02 percentage points \nin \nthe \nreview \nperiod. \nWithin \nthe \nindustrial sector, crude petroleum & \nnatural gas and manufacturing sub-\nsectors contracted by 0.96 and 0.07 \npercentage point, respectively. The \nrelative shares of the major sectors in \nthe \nGDP \nwere \nservices \n(37.28%), \nindustry (20.81%), agriculture (19.79%) \nand trade (17.77%). \n \n \n \nFigure 2.1 \nReal GDP Growth (%) 2014 Q1 – 2015Q2 \n \n \nIn the second quarter of 2015, real GDP \ngrowth weakened further by 1.61 \npercentage points to 2.35 per cent \n(year-on-year), from 3.96 per cent in \nthe preceding quarter and 6.54 per \ncent in the corresponding period of \n2014. \nThe \nindustrial \nsector, \nwhich \ncontracted further by 1.11 percentage \npoints, accounted for the slowdown. \nThe development was largely due to \ncrude petroleum & natural gas and \nmanufacturing \nsub-sectors \nthat \ncontracted \nby \n0.73 \nand \n0.39 \npercentage point, respectively. The \nkey drivers of the GDP growth during \nthe quarter were services, agriculture \nand trade, contributing 1.61, 0.73 and \n0.85 percentage points, respectively. \nThe relative shares of the major sectors \nin the GDP were services (37.66%), \nindustry (19.50%), agriculture (21.12%) \nand trade (17.22%). \n \n2.1 \nDomestic Economic Activity \n \nActivities \nin \nthe \nnon-oil \nsector \nremained the major driver of growth in \nthe first half of 2015, as weakness in the \n0.00\n1.00\n2.00\n3.00\n4.00\n5.00\n6.00\n7.00\nQ1-2014 Q2-2014 Q3-2014 Q4-2014 Q1-2015 Q2-2015\nPer cent\nG \n \n \n \n \n CBN Monetary Policy Review \n \n \n6 \n \n \noil sector persisted. The non-oil real \nGDP growth, however, moderated to \n5.59 per cent in the first quarter of 2015, \nfrom \n8.21 \nper \ncent \nin \nthe \ncorresponding \nquarter \nof \n2014, \nrepresenting \na \ndecline \nof \n2.62 \npercentage points. It also declined by \n0.85 percentage point compared with \n6.44 per cent in the preceding quarter. \nGrowth in the non-oil sector was largely \ndriven by activities in information & \ncommunication \n(1.17%), \ncrop \nproduction \n(0.87%), \nfinance \n& \ninsurance \n(0.34%) \nand \naccommodation \n& \nfood \nservices \n(0.31%). This compares with 0.64, 0.82, \n0.23, and 0.12 percentage points, \nrespectively, in the fourth quarter of \n2014. \n \nIn the second quarter, the non-oil real \nGDP also slowed to 3.46 per cent from \n5.59 per cent in the preceding quarter \nof 2015. Compared with the 6.71 per \ncent recorded in the corresponding \nquarter of 2014, it declined by 3.25 \npercentage points. At this rate, growth \nin the non-oil sector was largely driven \nby \nactivities \nin \ninformation \n& \ncommunication \n(0.83%), \ncrop \nproduction (0.67%), real estate (0.26%), \nand finance & insurance (0.23%). This \ncompares with 1.17, 0.87, 0.24, and \n0.34 percentage points, respectively, in \nthe first quarter of 2015. \nThe oil sector GDP contracted by 8.15 \nper cent in the first quarter of 2015, \nrepresenting a further decline of 1.55 \npercentage points compared with -\n6.60 per cent in the first quarter of 2014. \nIt, however, grew by 1.18 per cent in \nthe preceding quarter. The contraction \nin the oil sector was due to production \nchallenges and depressed global oil \nprices, which lowered the average \ndaily production to 2.17 million barrels \nper day (mbpd) from 2.26mbpd in the \ncorresponding quarter of 2014. As a \npercentage of total real GDP, oil \ncontributed \n10.45 \nper \ncent, \nrepresenting \na \ndecline \nof \n1.38 \npercentage points from 11.83 per cent \nrecorded in the corresponding quarter \nof 2014. In the second quarter of 2015, \nthe oil sector GDP shrank by 6.79 per \ncent compared with 8.15 per cent in \nthe first quarter, and 5.14 per cent in \nthe corresponding period of 2014. \nFigure 2.2 \nNon-oil Sector Performance 2014Q1 - 2015Q2 \n \n \nFigure 2:3 \nPerformance of the oil sector 2014Q1 – 2015Q2 \n \n -\n 5.00\n 10.00\n 15.00\n 20.00\n 25.00\n 30.00\n 35.00\n 40.00\n 45.00\n2014 Q1\n2014Q2\n2014Q3\n2014Q4\n2015Q1\n2015Q2\n-10.00\n-8.00\n-6.00\n-4.00\n-2.00\n0.00\n2.00\n4.00\n6.00\nQ1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015\nPer cent \n \n \n \n \n CBN Monetary Policy Review \n \n \n7 \n \n \n2.2 \nSectoral Analysis \n \nThe sectoral performance of the \neconomy is analysed in this section \ntaking \ninto \nconsideration \nkey \ninstitutional factors that shaped output \ngrowth in the review period. \n \n2.2.1 \nAgriculture \n \n \n2.2.1.1 Agricultural Output \n \nReal agricultural output decreased by \n1.21 percentage points to 3.49 per \ncent (year-on-year) in the second \nquarter, from 4.70 per cent in the first \nquarter of 2015. It also decreased by \n0.19 \npercentage \npoint \nwhen \ncompared with 3.68 per cent in the \ncorresponding quarter of 2014. \nActivity in the livestock sub-sector was \nthe main driver of agricultural growth in \nthe second quarter of 2015, as it grew \nby 6.20 per cent, while fishing, forestry \nand crop production grew by 5.53, \n4.01 and 3.20 per cent, respectively. \nThis compares with 4.54, 4.89, 5.04 and \n3.56 per cent in the corresponding \nperiod of 2014 for livestock, fishing, \nforestry, \nand \ncrop \nproduction, \nrespectively. The percentage share of \nagriculture in real GDP was 21.12 per \ncent in the second quarter of 2015, \ncompared with 19.79 per cent in the \nfirst quarter and 20.89 per cent in the \ncorresponding quarter of 2014. \nReal agricultural output decreased by \n0.83 percentage point to 4.70 per cent \n(year-on-year) in the first quarter of \n2015 from \n5.53 per cent in the \ncorresponding quarter of 2014. It, \nhowever, increased by 1.06 per cent \nwhen compared with 3.64 per cent in \nthe fourth quarter of 2014. At 6.97 per \ncent, activity in the fishing sub-sector \nwas the main driver of agricultural \ngrowth \nin \nthe \nfirst \nquarter \n2015. \nLivestock, crop production and forestry \nalso grew by 6.44, 4.46 and 4.33 per \ncent, respectively. This compares with \n8.40, 5.61, 5.42 and 6.53 per cent in the \ncorresponding \nperiod \nof \n2014 \nfor \nfishing, livestock, crop production and \nforestry, respectively. Thus, apart from \nlivestock, the growth rates of the other \nsub-sectors were lower in the review \nquarter. The percentage share of \nagriculture in real GDP was 19.79 per \ncent in the first quarter of 2015, \ncompared with 23.86 per cent in the \nfourth quarter of 2014 and 19.65 per \ncent in the corresponding quarter of \n2014. \nFigure 2.4 \nQuarterly growth rates of Agricultural Sector \nActivity in 2015 \n \n \n0\n1\n2\n3\n4\n5\n6\n7\n8\n9\nQ1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015\nPer cent \nCrop Production\nLivestock\nForestry\nFishing\n \n \n \n \n CBN Monetary Policy Review \n \n \n8 \n \n \n2.2.1.2 Agricultural Policies and \nInstitutional Support \nThe sector continued to benefit from a \nnumber \nof \npolicies, \nreforms \nand \ninstitutional support such as: \n \n \nThe \nAgricultural \nCredit \nand \nGuarantee Scheme (ACGS) \nIn the first half of 2015, a total of 28,702 \nloans valued at N5.44 billion were \nguaranteed under the ACG scheme, \ncompared with 35,413 loans valued at \nN5.93 billion in the corresponding \nperiod \nof \n2014. \nThe \ntotal \nloans \nguaranteed were distributed across \nfood crops (66.17%), livestock (14.6%), \nmixed crops (6.86%), fisheries (3.95%), \ncash crops (3.96%) and others (4.47%). \n \n \nThe \nN200 \nBillion \nCommercial \nAgriculture Credit Scheme (CACS) \nIn the review period, the sum of N24.46 \nbillion was released to 25 private \nprojects \nand \none \n(1) \nstate \ngovernment. \nThe \ndistribution \nof \nprojects financed by value chain were: \nproduction \n(65.92%), \nprocessing \n(26.43%) and input supplies (7.69%). \n \n \nThe \nN200 \nBillion \nSME \nCredit \nGuarantee Scheme (SMECGS) \nIn the first half of 2015, loans for two (2) \nprojects valued at N140.0 million were \nguaranteed \nunder \nthe \nSMECGS, \ncompared with loans for four (4) \nprojects valued at N155.23 million in \nthe corresponding period of 2014. \n \nThe Nigeria Incentive-Based Risk \nSharing \nSystem \nfor \nAgricultural \nLending (NIRSAL) \nIn the review period, six (6) credit risk \nguarantees (CRG), valued at N700.46 \nmillion were executed in favour of \nvarious counter parties. In addition, the \nsum of N50.45 million was paid as \nInterest Drawback (IDB) claims to 14 \nprojects. \n2.2.2 \nIndustry \n \n \n2.2.2.1 Industrial Output \n \nIn the second quarter of 2015, the \nindustrial sector output contracted by \n5.27 per cent in contrast to a growth of \n9.34 per cent in the corresponding \nperiod of 2014. It decelerated by 0.76 \npercentage point when compared \nwith a decline of 4.51 per cent in the \npreceding quarter of 2015. At -6.79 per \ncent, crude petroleum and natural gas \nlargely accounted for the dwindling in \nthe \nsector, \nfollowed \nby \nthe \nmanufacturing \nsub-sector, \nwhich \ncontracted by 3.82 per cent. Solid \nminerals, however, grew by 7.09 per \ncent. Relative to the corresponding \nperiod of 2014, the crude petroleum & \nnatural gas, manufacturing and solid \nminerals sub-sectors grew by 5.14, \n14.01 and 20.95 per cent, respectively. \nDuring the first quarter, the industrial \nsector output contracted by 4.51 per \ncent, in contrast to a growth of 2.76 \nper cent in the corresponding period \n \n \n \n \n CBN Monetary Policy Review \n \n \n9 \n \n \nof 2014 and 7.13 per cent in the \npreceding quarter. The development \nwas \nlargely \nattributed \nto \ncrude \npetroleum \n& \nnatural \ngas, \nwhich \ncontracted by 8.15 per cent. The \nmanufacturing \nsub-sector \nalso \ndeclined marginally by 0.70 per cent, \nwhile solid minerals grew by 11.28 per \ncent. \nWhen \ncompared \nwith \nthe \ncorresponding period of 2014, the \ncrude petroleum & natural gas sub-\nsector contracted by 6.60 per cent, \nwhile the manufacturing and solid \nminerals sub-sectors grew by 15.41 and \n14.14 per cent, respectively. \nFigure 2.5 \nQuarterly Growth Rates of Industrial Sector \nActivity in 2015 \n \n \n2.2.2.2 The \nIndustrial \nPolicy \nand \nInstitutional support: \n \nDuring the review period, the sector \nbenefited \nfrom \nongoing \nreforms, \ninitiatives and incentives such as: \n \n \nThe N300 Billion Power and Airline \nIntervention Fund (PAIF) \nIn the first half of 2015, the sum of \nN13.26 billion was disbursed to two \nprojects namely, power (N9.924 billion) \nand airline (N3.335 billion). \n \n \nN213 \nbillion \nNigerian \nElectricity \nMarket \nStabilization \nFacility \n(NEMSF) \nDisbursements under the facility began \nin February, 2015 and by the end of the \nreview period, the sum of N64.75 billion \nhad \nbeen \nreleased \nto \nrefinance \neighteen (18) participants. \n \nThe \nN200 \nBillion \nSME \nRestructuring/Refinancing \nFund \n(RRF) \nUnder the RRF scheme, N23 billion was \nreleased to the Bank of Industry (BOI) \nfor disbursement between January \nand June, 2015, compared with N17 \nbillion released in the corresponding \nperiod of 2014. \n \n2.2.3 Construction \n \nThe growth in the construction sector \nslowed to 6.42 per cent in the second \nquarter of 2015 from 10.70 and 11.17 \nper cent in the corresponding and \npreceding \nquarters, \nrespectively, \nrepresenting declines of 4.28 and 4.75 \npercentage points. The development \nwas attributed largely to the decline in \ngovernment capital expenditure from \nN331.214 billion in the preceding half of \n2014, to N274.526 billion in the first half \nof \n2015, \ndue \nto \ndwindling \nfiscal \nrevenues. \nThe sector grew by 11.17 per cent in \nthe first quarter of 2015 down from \n-10\n-5\n0\n5\n10\n15\n20\n25\nQ1 2014\nQ2 2014\nQ3 2014\nQ4 2014\nQ1 2015\nQ2 2015\nPer cent \nCrude Petroleum & Natural Gas\nSolid Minerals\nManufacturing\n \n \n \n \n CBN Monetary Policy Review \n \n \n10 \n \n \n17.88 and 12.66 per cent in the \ncorresponding and previous quarters, \nrespectively, representing declines of \n6.71 and 1.49 percentage points. \n2.2.4 \nTrade Sector \n \nIn the second quarter of 2015, the \ngrowth in the trade sector moderated \nto 5.07 per cent down from 5.15 and \n6.47 per cent in the corresponding \nquarter of 2014 and preceding quarter, \nrespectively, representing decreases of \n0.08 and 1.4 percentage points. \nThe sector grew by 6.47 per cent in first \nquarter of 2015, up from 6.28 and 5.32 \nper cent in the corresponding quarter \nof \n2014 \nand \npreceding \nquarter, \nrespectively, representing increases of \n0.19 and 1.15 percentage points. \n2.2.5 \nServices Sector \n \nThe services sector grew by 4.35 per \ncent in the second quarter of 2015 \ncompared with 6.82 per cent in the \ncorresponding quarter of 2014. This \nrepresented \na \ndeclined \nof \n2.50 \npercentage \npoints \nbelow \nthe \npreceding quarter growth of 6.85 per \ncent. The major drivers of growth in the \nsector \nwere \nEducation \n(7.27%), \nFinance and Insurance (6.41%), and \nArts, Entertainment and Recreation \n(6.30%). \n \nIn the first quarter of 2015, the sector \ngrew by 6.85 per cent down from 7.62 \nper cent in the corresponding quarter \nof 2014. Compared with the preceding \nquarter figure of 6.52 per cent, the \nsector grew by 0.33 percentage point. \nThe major drivers of growth in the \nsector \nwere \naccommodation \nand \nfood services (26.66%), entertainment \nand recreation (18.19%), information & \ncommunication (9.49%) and education \n(6.94%). \nFigure 2.6 \nQuarterly Growth Rates of Services Activity in \n2015 \n \n2.2.6 \nOil Sector \n \nThe weakness in the oil sector persisted \nin the first half of 2015. Average crude \noil production in the second quarter \ndeclined to 2.05 mbpd from 2.21 and \n2.17 \nmbpd \nin \nthe \ncorresponding \nquarter of 2014 and the preceding \nquarter, \nrespectively. \nIn \nthe \nfirst \nquarter, average crude oil production \ndeclined to 2.17 mbpd from 2.26 and \n2.21 \nmbpd \nin \nthe \ncorresponding \nquarter of 2014 and the preceding \nquarter, respectively. \n \n-30\n-20\n-10\n0\n10\n20\n30\nPer cent \nQ1 2014\nQ2 2014\nQ3 2014\nQ4 2014\nQ1 2015\nQ2 2015\n \n \n \n \n CBN Monetary Policy Review \n \n \n11 \n \n \nFigure 2.7 \nQuarterly oil production in 2015 \n \nDevelopments in the international oil \nmarket \nduring \nthe \nreview \nperiod \nindicated a gradual recovery in global \noil prices. The price of Bonny Light (370 \nAPI), rose steadily from US$48.81 per \nbarrel in January to US$65.08 per barrel \nin May 2015 but declined slightly in \nJune 2015 to an average of US$58.03 \nper \nbarrel. \nThe \ngradual \nincrease \nwitnessed between January and May \nwas \nattributed \nto \nsignificant \ndivestments in the US shale oil industry, \nsignaling the bottoming-out of the oil \nprice decline. The subsequent decline \nin June 2015, came on the heels of \nincreased supplies from some OPEC \ncountries including Saudi Arabia, Iraq, \nNigeria and the U.A.E. In addition, a \nbearish sentiment pervaded the oil \nmarket due to the impending nuclear \ndeal between Iran and the P5+1(the \nfive permanent members of the UN \nSecurity Council). However, average \noil price remained above the Federal \nGovernment budget benchmark price \nof US$53.00 per barrel in the review \nperiod. \nFigure 2.8 \nMonthly bonny light oil price July 2014 - June \n2015 \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n1.9\n1.95\n2\n2.05\n2.1\n2.15\n2.2\n2.25\n2.3\nQ1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015\nMillion Barrels Per Day \n0\n20\n40\n60\n80\n100\n120\nJul-14\nAug-14\nSep-14\nOct-14\nNov-14\nDec-14\nJan-15\nFeb-15\nMar-15\nApr-15\nMay-15\nJun-15\nUS$ \n \n \n \n \n CBN Monetary Policy Review \n \n \n12 \n \n \n \n \n \n \n \n \n \n \n CBN Monetary Policy Review \n \n \n13 \n \n \nCHAPTER 3 \n \n3.0 \nPRICE DEVELOPMENTS \n \nnflationary pressures in the domestic \neconomy intensified in the first half of \n2015 despite the Bank‘s sustained \ntight monetary policy stance. Headline \ninflation \ntrended \nupwards \nand \nexceeded the Bank‘s inflation band of \n6-9 per cent towards the end of the \nreview period. Both core and food \ninflation rates displayed an upward \ntrajectory, suggesting that the driving \nfactors were both from the supply and \ndemand sides. \n \nIn the foreign exchange market, the \nnaira witnessed significant volatility \nduring \nthe \nreview \nperiod. \nThe \nexchange \nrate \ncontinued \nto \ndepreciate substantially in all segments \nof \nthe \nforeign \nexchange \nmarket, \nleading to the closure of the official \nforeign exchange window on February \n18, 2015. As a further measure to \nmoderate \nthe \nforeign \nexchange \ndemand pressure, the Bank restricted \naccess to foreign exchange for some \n41 import items. The depreciation has \nbeen largely driven by reduced supply \nof foreign exchange, due to lower \naccretion to reserves from falling oil \nprices, as well as demand pressures \narising from capital reversals, and the \nexpected normalization of the US \nmonetary policy. \n \nIn the money market, the Inter-Bank \nCall and Open Buy Back (OBB) rates \nfluctuated remarkably, with a wide \nrange around the standing facilities \ncorridor, indicating liquidity swings in \nthe banking system during the period. \n \n3.1 \nTrends in Inflation \n \nAll measures of inflation increased \nthroughout the review period, despite \nthe \nBank‘s \ntight \nmonetary \npolicy \nstance. The core and food measures of \nCPI inflation increased progressively \nbetween January and June 2015, from \n163.70 and 169.80 in January to 170.60 \nand 178.10 in June 2015. Food inflation \n(year-on-year) increased from 9.20 per \ncent in January to 10.00 per cent in \nJune 2015. Core inflation (year-on-\nyear) rose significantly from 6.80 to 8.40 \nper cent during the same period. As a \nresult, headline inflation increased to \n9.20 per cent in June 2015 from 8.20 \nper cent in January 2015. Both in terms \nof the weight of food in the consumer \nbasket and its price level, the food \ncomponent remained the major driver \nof headline inflation, even though the \npressure of the core component in the \nreview period has become significant. \nThe major components that drove \ncore prices included processed foods, \nhousing; water; electricity; transport; \nand clothing & foot wear (Table 3.1 \nand figures 3.1 and 3.2). \n \n \n \nI \n \n \n \n \n CBN Monetary Policy Review \n \n \n14 \n \n \nTable 3.1 \nInflation Rates, July 2014 – June 2015 \n \nFigure 3.1 \nHeadline, Core and Food Inflation Rates \n (January – June 2015) \n \nIn \nthe \nfirst \nhalf \nof \n2015, \nmost \ncomponents \nof \ncore \ninflation \nexperienced \nmajor \nincreases \ncompared with a general decrease in \nthe second half of 2014. Processed \nfood component exerted the most \npressure on core inflation, rising by 0.58 \npercentage point to 3.08 per cent in \nJune from 2.48 per cent in January \n2015. Prices of other components of \ncore inflation also increased, namely \nhousing, water, electricity, gas & other \nfuels (0.28 percentage point); transport \n(0.19 percentage point) and clothing \n& footwear (0.15 percentage point) \n(Table 3.6). \nFigure 3.2 \nCPI Headline, Core and Food (January - June \n2015) \n \n3.1.2 \nHeadline Inflation \n \nThe uptick in the major components \nof headline inflation was reflected in \nthe upward trend in domestic prices \nduring the first half of 2015. Food & \nnon-alcoholic \nbeverages, \nwhich \ncontinued \nto \nexert \nthe \ngreatest \ninfluence \non \nheadline \ninflation, \nincreased to 5.27 per cent in June from \n4.82 per cent in January 2015. This was \nfollowed by housing, water, electricity, \ngas and other fuels, which increased \nto 1.29 from 1.12 per cent over the \nsame period (Table 3.2 and Figure 3.3). \n \nFigure 3.3 \nMajor Components of Headline Inflation \n(Y-on-Y), January-June 2015 \n \n Headline Inflation\n Core Inflation\n Food Inflation\nYear/Mon\nCPI\nY-on-Y\n12MMA\nCPI\nY-on-Y\n12MMA\nCPI\nY-on-Y\n12MMA\nJul-14\n159.70\n8.30\n8.00\n157.70\n7.10\n7.40\n163.10\n9.90\n9.50\nAug-14\n160.40\n8.50\n8.00\n158.40\n6.30\n7.30\n164.00\n10.00\n9.50\nSep-14\n161.30\n8.30\n8.00\n159.40\n6.30\n7.20\n165.00\n9.70\n9.50\nOct-14\n162.10\n8.10\n8.00\n160.30\n6.20\n7.10\n165.80\n9.30\n9.50\nNov-14\n163.10\n7.90\n8.00\n161.30\n6.30\n7.00\n166.80\n9.10\n9.50\nDec-14\n164.40\n8.00\n8.00\n162.50\n6.20\n6.90\n168.40\n9.20\n9.50\nJan-15\n165.80\n8.20\n8.10\n163.70\n6.80\n6.90\n169.80\n9.20\n9.50\nFeb-15\n166.90\n8.40\n8.10\n164.80\n7.00\n6.90\n171.10\n9.40\n9.50\nMar-15\n168.40\n8.50\n8.20\n166.20\n7.50\n6.90\n172.80\n9.40\n9.50\nApr-15\n169.70\n8.70\n8.20\n167.20\n7.70\n6.90\n174.40\n9.50\n9.50\nMay-15\n171.60\n9.00\n8.30\n169.20\n8.30\n7.00\n176.30\n9.80\n9.50\nJun-15\n173.20\n9.20\n8.40\n170.60\n8.40\n7.00\n178.10\n10.00\n9.50\n \n \n \n \n CBN Monetary Policy Review \n \n \n15 \n \n \nIn general, headline inflation increased \nas a result of the combined effects of \nthe rise in the price of food and non-\nalcoholic beverages; housing; water, \nelectricity, \ngas \nand \nother \nfuels; \ntransport and clothing & foot wear. \n \nInflationary pressures witnessed during \nthe period, despite the tight monetary \npolicy \nstance \nof \nthe \nBank \nwere \nattributable to several factors including \nthe pass-through to domestic prices \nfrom the depreciation of the exchange \nrate; disruptions to the distribution \nchain due to continuing insurgency in \nthe north east region of the country; \nthe \nliquidity \nimpact \nof \nelection \nspending as well as shortages of \npetroleum products arising from the \nstand-off between oil marketers and \nthe government on subsidy payments. \n \nTable 3.2 \nMajor Components of Headline Inflation \n(Y-on-Y), January-June 2015 \n \n \nOn a month-on-month basis, headline \ninflation fluctuated upwards during the \nperiod under review in contrast to the \nyear-on-year \nrates. \nIt \nfluctuated \nbetween 0.70 per cent in February and \n1.10 per cent in May, 2015, but \nhowever, maintained an upward trend \nfrom 0.81 per cent in January to 0.90 \nper \ncent \nin \nJune. \nThe \nmajor \ncomponents that accounted for the \nfluctuation were the prices of food and \nnon-alcoholic beverages that ranged \nfrom 0.39 to 0.57 per cent; and \nhousing, water, electricity, gas & other \nfuels, from 0.10 to 0.20 per cent (Table \n3.3 and Figure 3.4). \n \nTable 3.3 \nMajor Components of Headline Inflation \n(M-on-M), January-June 2015 \n \n \nFigure 3.4 \nMajor Components of Headline Inflation \n(M-on-M), January-June 2015 \n \n \n3.1.2 \nFood Inflation \n \nFood inflation (year-on-year) trended \nupwards from 9.21 per cent in January \nDate Headline \nFood &\nNon- \nAlcoholic\nBev\nHousing, \nWater, \nElect. \nGas & \nOther\nFuel \nClothing \n&\nfootwea\nTranspor\nFurnishings, \n \n \nHousehold\n Equip \n& HH\nMaint\nEducation\nJan -15 8.20 \n4.82\n1.12\n0.60\n0.44\n0.39\n0.25\nFeb-15\n8.40 \n4.90\n1.15\n0.62\n0.45\n0.41\n0.27\nMar-15\n8.50 \n4.92 \n1.18 \n0.65 \n0.46\n0.42\n0.28 \nApr-15 8.70 \n4.98 \n1.21 \n0.66 \n0.50\n0.43\n0.28 \nMay-15\n9.00\n5.14\n1.30\n0.68\n0.53\n0.44\n0.30\nJun -15\n9.20 \n5.27 \n1.29 \n0.68\n0.55\n0.43 \n0.32 \nDate Headline\nFood & \nNon-\nAlcoholic \nBev\nHousing, \nWater, \nElect. \nGas & \nOther \nFuel \nClothing \n&\nfootwea\nTransport \nFurnishings, \nHousehold \nEquip \n& HH \nMaint\nEducation\n \nJan-15\n0.81 \n0.46\n0.12 \n0.06 \n0.04 \n0.04\n0.03 \nFeb-15 \n0.70 \n0.39\n0.10 \n0.05 \n0.04 \n0.03\n0.02 \nMar-15\n0.90 \n0.54\n0.12\n0.07\n0.05\n0.04\n0.03\nApr-15\n0.80 \n0.47\n0.11 \n0.04 \n0.05 \n0.03\n0.02 \nMay-15 \n1.10 \n0.57 \n0.20\n0.09\n0.08 \n0.05 \n0.04 \nJun-15\n0.90\n0.56\n0.13\n0.06\n0.07\n0.03\n0.03\n \n \n \n \n CBN Monetary Policy Review \n \n \n16 \n \n \nto 10.04 per cent in June 2015 due to \nincreases \nin \nthe \nprices \nof \nits \ncomponents, mainly processed food \nand farm produce. The price of \nprocessed food increased from 4.38 to \n4.81 per cent, and farm produce from \n4.83 to 5.23 per cent. Of the 0.83 \npercentage point increase in food \ninflation, processed food contributed a \nlarger share of 0.43 percentage point, \nwhile farm produce contributed 0.40 \npercentage point. The key drivers of \nthe increase in the processed food \ncategory were fish and sea food, \nwhich increased by 0.17 percentage \npoint; \nand \ngarri \nyellow \nby \n0.15 \npercentage point. This was due to \nrain-related delay in harvests and hike \nin transport costs during the period \n(Table 3.4 and Figure 3.5). \n \nTable 3.4 \nMajor Components of Food Inflation (Y-on-Y), \nJan - Jun 2015 \nJan.15\nFeb.15\nMar.15\nApr.15\nMay.15\nJun.15\nChange \nJan - \nJune \n2015 \nFOOD\n9.21\n9.36\n9.38\n9.49\n9.78\n10.04\n0.83\nProcessed Food\n4.38\n4.87\n4.65\n4.62\n4.75\n4.81\n0.43\nFarm Produce\n4.83\n4.49\n4.73\n4.87\n5.03\n5.23\n0.40\nYams, Potatoes & Other Tubers\n1.12\n1.16\n1.18\n1.23\n1.29\n1.29\n0.17\nMeat\n0.88\n0.91\n0.91\n0.91\n0.93\n0.94\n0.06\nVegetables\n0.97\n1.00\n1.00\n1.03\n1.07\n1.18\n0.21\nFish & Sea Food\n0.92\n0.97\n0.98\n0.96\n1.03\n1.09\n0.17\n \n \n \n \n \n \n \n \n \nFigure 3.5 \nMajor Components of Food Inflation \n(Y-on-Y), Jan - Jun 2015 \n \n \nOn a month-on-month basis, food \ninflation increased from 0.90 per cent \nin January to 1.06 per cent in June \n2015, similar to its year-on-year trend. \nThe price of processed food increased \nto 0.48 from 0.40 per cent and farm \nproduce to 0.57 from 0.50 per cent \nduring the review period. Accordingly, \nthe 0.16 percentage point increase in \nfood \ninflation \nwas \ndue \nto \nboth \ncomponents. The key drivers of the \nincrease were fish & sea food and \nvegetable, \nwhich \nrose \nby \n0.06 \npercentage points apiece (Table 3.5 \nand Figure 3.6). \n \n \n \n \n \n \n \n0.00\n1.00\n2.00\n3.00\n4.00\n5.00\n6.00\nJan.15\nFeb.15\nMar.15\nApr.15\nMay.15\nJun.15\nProcessed Food\nFarm Produce\nYams, Potatoes & Other Tubers\nMeat\nVegetables\nFish & Sea Food\n \n \n \n \n CBN Monetary Policy Review \n \n \n17 \n \n \nTable 3.5 \nMajor Components of Food Inflation (M-on-M), \nJan-Jun 2015 \nJan.15\nFeb.15\nMar.15\nApr.15\nMay.15\nJun.15\nChange \nJan - \nJune \n2015 \nFOOD\n0.90\n0.70\n1.00\n0.90\n1.10\n1.06\n0.16\nProcessed Food\n0.40\n0.40\n0.50\n0.40\n0.50\n0.48\n0.08\nFarm Produce\n0.50\n0.40\n0.50\n0.50\n0.50\n0.57\n0.07\nYams, Potatoes & Other Tubers\n0.11\n0.09\n0.14\n0.13\n0.14\n0.12\n0.01\nMeat\n0.09\n0.07\n0.09\n0.08\n0.10\n0.08\n-0.01\nVegetables\n0.12\n0.09\n0.12\n0.08\n0.12\n0.18\n0.06\nFish & Sea Food\n0.08\n0.08\n0.11\n0.07\n0.13\n0.14\n0.06\n \nFigure 3.6 \nMajor Components of Food Inflation (M-on-M), \nJan - Jun 2015 \n \n \n3.1.3 \nCore Inflation \n \nCore inflation (year-on-year) rose by \n1.60 percentage points from 6.80 per \ncent in January to 8.40 per cent in \nJune 2015. Of the 1.60 percentage \npoint \nincrease \nin \ncore \ninflation, \nprocessed food contributed the largest \nshare \nof \n0.58 \npercentage \npoint, \nfollowed by housing, water, electricity, \ngas and other fuels (0.28 percentage \npoint); and transport (0.19 percentage \npoint). Thus, the major contributors to \nthe increase in core inflation were \nprocessed food (2.48 to 3.10 per cent \npoint); housing, water, electricity, gas \nand other fuel (1.48 to 1.76 per cent); \ntransport (0.56 to 0.75 per cent) \nclothing and footwear (0.77 to 0.93 per \ncent); and (Table 3.6). \n \nIn the processed food category, the \nkey drivers of the increase were meat, \nwhich rose from 0.57 to 0.65 per cent, \nfish & sea foods (0.60 to 0.76 per cent), \nmilk, cheese & egg (0.10 to 0.13 per \ncent), and oil & fats (0.32 to 0.39 per \ncent). The increase in core inflation \nduring \nthe \nperiod \nwas \nmainly \ntraceable \nto \nthe \neffects \nof \nthe \nshortage of petroleum products and \nthe pass-through to domestic prices \nfrom the depreciation of the naira. \n \nTable 3.6 \nMajor Components of Core Inflation (Y-on-Y) \nJanuary-June 2015 \n \n \n \n \n \n \n \n \n \n \n \n0.00\n0.10\n0.20\n0.30\n0.40\n0.50\n0.60\nJan.15\nFeb.15\nMar.15\nApr.15\nMay.15\nJun.15\nProcessed Food\nFarm Produce\nYams, Potatoes & Other Tubers\nYEAR-ON-YEAR (CORE)\nWeights\nJ an'15\nFeb'15\nMar'15\nApr'15\nMay'15\nJune'15\nChange btw Jan. to \nJun. 2015\nALL ITEMS LESS FARM \nPRODUCE CPI\n730.50\n6.79\n6.99\n7.46\n7.7\n8.3\n8.4\n1.62\nProcessed Food\n237.53\n2.48\n2.56\n2.71\n2.75\n2.98\n3.06\n0.58\nMilk,Cheese & Eggs\n12.75\n0.10\n0.09\n0.11\n0.11\n0.12\n0.13\n0.03\nSugar,Jam,Honey,etc\n11.10\n0.13\n0.14\n0.14\n0.15\n0.15\n0.15\n0.02\nNon-Alcoholic Beverages\n10.97\n0.10\n0.11\n0.11\n0.11\n0.11\n0.11\n0.01\nAlcoholic Bev. Tobacco & Kola \n10.87\n0.10\n0.10\n0.11\n0.11\n0.12\n0.12\n0.02\nClothing & footwear\n76.50\n0.77\n0.79\n0.86\n0.88\n0.92\n0.93\n0.15\nHousing,Water, Elect.Gas & \nOther Fuel\n167.34\n1.48\n1.53\n1.59\n1.64\n1.77\n1.76\n0.28\nFurnishings, Household Equip \n&HH Maint.\n50.27\n0.49\n0.51\n0.55\n0.56\n0.58\n0.58\n0.09\nHealth\n30.04\n0.23\n0.24\n0.27\n0.29\n0.32\n0.31\n0.08\nTransport\n65.08\n0.56\n0.57\n0.60\n0.65\n0.71\n0.75\n0.19\nCommunication\n6.80\n0.03\n0.03\n0.03\n0.02\n0.02\n0.02\n-0.01\nRecreation & culture\n6.91\n0.06\n0.06\n0.06\n0.06\n0.06\n0.06\n0.00\nEducation\n39.44\n0.30\n0.31\n0.35\n0.36\n0.39\n0.42\n0.12\nRestaurant & Hotels\n12.12\n0.07\n0.07\n0.09\n0.10\n0.11\n0.12\n0.04\nMiscellaneous Goods & \nServices\n16.63\n0.11\n0.12\n0.14\n0.15\n0.17\n0.18\n0.07\n \n \n \n \n CBN Monetary Policy Review \n \n \n18 \n \n \nFigure 3.7 \nMajor Components of Core Inflation (Y-on-Y) \nJanuary-June 2015 \n \n \nThe month-on-month analysis showed \nthat core inflation rose from 0.73 per \ncent in January to 0.80 per cent in \nJune 2015. Processed food remained \nthe major driver of core inflation, \nincreasing from 0.25 to 0.30 per cent in \nthe review period. Other drivers were: \nhousing, water, electricity, gas & other \nfuels which increased from 0.16 to 0.17 \nper cent; transport (0.06 to 0.09 per \ncent) and miscellaneous goods & \nservices (0.01 to 0.02 per cent) (Table \n3.7 and Figure 3.8). \nTable 3.7 \nMajor Components of Core Inflation (M-on-M) \nJanuary-June 2015 \n \nFigure 3.8 \nMajor Components of Core Inflation (M-on-M) \nJanuary-June 2015 \n \n \n3.1.5 \nSeasonally-Adjusted Inflation \n \nDuring the review period, both actual \nand seasonally-adjusted measures of \nheadline inflation maintained upward \ntrajectory, in continuation of the trends \nwitnessed during the last quarter of \n2014 (Table 3.8 and Figure 3.14). Actual \nheadline inflation rate continued to \ntrend upwards in the first half of 2015, \nreflecting the general price levels in \nthe economy. It trended below the \nseasonally-adjusted headline inflation \nduring the first quarter and above it in \nthe second quarter of 2015. The \ndevelopment indicated that seasonal \neffects attenuated inflation during the \nfirst quarter, and accentuated it during \nthe second quarter of 2015. The \ngeneral upward trend in both actual \nand seasonally-adjusted measures of \ninflation were attributable to increased \nspending during the 2015 elections, \nscarcity of petroleum products that \nMONTH-ON-MONTH (CORE)\nWeight \nJ an'15\nFeb'15\nMar'15\nApr'15\nMay'15\nJune'15\nChange btw Jan. to \nJun. 2015\nALL ITEMS LESS FARM \nPRODUCE CPI\n730.50\n0.73\n0.68\n0.83\n0.6\n1.2\n0.8\n0.07\nProcessed Food\n237.53\n0.25\n0.25\n0.31\n0.23\n0.41\n0.30\n0.05\nMilk,Cheese & Eggs\n12.75\n0.01\n0.01\n0.01\n0.01\n0.02\n0.01\n0.00\nSugar,Jam,Honey,etc\n11.10\n0.01\n0.01\n0.02\n0.01\n0.02\n0.01\n0.00\nNon-Alcoholic Beverages\n10.97\n0.01\n0.01\n0.01\n0.01\n0.01\n0.01\n0.00\nAlcoholic Bev. Tobacco & Kola \n10.87\n0.01\n0.01\n0.01\n0.01\n0.01\n0.01\n0.00\nClothing & footwear\n76.50\n0.09\n0.07\n0.09\n0.05\n0.13\n0.08\n-0.01\nHousing,Water, Elect.Gas & \nOther Fuel\n167.34\n0.16\n0.14\n0.16\n0.15\n0.28\n0.17\n0.01\nFurnishings, Household Equip \n&HH Maint.\n50.27\n0.06\n0.05\n0.06\n0.03\n0.07\n0.04\n-0.02\nHealth\n30.04\n0.03\n0.03\n0.04\n0.02\n0.05\n0.02\n-0.01\nTransport\n65.08\n0.06\n0.05\n0.07\n0.07\n0.11\n0.09\n0.04\nCommunication\n6.80\n0.00\n0.00\n0.00\n0.00\n0.00\n0.00\n0.00\nRecreation & culture\n6.91\n0.01\n0.00\n0.00\n0.00\n0.01\n0.01\n0.00\nEducation\n39.44\n0.04\n0.03\n0.04\n0.02\n0.06\n0.04\n0.00\nRestaurant & Hotels\n12.12\n0.01\n0.01\n0.01\n0.01\n0.02\n0.01\n0.00\nMiscellaneous Goods & \nServices\n16.63\n0.01\n0.02\n0.02\n0.01\n0.03\n0.02\n0.01\n \n \n \n \n CBN Monetary Policy Review \n \n \n19 \n \n \nresulted in increased energy and \ntransport costs; as well as imported \ninflation due to significant depreciation \nof the naira during the period. The \nuptick \nin \nJune, \nhowever, \nlargely \nresulted \nincrease \nin \nconsumption \nspending \nassociated \nwith \nIslamic \nfestivities, coupled with energy supply \nshock which affected retail prices. \n \nTable 3.8 \nActual and Seasonally Adjusted Headline \nInflation Jan -June 2015 \nDate \nInflation \nS-A Inflation \nJan-15 \n8.20 \n8.41 \nFeb-15 \n8.40 \n8.44 \nMar-15 \n8.50 \n8.57 \nApr-15 \n8.70 \n8.64 \nMay-15 \n9.00 \n8.81 \nJun-15 \n9.20 \n8.91 \n \n \nFigure 3.9 \nActual and Seasonally Adjusted Headline \nInflation January - June 2015 \n \n \n \n \n \n \n3.3 \nKey Factors that Influenced \nDomestic Prices \n \nThe upward trend in the general price \nlevel observed in the first half of 2015 \nwas due to both supply and demand \nfactors. Both core and food inflation \nrates (year-on-year) maintained an \nupward \ntrajectory, \nsuggesting \nthe \nimpact of structural and demand \nforces on aggregate price levels. This \noccurred \ndespite \nthe \nmoderating \neffect of the sustained tight monetary \npolicy stance of the Bank to rein-in \nliquidity surfeit in the banking system. \nThe factors included the pass-through \nto \ndomestic \nprices \nfrom \nthe \ndepreciation of the exchange rate; \ndisruptions to the distribution chain due \nto continuing insurgency in the north \neast region of the country; the liquidity \nimpact of election spending and \nshortages \nof \npetroleum \nproducts \nwitnessed during the period. \n \n3.3.1 \nDemand-side Factors \n \nThe election spending, coupled with \nexcess liquidity in the banking system, \nexerted pressure on the exchange \nrate. This was in addition to the \ndepreciation of the exchange rate, \nwhich \nstemmed \nfrom \nreversals \nof \ncapital \nflows \nand \nthe \nexpected \nnormalization of the US monetary \npolicy \nduring \nthe \nperiod. \nThe \ndevelopment was accentuated by \ndeclining \naccretion \nto \nexternal \nreserves \narising \nfrom \nlower \nfiscal \n7.6\n7.8\n8\n8.2\n8.4\n8.6\n8.8\n9\n9.2\n9.4\nJan-15\nFeb-15\nMar-15\nApr-15\nMay-15\nJun-15\nPer cent \nActual Inflation\nS-A Inflation\n \n \n \n \n CBN Monetary Policy Review \n \n \n20 \n \n \nreceipts occasioned by the sustained \ndrop in crude oil prices. The overall \neffect of these developments was a \nsubstantial depreciation of the naira \nexchange rate from N168/US$ (rDAS) \nat \nend-January \nto \nN196.95/US$ \n(Interbank) at end-June 2015, following \nthe closure of the rDAS segment of the \nmarket on February 18, 2015. \n \n3.3.2 \nSupply-side Factors \n \nA number of supply side factors \naffected the domestic price level \nduring the review period. These factors \nwere primarily related to production \nand distribution activities. Aggregate \noutput growth declined to 3.96 per \ncent in the first quarter of 2015, \ncompared with 5.53 and 5.94 per cent \nin the corresponding and preceding \nquarters of 2014, respectively. In the \nsecond \nquarter, \ngrowth \nfurther \ndeclined to 2.35 per cent. Production \nand \ndistribution \nactivities \nwere \nhampered \nby \nthe \nlate \ncommencement of rain, cattle rustling, \nthe displacement of farmers due to \ninsurgency as well as the shortage of \npetroleum products, leading to high \ntransport cost and disruption to supply \nof goods and services. Other cost-\nrelated \nchallenges \nwere \nthe \ndepreciation of the naira exchange \nrate, \nresulting \nin \nhigher \ncost \nof \nimported inputs and low level of \nelectricity \nsupply \ncaused \nby \ninadequate gas-to-power. \n \n3.3.3 \nModerating Factors \n \nA combination of factors moderated \nthe rise in the general price level during \nthe \nperiod. \nThese \nincluded \nthe \ncontinued decline in global inflation, \nlow oil receipts and late passage of \nthe 2015 budget which slowed down \npublic spending. Others were the non-\npayment of workers‘ salary in many \nstates of the federation, which partly \naccounted for a slowdown in private \ndemand, \nand \nmoderation \nin \neconomic \nactivities \nas \neconomic \nagents awaited a transition to the new \ngovernment. In addition, the sustained \nliquidity \nmanagement \nand \ntight \nmonetary policy stance of the Bank \nmoderated inflationary pressures. \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n CBN Monetary Policy Review \n \n \n21 \n \n \nCHAPTER FOUR \n \n4.0 \nMONETARY \nPOLICY \nAND \nLIQUIDITY MANAGEMENT \n \nonetary policy in the first half \nof 2015 took cognizance of \nkey \ndevelopments \nin \nthe \nglobal economy, including uncertainty \nabout the expected commencement \nof \nthe \nUS \nmonetary \npolicy \nnormalization, \nthe \nexpanded \nquantitative easing by the European \nCentral Bank (ECB) as well as the \nprotracted Greek debt crisis. Other \nfactors were the geopolitical tensions \nin Ukraine and the Middle East, crude \noil supply glut, sluggish growth in the \nEuro Area as well as low commodity \nprices. These developments affected \ngovernment revenues, accretion to \nreserves, and the stability of exchange \nrates \nof \nemerging \nmarkets \nand \ndeveloping economies. \n \nIn the domestic economy, the key \nchallenges to monetary policy were \nthe continuing liquidity surfeit in the \nbanking system and the associated \ncost \nof \nliquidity \nmanagement, \nsustained \npressure \non \nthe \nnaira \nexchange rate leading to divergence \nbetween the interbank and Bureau de \nchange (BDC) rates, increasing risk of \ncurrency \nsubstitution \nas \nwell \nas \nactivities and spending in the run-up to \nthe 2015 general elections. These \ndevelopments were accentuated by \ncontinued security challenges in some \nparts of the country, thereby impacting \non \ninvestor \nconfidence. \nThese \nconsiderations, and the need to sustain \nthe \nachievement \nof \nthe \nBank‘s \nmandate of price and exchange rate \nstability, provided the context for \nmonetary policy decisions in the review \nperiod. \n \n4.1 \nDecisions \nof \nthe \nMonetary \nPolicy Committee (MPC) \n \nThe \nMonetary \nPolicy \nCommittee \n(MPC) decisions in the first half of 2015 \nwere influenced by key global and \ndomestic developments. Primarily, the \nissues of concern on the domestic front \nincluded: \nliquidity \ninjections \nfrom \nelectoral spending, liquidity surfeit in \nthe banking system, the rising risk of \ncurrency \nsubstitution, \ndeclining \nexternal \nreserves \nand \ngovernment \nrevenues occasioned by low oil prices, \ninsurgency activities in key agricultural \nregions, \nreemergence \nof \ndemand \npressure \nin \nthe \nforeign \nexchange \nmarket, creeping inflationary pressure \nand rising credit to government. The \nconsiderations on the global front \nincluded: uneven and tepid recovery, \ndivergence \nin \nmonetary \npolicy \nbetween the US and the Euro Area, the \npace of US recovery and expected \nnormalization of the US monetary \npolicy, capital flow reversals leading to \ndepreciation \nof \nemerging \nmarket \nexchange rates, declining commodity \nprices as well as the lingering Greek \ndebt crisis. \nM \n \n \n \n \n CBN Monetary Policy Review \n \n \n22 \n \n \n4.1.1 \nJanuary 2015 MPC Meeting \n \nIn January 2015, the MPC reviewed \ndevelopments in the monetary policy \nenvironment, \nand \nexpressed \nsatisfaction with the economic growth \nperformance and the outcome of \ninflation in 2014. The MPC noted the \nimpact \nof \nsecurity \nchallenges \non \nagricultural and associated activities \nand the continued decline in oil GDP. \nThe \nimpact \nof \nsustained \nbanking \nsystem liquidity surfeit on inflation and \nexchange rate was emphasized, along \nwith the implications of capital flow \nreversals on the depreciation of the \nexchange \nrate. \nThe \nexternal \nenvironment \nwas \nchallenging \nwith \nweak recovery in the Euro Area and \nJapan, and slowdown in emerging \nmarket economies. Although the IMF \nprojected global growth in 2015 at 3.5 \nper cent, the MPC recognized high \nunemployment \nand \ndebt \nlevels, \ngeopolitical tensions and declining \ncommodity \nprices \nas \nsignificant \ndownside risks to the projection. In \naddition, the devastating impact of \nthe Ebola epidemic was a further \nsource of risk in the West African sub-\nregion. Monetary policy in the Euro \nArea \nand \nJapan \nremained \naccommodative as opposed to the \nUS, \nwhile \nemerging \nmarket \nand \ndeveloping \neconomies \ngenerally \nmaintained a tight monetary policy \nstance. \n \nThe key concerns were the adverse \nimpact \nof \nsecurity \nchallenges \non \ngrowth, the declining contribution of \nthe oil sector to GDP growth and the \nsustained bearish condition of the \ncapital market. The Committee noted \nthat insurgency contributed to food \nsupply bottlenecks in key agricultural \nzones. In addition, the challenge of \nexcess liquidity in the banking system, \nthe complications arising from capital \nreversals and demand pressures on the \nforeign exchange market, as well as \nthe \npossible \neffects \nof \nexpected \nnormalization of US monetary policy \nwere considered. \n \nIn the light of these developments, and \nrecognizing the need to allow previous \npolicy measures to work through the \nreal \neconomy, \nthe \nCommittee \ndecided to retain the Monetary Policy \nRate (MPR) at 13.0 per cent, with a \nsymmetric corridor of +/- 200 basis \npoints \naround \nthe \nmidpoint. \nThe \nLiquidity Ratio, the Cash Reserve Ratio \n(CRR) on private sector deposits and \nthe CRR on public sector deposits, \nwere also retained at 30.0, 20.0 and \n75.0 per cent, respectively. \n \n4.1.2 \nMarch 2015 MPC Meeting \n \nA t the March 2015 meeting, the MPC \nreviewed developments in the global \nand domestic economy and financial \nmarkets, and noted the slow and \nuneven pace of global economic \nrecovery, low commodity prices, and \n \n \n \n \n CBN Monetary Policy Review \n \n \n23 \n \n \nexpectation of the normalization of US \nmonetary policy fuelling speculations \nabout the possible increase in US short-\nterm rates. The Committee further \nobserved the sluggish growth in oil \nexporting and developing economies, \nwhich stemmed from decreased oil \nreceipts and low accretion to reserves, \nleading \nto \ncapital \nreversals \nand \nweakening of their currencies. Other \ndevelopments, \nwhich \nposed \na \ndownside risk to global growth were \nweak economic performance in the \nEuro \nArea, \ngeopolitical \ntensions, \nstructural \nfactors, \nunfavourable \nweather \nconditions, \npoor \nexternal \ndemand and moderate growth in \nemerging \nmarket \nand \ndeveloping \neconomies. The Committee noted that \nglobal \ninflation \nremained \nbenign, \nalthough emerging and developing \neconomies were expected to face \nimported inflationary pressures caused \nby currency depreciations. In view of \nthese, global monetary policy stance \nremained largely accommodative. \n \nOn the domestic front, economic \ngrowth slowed in the last quarter of \n2014 due to moderation in the non-oil \nsector. \nHeadline \ninflation \ntrended \nupwards but remained within the \nacceptable band of the CBN. The \ndepreciation of the naira and its pass-\nthrough to domestic prices contributed \nto the observed increase in headline \ninflation. Developments in the money \nmarket indicated that on the average, \nshort-term rates were stable despite \nepisodes of sporadic volatility. The \nCommittee noted with satisfaction the \nstability \nin \nthe \nforeign \nexchange \nmarket \ndue \nto \nrecent \nmeasures, \nincluding the closure of the official \nwindow, to improve transparency and \nmoderate arbitrage. \n \nArising from these developments, the \nCommittee \nraised \na \nnumber \nof \nconcerns, \nincluding \nthe \nnegative \nimpact of global commodity price \ndeclines, expected US monetary policy \nnormalization, rising exchange rate \npremium \nbetween \nthe \nBDC \nand \ninterbank segments of the market, \nincreasing risk of currency substitution, \nlow oil prices and the adverse impact \non accretion to reserves, government \nrevenue, \nand \ncapital \nflows. \nThe \nCommittee was also concerned about \nthe moderate pace of economic \ngrowth and its near-term outlook as \nwell as the gradual increase in year-\non-year headline inflation, partly driven \nby the 2015 election spending, high \nimport prices and adverse shocks to \nfood supply. In addition, it was worried \nabout the bearish state of the capital \nmarket. \n \nReflecting \non \nboth \nglobal \nand \ndomestic \ndevelopments, \nthe \nCommittee was of the view that the \nimpact of existing monetary policy and \nsubsequent administrative measures \nwould require more time to fully \npermeate \nthe \neconomy. \nConsequently, \nthe \nCommittee \n \n \n \n \n CBN Monetary Policy Review \n \n \n24 \n \n \ndecided to maintain the MPR at 13.0 \nper cent, with a symmetric corridor of \n+/- \n200 \nbasis \npoints \naround \nthe \nmidpoint. The Committee also retained \nthe Liquidity Ratio at 30.0 per cent, CRR \non public sector deposits at 75.0 per \ncent and CRR on private sector \ndeposits at 20.0 per cent. \n \n 4.1.3 \nMay 2015 MPC Meeting \n \nAt the May 2015 meeting, the MPC \nobserved \nthat \nglobal \neconomic \nrecovery continued at a modest but \nuneven pace, with global growth in \n2015 projected at 3.5 per cent by the \nIMF. \nLow \ncommodity \nprices, \nparticularly oil, contributed to the \ngrowth of oil importing countries but \ndampened prospects in oil exporting \ncountries. \nIn \nthe \nEuro \nArea, \nthe \nCommittee observed that the massive \nquantitative easing of the ECB opened \na new growth vista that may halt the \nslide in output and engender a more \nsolid recovery. At 5.8 per cent in 2015, \ngrowth \nin \nemerging \nmarket \nand \ndeveloping \neconomies \nwas \ndampened by structural and cyclical \nfactors, monetary tightening, political \ntensions and currency depreciation. \nGlobal \ninflation was expected to \nremain subdued in 2015 due to the \neffects of the sharp drop in crude oil \nprices, \nexcess \ncapacity \nand \nappreciation of currencies of key \nadvanced \neconomies. \nHowever, \nemerging \nmarket \nand \ndeveloping \neconomies faced an upside risk to \ninflation \ndue \nto \ndepreciating \nexchange rates. \n \nOn \nthe \ndomestic \nscene, \nthe \ndeceleration \nin \ngrowth, \nwhich \ncommenced in the third quarter of \n2014 intensified in the first quarter of \n2015 partly on account of weaker oil \nreceipts. The Committee noted the \nbuild-up of inflationary pressures, which \nit considered transient and attributable \nto the shortage of petroleum products, \nrising food prices and the pass-through \nto prices from the depreciation of the \nexchange \nrate. \nShort-term \ninterest \nrates were relatively volatile, reflecting \nfluctuations in banking system liquidity. \nThe \ncapital \nmarket \nshowed \nslight \nimprovements, \nas \nboth \nmarket \ncapitalization and the All Share Index \n(ASI) increased. The naira exchange \nrate was relatively stable in the two \nsegments of the foreign exchange \nmarket, largely due to measures taken \nto calm the market and stabilize the \nexchange rate. \n \nThe above developments created a \nnumber of concerns for the Committee \nnotably: \nslow \nglobal \neconomic \nrecovery, downside risks to the external \nsector \ndue \nto \nthe \nexpected \nnormalization of US monetary policy \nand anticipated increase in short-term \nrates, worsening effects of capital \nreversals, \ntighter \nfinancial \nmarket \nconditions and low oil prices. Other \nconcerns were the decline in trade \nbalance evidenced in low accretion \n \n \n \n \n CBN Monetary Policy Review \n \n \n25 \n \n \nto \nexternal \nreserves, \nas \nwell \nas \ndeclining government revenue leading \nto growth in credit to government and \nits crowding out effect on private \nsector investments. The Committee \nwas worried about the upward trend in \ninflation rates for four consecutive \nmonths \nto \nApril \n2015. \nThe \nMPC \nconsidered \nthat \nthe \ncurrent \ndiscriminatory CRR on private and \npublic sector deposits, could constrain \npolicy space, and inspire moral hazard \nby market participants. \n \nThe \nCommittee \nwas, \nhowever, \noptimistic \nabout \nnear \nterm \nimprovement in economic conditions, \nas \nprogress \nwas \nbeing \nmade \nin \nresolving insecurity challenges, and the \nemergence of a conducive investment \nenvironment following the successful \nconclusion \nof \nthe \n2015 \ngeneral \nelections. \n \nIn \nthe \nlight \nof \nthe \nabove \nconsiderations, \nthe \nCommittee \ndecided to maintain the MPR at 13.0 \nper cent, with the symmetric corridor of \n+/- \n200 \nbasis \npoints \naround \nthe \nmidpoint and to retain the Liquidity \nRatio at 30.0 per cent. The Cash \nReserve Ratio (CRR) on public and \nprivate sector deposits were, however, \nharmonized at 31.0 per cent. \n \n \n \n \n4.2.0 \nInstruments \nof \nLiquidity \nManagement \n \nIn line with the Bank‘s objectives of \nprice stability and macroeconomic \nmanagement, arrays of instruments \nwere deployed in the conduct of \nmonetary policy during the period \nunder review. These included; the MPR, \nthe CRR, Open Market Operations \n(OMO) \nand \nDiscount \nWindow \nOperations. \n \n4.2.1 \nMonetary Policy Rate (MPR) \n \nThe Monetary Policy Rate (MPR) \nremained the prime instrument for \nmonetary policy management. The \nMPR was retained at 13.0 per cent \nthroughout the review period with the \nsymmetric corridor of +/-200 basis \npoints around the midpoint. This was \nmainly to help rein-in inflation and \nmanage the liquidity surfeit in the \nbanking system. With the MPR at 13.0 \nper cent and headline inflation rate of \n9.2 per cent at end-June 2015, the real \ninterest \nrate \nwas \npositive, \nwhich \nencouraged \ncapital \ninflow \nand \naccretion to external reserves. \n \n4.2.2 \nOpen \nMarket \nOperations \n(OMO) \n \nThe Bank continued to rely on Open \nMarket Operations (OMO) as the main \ntool for managing banking system \nliquidity in the first half of 2015. Actual \nOMO sales amounted to N4,261.72 \n \n \n \n \n CBN Monetary Policy Review \n \n \n26 \n \n \nbillion compared with N3,937.76 billion \nand N4,484.94 billion recorded in the \npreceding and corresponding periods \nof 2014, respectively. This represented \na decrease of 4.98 below the level in \nthe first half of 2014 but an increase of \n8.23 per cent above the level in the \nsecond half of 2014 (Table 4.1). \n \nTable 4.1 \nOMO Bills Auction (January 2014 – June 2015) \n(N’million) \nDate \n2014 \n2015 \n% Change \nJan \n1,091.49 \n1,295.88 \n \nFeb \n307.40 \n217.33 \n \nMar \n714.80 \n543.86 \n \nApr \n285.94 \n933.74 \n \nMay \n905.99 \n524.54 \n \nJun \n1,179.54 \n746.37 \n \n1st Half \n4,485.17 \n4,261.72 \n-4.98 \nJul \n810.92 \n \n \nAug \n654.53 \n \n \nSep \n989.58 \n \n \nOct \n652.50 \n \n \nNov \n830.23 \n \n \nDec \n0.00 \n \n \n2nd Half \n3,937.76 \n \n \nCumulative \nFigure \n8,422.93 \n4,261.72 \n \n \n4.3.3 \nReserve Requirements \n \nThe \nCash \nReserve \nRatio \n(CRR) \ncontinued \nto \nbe \nemployed \nto \ncomplement the MPR, OMO and other \nmacroprudential instruments in liquidity \nmanagement. \nDuring \nthe \nreview \nperiod, the MPC harmonized the CRR \non private sector deposits of 20.0 per \ncent and public sector deposits of 75.0 \nper cent to 31.0 per cent of total \nreservable deposits. This led to the \nimprovement \nin \nthe \nefficacy \nof \nmonetary \npolicy \ntransmission, \neffectiveness of liquidity management \nand curtailed abuses. \n \n4.2.4 \nStanding Facilities \n \nThe Bank‘s standing facilities window \n(lending/deposit) remained open, and \nwas accessed by Deposit Money Banks \n(DMBs) and discount houses (DH) to \nmeet their daily liquidity requirements \nin the first half of 2015. The request for \nStanding \nLending \nFacility \n(SLF), \nincreased by 51.14 per cent from \nN1,664.00 billion in the second half of \n2014 to N2,515.05 billion in the first half \nof 2015. The volume of SLF at end-June \n2015 represented an increase of 24.43 \nper \ncent \ncompared \nwith \nthe \ncorresponding period of 2014 (Table \n4.2). At the Standing Deposit Facility \n(SDF) window, the volume decreased \nsignificantly during the period. The \ncumulative volume of deposits stood \nat N9,257.46 billion, representing 68.52 \nper \ncent \ndecrease \nbelow \nthe \nN29,410.97 billion recorded in the \nsecond half of 2014. Similarly, the end-\nJune 2015 figure represented 80.09 per \ncent decrease below the N46,496.63 \nbillion recorded in the corresponding \nperiod of 2014 (see Table 4.3). The \ncombination of liquidity management \ninstruments deployed by the Bank in \nthe period under review, effectively \nmoderated the liquidity surfeit within \nthe banking system. This resulted in \nincreased lending at the SLF window \nand decreased deposit at the SDF \nwindow. \nAlso, \nlower \nFederation \n \n \n \n \n CBN Monetary Policy Review \n \n \n27 \n \n \nAccounts \nAllocation \nCommittee \n(FAAC) distributions to the three tiers of \ngovernment moderated liquidity in the \nbanking system. \n \nTable 4.2 \nCBN Standing Lending Facility (January 2014 – \nJune 2015) (N’billion) \nDate \n2014 \n2015 \n% \nChange \nJan \n615.59 \n104.75 \n \nFeb \n653.74 \n922.28 \n \nMar \n560.27 \n541.13 \n \nApr \n50.29 \n529.77 \n \nMay \n44.88 \n229.36 \n \nJun \n96.42 \n187.76 \n \n1st Half \n2,021.19 \n2,515.05 \n24.43 \nJul \n 96.42 \n \n \nAug \n 55.46 \n \n \nSep \n 133.80 \n \n \nOct \n 23.84 \n \n \nNov \n 224.59 \n \n \nDec \n 1,129.89 \n \n \n2nd Half \n1,664.00 \n \n \nTotal \n3,685.19 \n2,515.05 \n \n \nTable 4.3 \nCBN Standing Deposit Facility (January 2014 – \nJune 2015) (N’billion) \nDate \n2014 \n2015 \n% Change over \nthe Preceding/ \nCorresponding \nPeriod \nJan \n13,543.87 \n2,562.15 \n-81.1 \nFeb \n4,953.72 \n862.15 \n-82.6 \nMar \n5,844.76 \n1,298.46 \n-77.8 \nApr \n8,190.69 \n864.11 \n-89.5 \nMay \n8,061.09 \n1,958.72 \n-75.7 \nJun \n5,902.5 \n1,711.87 \n-71.0 \n1st \nHalf \n46,496.63 \n9,257.46 \n-79.6 \nJul \n 7,049.30 \n \n \nAug \n 4,309.30 \n \n \nSep \n 6,734.45 \n \n \nOct \n 7,436.35 \n \n \nNov \n 2,804.84 \n \n \nDec \n 1,076.73 \n \n \n2nd \nHalf \n29,410.97 \n \n \nTotal \n75,907.60 \n9,257.46 \n \n \n4.3.5 \n Foreign Exchange Intervention \n \nThe Bank continued to intervene in \nthe \nforeign \nexchange \nmarket \nto \nstabilize the naira exchange rate in the \nreview period. Total supply of foreign \nexchange declined to US$13,974.27 \nmillion in the first half of 2015 from \nUS$20,752.01 \nmillion \nin \nthe \ncorresponding \nperiod \nof \n2014, \nrepresenting \na \n32.66 \nper \ncent \nreduction. \nWhen \ncompared \nwith \nUS$16,263.03 million in the second half \nof 2014, it declined by US$2,288.76 \nmillion or 14.07 per cent (Table 4.4). \n \nThe \nreduced \nsupply \nof \nforeign \nexchange reflected the efficacy of the \nimplementation of the administrative \nmeasures introduced. This moderated \nspeculative demand in the foreign \nexchange market, limited arbitrage \nopportunities and the rate of depletion \nof foreign reserves. The administrative \nmeasures included the closure of the \nofficial window (rDAS) of the foreign \nexchange \nmarket, \nlower \nlimit \non \nweekly \nsales \nto \nBDCs \nand \nnew \ndirectives \non \nthe \nmonitoring, \nrepatriation of export proceeds. \n \n \n \n \n CBN Monetary Policy Review \n \n \n28 \n \n \nTable 4.4 \nForeign Exchange Supply by the CBN (US$ \nMillion) \nDate\nSales to \nrDAS\nSales to \nBDC\nTotal Supply \n(RDAS + \nBDC)\nSales to \nrDAS\nSales to \ninterbank\nSales to \nBDC\nTotal Supply \n(rDAS+inter\nbank + BDC)\nJan\n2,989.43\n \n556.30\n \n3,545.73\n \n1,987.40\n \nN/a\n184.70\n \n2,172.10\n \nFeb\n3,101.87\n \n567.05\n \n3,668.92\n \n1,197.10\n \n2,334.90\n \n371.40\n \n3,903.40\n \nMar\n3,151.59\n \n560.95\n \n3,712.54\n \n1,866.10\n \n301.60\n \n2167.7\nApr\n2,663.92\n \n712.80\n \n3,376.72\n \n1,375.70\n \n370.40\n \n1746.1\nMay\n2,928.49\n \n619.84\n \n3,548.33\n \n1,856.60\n \n309.90\n \n2166.5\nJun\n2,398.55\n \n501.22\n \n2,899.77\n \n1,448.50\n \n369.97\n \n1818.47\n1st Half\n17,233.85\n \n3,518.16\n \n20,752.01\n \n3,184.50\n \n8,881.80\n \n1,907.97\n \n13,974.27\n \nJul\n2,494.76\n \n184.94\n \n2,679.70\n \n-\n \nAug\n3,201.10\n \n169.08\n \n3,370.18\n \n-\n \nSep\n2,598.45\n \n143.24\n \n2,741.69\n \n-\n \nOct\n3,498.48\n \n178.86\n \n3,677.34\n \n-\n \nNov\n2,296.93\n \n145.71\n \n2,442.64\n \n-\n \nDec\n1,241.13\n \n110.35\n \n1,351.48\n \n-\n \n2nd Half\n15,330.85\n \n932.18\n \n16,263.03\n \n-\n \n-\n \n-\n \nTotal\n32,564.70\n \n4,450.34\n \n37,015.04\n \n3,184.50\n \n1,907.97\n \n13,974.27\n \n2014\n2015\n \n \n4.3 \nDevelopments \nin \nMonetary \nAggregates \n \nThe \nperformance \nof \nmonetary \naggregates in the first half of 2015 was \nweaker than projected: this could be \nexplained by the maintenance of a \ntight monetary policy stance and \nlower fiscal injections into the system \ndue to low public sector revenues. \nFurther analysis revealed that credit to \nthe public sector increased in the \nreview period, thus crowding out the \nprivate sector. \n \n4.3.1 \nBroad Money (M2) \n \nBroad Money (M2) declined by 0.61 \nper cent to N18,811.64 billion at end-\nJune 2015 from N18,927.79 billion at \nend-December 2014. Compared with \nthe end-June 2014 level of N17,576.64 \nbillion, M2 increased by 7.03 per cent. \nThe decline in M2 as at end-June 2015, \nwhen \nannualized, \nindicated \na \ncontraction \nof \n1.22 \nper \ncent, \nin \ncontrast \nto \nthe \nindicative \ngrowth \ntarget of 15.24 per cent. \n \nFigure 4.1 \nMoney Supply (M1) and (M2) (Dec 2014 – June \n2015) \nDec-14\nJan-15\nFeb-15\nMar-15\nApr-15\nMay-15\nJun-15\nBroad Money (M2)\n18,927.79\n18,975.00\n18,871.26\n19,142.53\n19,267.59\n19,193.98\n18,811.64\nNarrow Money (M1)\n6,919.55\n7,118.51\n6,729.93\n6,994.09\n6,844.75\n6,669.65\n6,542.60\n -\n 5,000.00\n 10,000.00\n 15,000.00\n 20,000.00\n 25,000.00\nN'Billion\nMoney Supply (M1) & (M2) (December 2014 - June 2015)\nBroad Money (M2)\nNarrow Money (M1)\n \nFigure 4.2 \nGrowth in Money Supply (M1) and (M2) (Dec \n2014 – Jun 2015) \n-6.00%\n-4.00%\n-2.00%\n0.00%\n2.00%\n4.00%\n6.00%\nDec-14\nJan-15\nFeb-15\nMar-15\nApr-15\nMay-15\nJun-15\nPercentage\nGrowth in Money Supple (M1) & (M2) (December 2014 - June 2015)\nM2 Growth (%)\nM1 Growth (%)\n \n4.3.2 \nNarrow Money (M1) \n \nNarrow Money (M1) decreased by \n5.45 per cent to N6,542.60 billion at \nend-June 2015 from N6,919.55 billion at \nend-December 2014. Compared with \n \n \n \n \n CBN Monetary Policy Review \n \n \n29 \n \n \nthe end-June 2014 figure of N7,096.44 \nbillion, M1 declined by 7.80 per cent. \nThe growth rate of M1 as at end-June \n2015, when annualized, indicated a \ndecline of 10.90 per cent, in contrast to \nthe indicative growth target of 9.91 per \ncent (Figures 4.1 and 4.2). \n \n4.3.3 \nNet Foreign Assets (NFA) \n \nNet Foreign Assets (NFA) decreased \nby 16.15 per cent to N5,951.45 billion at \nend-June 2015 from N7,098.10 billion at \nend-December 2014. Compared with \nthe end-June 2014 figure of N7,673.10 \nbillion, NFA declined by 22.44 per cent. \nThe growth rate of NFA as at end-June \n2015, when annualized, indicated a \ndecline of 32.30 per cent, in contrast to \nthe indicative growth target of 10.60 \nper \ncent. \nThe \ncontinued \nweak \nperformance of NFA was attributed to \ndeclining oil receipt due to a fall in oil \nprices, capital flow reversals due to \nimprovements in some industrialized \neconomies such as the US and the UK, \nand investor‘s anxiety about the 2015 \ngeneral elections. \n \n \n \n \n \n \n \n \n \n \n \n \n \n \nFigure 4.3 \nNet Domestic Asset (NDA) (Dec 2014 – Jun 2015) \nDec-14\nJan-15\nFeb-15\nMar-15\nApr-15\nMay-15\nJun-15\nNet Domestic Assets\n11,829.69\n12,671.68\n13,033.70\n13,156.93\n13,250.46\n13,714.29\n12,860.18\n 10,000.00\n 11,000.00\n 12,000.00\n 13,000.00\n 14,000.00\nN'Billions\nNet Domestic Assets (December 2014 -June 2015)\nNet Domestic Assets\n \nFigure 4.4 \nNDA, NDC and Other Assets (net) (Dec 2014 – \nJun 2015) \n (10,000.00)\n (5,000.00)\n -\n -\n 10,000.00\n 20,000.00\n 30,000.00\nN'Billion\nDec-14\nJan-15\nFeb-15\nMar-15\nApr-15\nMay-15\nJun-15\nNet Domestic Assets\n11,829.69\n12,671.68\n13,033.70\n13,156.93\n13,250.46\n13,714.29\n12,860.18\nNet Domestic Credit\n18,872.73\n17,278.86\n20,647.70\n20,757.62\n20,695.57\n21,210.50\n21,410.18\nOther Assets (Net)\n(7,043.05)\n(7,469.89)\n(7,614.01)\n(7,600.69)\n(7,445.11)\n(7,496.21)\n(8,549.99)\nNDA, NDC and Other Assets (net) (December 2014 -June 2015)\n \n4.4.3 \nCredit to the Government (Cg) \n \nCredit to government (Cg) grew by \n231.72 per cent to N2,512.5 billion at \nend-June 2015 from N757.53 billion at \nend-December 2014. When compared \nwith the end-June 2014 figure of \nnegative N236.09 billion. The growth \nrate of Cg as at end-June 2015, when \nannualized, indicated an increase of \n463.44 per cent, which was well above \nthe indicative growth target of 36.05 \nper cent. In effect, the government \nsector moved from being a net \n \n \n \n \n CBN Monetary Policy Review \n \n \n30 \n \n \ncreditor to the banking system to a net \ndebtor, owing to a massive drop in \nrevenues occasioned by the decline in \ncrude oil prices in the international \nmarket. \n \n4.4.4 \nCredit to the Private Sector (Cp) \n \nCredit to the private sector (Cp) \nincreased \nby \n4.32 \nper \ncent \nto \nN18,897.31 billion at end-June 2015 \nfrom \nN18,115.21 \nbillion \nat \nend-\nDecember 2014. Compared with the \nend-June 2014 figure of N16,925.58 \nbillion, Cp rose by 8.31 per cent. The \ngrowth rate of Cp as at end-June 2015, \nwhen \nannualized, \nindicated \nan \nincrease of 8.64 per cent, which was \nbelow the indicative growth target of \n26.06 per cent for 2015. \n \nFigure 4.5 \nDomestic Credit to Private Sector (Dec 2013 – \nJune 2015) \nDec-14\nJan-15\nFeb-15\nMar-15\nApr-15\nMay-15\nJun-15\nCredit to Private Sector 18,115.21\n18,165.67\n18,711.74\n18,579.22\n18,595.24\n18,651.81\n18,897.31\n17,600.00\n17,800.00\n18,000.00\n18,200.00\n18,400.00\n18,600.00\n18,800.00\n19,000.00\nN'Billion\nCredit to Private Sector (December 2014 -June 2015)\n \n4.4.5 \n Reserve Money (RM) \n \nReserve Money (RM), at N5,945.80 \nbillion increased by 0.25 per cent at \nend-June 2015 from N5,930.90 billion at \nend-December 2014. Provisional figures \nshowed that when annualized, RM as \nat end-June 2015 was below the 2015 \nindicative target of N7,095.49 billion. \nThe \nincrease \nin \nRM \nover \nthe \ncorresponding period of 2014 was due \nto the effects of the discriminatory CRR \non private and public sector deposits, \nup to May when it was harmonized at \n31 per cent. The marginal decline in \nCRR during the review period was \npartly due to the effect of the \nharmonization of the CRR, and active \nliquidity mop-up in the system through \nOMO. Table 4.5 below is a summary of \nthe major monetary aggregates and \nprovisional outcome as at end-June \n2015. \n \nTable 4.5 \nMonetary Aggregates Outcomes (Growth in % \nexcept otherwise stated) \n \n \nChange \nin \nH1 \n2015 \n \nActual \nActual \nActual \nBench\nmark \nDevi\nation \n(N'b) \nActual \nJune \nDec \nJune \n2015 \n2014 \n2014 \n2015 \n \nM2 \n(N'b) \n17,576\n.64 \n18,927\n.79 \n18,811.6\n4 \n20,769\n.04 \n-\n1,957\n.40 \n-116.15 \nM2 \n(%) \n12.03 \n20.64 \n-0.61 \n15.20 \n-\n15.85 \n-21.25 \nM1 \n(N'b) \n7,096.\n44 \n6,919.\n55 \n6,542.60 \n9,480.\n49 \n-\n2,937\n.89 \n-376.95 \nM1 \n(%) \n0.9 \n-1.61 \n-5.45 \n9.91 \n-\n15.36 \n-3.84 \nRM \n(N'b) \n4,786.\n36 \n5,964.\n76 \n5,945.97 \n7,095.\n49 \n-\n1,149\n.52 \n-18.79 \nRM \n(%) \n-5.97 \n24.62 \n-0.32 \n16.78 \n-\n17.10 \n-24.94 \nNDC \n(N'b) \n16,689\n.49 \n18,872\n.73 \n21,410.1\n8 \n24,970\n.45 \n-\n3,560\n.27 \n2,537.44 \n \n \n \n \n CBN Monetary Policy Review \n \n \n31 \n \n \nNDC \n(%) \n14.82 \n29.84 \n13.45 \n29.3 \n-\n15.85 \n-16.39 \nCg \n(N'b) \n-\n236.09 \n757.53 \n2,512.87 \n-\n642.91 \n3,155\n.78 \n1,755.34 \nCg \n(%) \n85.75 \n145.74 \n231.72 \n36.05 \n195.6\n7 \n85.98 \nCp \n(N'b) \n16,925\n.58 \n18,115\n.21 \n18,897.3\n1 \n25,613\n.36 \n-\n6,716\n.05 \n782.10 \nCp \n(%) \n4.53 \n11.88 \n4.32 \n26.06 \n-\n21.74 \n-7.56 \nNFA \n(N'b) \n7,673.\n10 \n7,098.\n10 \n5,951.45 \n10,467\n.19 \n-\n4,515\n.74 \n-\n1,146.65 \nNFA \n(%) \n-11.38 \n-18.02 \n-16.15 \n10.6 \n-\n26.75 \n1.87 \n \n \n \n \n \n \n \n \n CBN Monetary Policy Review \n \n \n32 \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n CBN Monetary Policy Review \n \n \n33 \n \n \nCHAPTER FIVE \n \n5.0 \nDEVELOPMENTS \nIN \nTHE \nFINANCIAL MARKETS \n \nhe Nigerian financial environment \nwas shaped largely by global \neconomic developments notably: \nthe \nweak \ncommodity \nmarket \nparticularly the continued decline in \ncrude oil prices, heightened risks in \nthe euro area following the Greek debt \ncrisis, and continued slowdown in \nChina. \nThese \nrequired \na \nbroadly \naccommodative \nmonetary \nenvironment, which was provided by \nthe expansion of the ECB quantitative \neasing \nprogramme, \nand \nthe \nquantitative and qualitative monetary \neasing by the Bank of Japan (BoJ). \nThere was, however, a trend towards \nmonetary policy divergence in the \nadvanced \neconomies \nfollowing \nexpectations about the prospects of \nUS \nmonetary \npolicy \nnormalization. \nThese were compounded by the \ncontinued appreciation of the US \ndollar, as well as the depreciation of \nemerging market currencies, leading \nto capital flow reversals from emerging \nand developing markets, including \nNigeria. \n \nThe money market remained active \nwith fluctuations in banking system \nliquidity towards the later part of the \nreview \nperiod, \nreflecting \nrelative \nvolatility in money market interest rates. \nIn the foreign exchange market, the \nheightened \ndemand \nfor \nforeign \nexchange led to further depreciation \nof the naira, and in a bid to stem \nfurther \ndepletion \nof \nthe \nexternal \nreserves, the Bank closed the official \nforeign \nexchange \nwindow. \nThis \nmoderated the demand pressure and \nreversal of capital flows. As a result, \nthe capital market witnessed a modest \ndecline. \n \n5.1 \nThe Money Market \n \nThere were significant developments \nin the money market, which reflected \nactive transactions in CBN bills and \ngovernment securities in the first half of \n2015. The observable fluctuations in \nbanking system liquidity in the later \npart of the period under review, \nreflected \nthe \nrelative \nvolatility \nin \nmoney market interest rates. Market \nactivities \nalong \nwith \nsubstantial \ndemand \npressure \nin \nthe \nforeign \nexchange \nmarket \nwere \nimpacted \nnotably by the fluctuations in banking \nsystem liquidity. During the review \nperiod, the interbank and OBB rates \noccasionally soared above the MPR \ncorridor of MPR +/-200 basis points. \nMarket activities were dominated by \npersistent rebound of activities in the \nuncollateralized \nsegment \nof \nthe \nmarket, and frequent transactions in \nOMO/NTB \ndeployed \nto \nregulate \nliquidity surfeits due to FAAC injections. \nMore importantly, to further address \nthe liquidity conditions in in the banking \nsystem, CRR on public and private \nT \n \n \n \n \n CBN Monetary Policy Review \n \n \n34 \n \n \nsector deposits were harmonized at \n31.0 per cent, and the MPR was \nretained at 13.0 per cent with a \ncorridor of +/- 200 basis points around \nthe \nmidpoint. \nThe \nlow \nlevel \nof \ntransactions previously recorded in the \nrepo segment of the market, remained \nunchanged during the period. \n \n5.1.1 \nShort-term \nInterest \nRate \nDevelopments \n \nDuring the review period, money \nmarket interest rates largely reflected \nthe liquidity levels in the banking \nsystem \nand \nwere \ninfluenced \nby \nstatutory \nFAAC \ndisbursement, \nNTB \nmaturities/auctions \nand \nthe \nharmonization of the CRR for both \nprivate and public sector deposits. The \nMPR, however, was maintained at 13.0 \nper cent with the corridor of +/- 200 \nbasis \npoints \nto \nguide \nliquidity \nintervention in the system. Accordingly, \na number of OMO auctions were \nconducted by the Bank to moderate \nthe effects of liquidity surge associated \nwith FAAC disbursements, and maturity \nof treasury securities. Various tightening \nmeasures were adopted in response to \nthe liquidity surfeit, caused by AMCON \nBond redemption in the last quarter of \n2014. As a result, there was preference \nfor collateralized financing by lenders, \nfollowing the migration to the new Real \nTime Gross Settlement (RTGS) system \nand Scrippless Securities Settlement \nSystem \n(S4), \nwhich \nwere \nmore \ntransparent. Consequently, the OBB \nrate was higher than the interbank call \nrate for most of the period (table 5.1). \nThe \naverage \nOBB \nrate \nranged \nbetween 8.65 and 28.52 per cent, \nwhile the interbank call rate ranged \nbetween 7.49 and 24.24 per cent. The \n30-day NIBOR was between 14.67 and \n16.99 per cent. \n \nTable 5.1 \nWeighted Average Money Market Interest Rates \n(December 2014 – June 2015) \n \nFigure 5.1 \nWeighted Average Money Market Interest Rates \n(December 2014 – June 2015) \n \n \n \n \n \n CBN Monetary Policy Review \n \n \n35 \n \n \n(i) \nThe Interbank Call Rate \n \nIn the review period, activity in the \ninterbank market increased as the call \nrate rose from 6.99 per cent in January \nto 12.7 per cent in March 2015. The \nrate, further, increased significantly by \n1155 basis points to 24.25 per cent in \nApril 2015. The development in April \nwas attributed to the reduction in net \nliquidity in the banking system, due to \nsale of CBN Bills and NTBs worth N61.37 \nbillion and N95.00 billion on March 12, \n2015 (Figure 5.2). \n \nFigure 5.2 \nInterbank Call Rate (December 2014 – June \n2015) \n \n \n(ii) \nThe Open Buy Back Rate \n \nThe weighted average OBB rate \nfluctuated between 8.69 and 27.19 per \ncent to an average of 15.95 per cent \nin the first half of 2015. It decreased \nfrom 23.20 per cent in April to 11.69 \nand 10.64 per cent in May and June, \n2015, respectively. The relative stability \nin the OBB rate in the later part of the \nreview \nperiod, \nwas \ndue \nto \nthe \nharmonization of CRR on both private \nand public sector deposits at the MPC \nmeeting of May 18 – 19, 2015 (Figure \n5.3). Transactions in the OBB segment \nremained active in the review period. \nAs in the interbank call segment, the \nspikes in the OBB rate were also due to \nlow level of liquidity in the banking \nsystem, arising from the sale of CBN Bills \nand NTBs worth N61.37 billion and \nN95.00 billion on March 12, 2015. The \nimproved \nactivities \nat \nthe \nOBB \nsegment were largely traceable to \navailability of funds within the system \nfrom OMO and NTB maturities. There \nwas also enhanced confidence by \nDMBs in the collateralized segment of \nthe market, resulting from the migration \nto \nthe \nnew \nRTGS \nand \nScrippless \nSecurity Settlement System (S4), which \nencouraged \ntransparency \nin \nthe \nsettlement of secured transactions. \n \nFigure 5.3 \nOpen Buy Back Rate (December 2014 – June \n2015) \n \n \n \n \n \n \n CBN Monetary Policy Review \n \n \n36 \n \n \n(iii) \nThe Nigeria Interbank Offered \nRate (NIBOR) \n \nThe reference rate in the Nigerian \nmoney market, the NIBOR, maintained \nrelative stability across tenors during \nthe \nreview \nperiod. \nThe \nweighted \naverage 30-day NIBOR, rose from 13.7 \nper cent in January to 15.89 per cent in \nMarch 2015. It however declined to \n14.61 per cent in May, owing largely to \nthe harmonization of CRR on private \nand \npublic \nsector \ndeposits \nbut \nsubsequently closed at 15.45 per cent \nin June 2015 (Table 5.1). \n \n5.2 \nForeign Exchange Market \n \nThe Bank‘s policy of maintaining an \nofficial exchange rate, mid-point of \nN168/US$, with a widened intervention \ncorridor of +/-5.0 per cent, became \nunsustainable in the face of increasing \npressure on the naira. Consequently, \nthe Bank closed the official foreign \nexchange window on February 18, \n2015 and only intervened at the \ninterbank foreign exchange market \nimplying a further depreciation of the \nexchange rate to N197/US$. The further \ndepreciation was targeted at halting \nthe dwindling reserves occasioned by \nfalling oil prices and capital reversals as \nwell \nas \ncurbing \nthe \nheightened \ndemand for foreign exchange in the \nmarket. The interbank exchange rate \nclosed at N196.95/US$ at end-June, \n2015. \n \nFigure 5.4 \nDaily Naira-US Dollar Exchange Rate (Jan - June \n2015) \n \n \n5.2.1 \nAverage Exchange Rates \n \nThe Interbank foreign exchange rate \nat \nan \naverage \nof \nN194.04/US$ depreciated by 16.05 per \ncent to an in the first half of 2015 from \nN167.21/US$, in the second half of \n2014. The BDC rate also depreciated \nby 23.16 per cent to an average of \nN213.58/US$ from N173.41/US$, over \nthe same period (Table 5.2). \n \n \n \n150.00\n155.00\n160.00\n165.00\n170.00\n175.00\n180.00\n185.00\n190.00\n195.00\n200.00\n205.00\n1/5/2015\n1/13/2015\n1/21/2015\n1/29/2015\n2/6/2015\n2/14/2015\n2/22/2015\n3/2/2015\n3/10/2015\n3/18/2015\n3/26/2015\n4/3/2015\n4/11/2015\n4/19/2015\n4/27/2015\n5/5/2015\n5/13/2015\n5/21/2015\n5/29/2015\n6/6/2015\n6/14/2015\n6/22/2015\n6/30/2015\nRates \nDaily Foreign Exchange Rates Naira/US$ \nInterbank\n \n \n \n \n CBN Monetary Policy Review \n \n \n37 \n \n \nTable 5.2 \nAverage Monthly Spot Exchange Rates (July \n2014 – June 2015) (N/US$) \n \n \n5.2.2 \nEnd-Period (Month) Exchange \nRates \n \nThe naira depreciated in the two \nsegments of the foreign exchange \nmarket at end-June 2015, compared \nwith \nend-December \n2014. \nAt \nthe \ninterbank foreign exchange market, \nthe naira depreciated by 9.42 per cent \nto N196.95/US$ at end-June 2015 from \nN180.00/US$ at end-December 2014. In \nthe BDC segment, the naira also \ndepreciated by 17.75 per cent to \nN225.50/US$ at end-June 2015 from \nN191.50/US$ at end-December 2014 \n(Figure 5.5 and Table 5.3). \n \n \nTable 5.3 \nEnd-Month Exchange Rates (July 2014 – June \n2015) (N/US$) \n \nFigure 5.5 \nEnd-Month Exchange Rates (July 2014-June \n2015) (N/U$$) \n \n \n \n \n \nMonth/Year\nInterbank Rate\nBDC 'B' Rate\n2014: Jul\n162.25\n167.71\nAug\n161.99\n170.36\nSep\n162.93\n168.64\nOct\n164.64\n169.43\nNov\n171.10\n175.85\nDec\n180.33\n188.45\nAverage\n167.21\n173.41\n2015: Jan\n181.78\n196.13\nFeb\n194.47\n213.18\nMar\n197.07\n222.93\nApr\n197.00\n210.70\nMay\n197.00\n219.55\nJun\n196.92\n218.98\nAverage\n194.04\n213.58\nMonth/Year\nInterbank Rate\nBDC 'B' Rate\n2014: Jul\n161.90\n167.00\nAug\n162.40\n169.00\nSep\n163.70\n169.00\nOct\n165.55\n170.00\nNov\n176.80\n182.50\nDec\n180.00\n191.50\nAverage\n168.39\n174.83\n2015: Jan\n185.20\n207.50\nFeb\n198.00\n224.00\nMar\n197.00\n214.50\nApr\n197.00\n221.00\nMay\n197.00\n216.00\nJun\n196.95\n225.50\nAverage\n195.19\n218.08\n \n \n \n \n CBN Monetary Policy Review \n \n \n38 \n \n \n5.2.3 \nNominal \nand \nReal \nEffective \nExchange Rates \n \nThe Nominal Effective Exchange Rate \n(NEER) depreciated by 9.23 per cent to \n104.90 in the first half of 2015 from 95.22 \nin the second half of 2014. It also \ndepreciated by 8.56 per cent when \ncompared with the corresponding \nperiod of 2014. The Real Effective \nExchange Rate (REER) depreciated by \n5.60 per cent from 58.62 in the second \nhalf of 2014 to 62.10 in the first half \n2015. When compared with the \ncorresponding period of 2014, the \naverage \nREER \ndepreciated \nmoderately by 2.25 per cent (Table \n5.4). Therefore, there was significant \ndepreciation of the naira in both \nnominal and real terms relative to the \ncurrencies of Nigeria‘s major trading \npartners (table 5.4 and figure 5.6). \n \nFigure 5.6 \nNominal and Real Effective Exchange Rates \nIndices (July 2014 – January 2015) \n \n \n \n \nTable 5.4 \nNominal and Real Effective Exchange Rates \nIndices (Jan 2014 – Jan 2015) \n \n5.2.5 \nForeign \nExchange \nFlows \nthrough the CBN \n \nForeign exchange inflows through the \nCBN on a gross basis, significantly \ndeclined \nby \n35.59 \nper \ncent \nto \nUS$15,283.00 million in the first half of \n2015, from US$23,728.32 million in the \nsecond half of 2014. It also dropped by \n33.23 \nper \ncent \ncompared \nwith \nUS$22,888.75 \nmillion \nin \nthe \ncorresponding period of 2014. Similarly, \ngross \nforeign \nexchange \noutflows \nMonths\nNEER\nREER\n14-Jan\n94.96\n60.43\n14-Feb\n95.84\n60.93\n14-Mar\n96.26\n61.06\n14-Apr\n96.37\n61.02\n14-May\n96.08\n60.53\n14-Jun\n96.00\n60.20\n2014: H1 Average\n95.92\n60.70\n14-Jul\n95.23\n59.47\n14-Aug\n94.84\n58.96\n14-Sep\n92.68\n57.32\n14-Oct\n92.75\n57.07\n14-Nov\n97.70\n59.62\n14-Dec\n98.10\n59.27\n2014: H2 Average\n95.22\n58.62\n15-Jan\n96.53\n57.69\n15-Feb\n95.77\n57.09\n15-Mar\n108.55\n64.52\n15-Apr\n110.20\n65.25\n15-May\n108.88\n64.04\n15-Jun\n109.45\n64.03\n2015: H1 Average\n104.90\n62.10\n \n \n \n \n CBN Monetary Policy Review \n \n \n39 \n \n \ndecreased by 19.97 per cent to \nUS$21,070.36 million in the first half of \n2015, from US$26,327.84 million in the \nsecond half of 2014. When compared \nwith \nUS$28,501.98 \nmillion \nin \nthe \ncorresponding period of 2014, it further \ndecreased by 26.18 per cent. Thus, in \nthe review period, there was a net \noutflow \nof \nUS$5,787.40 \nmillion, \ncompared with US$2,599.52 million and \nUS$5,613.24 million in the preceding \nand corresponding halves of 2014 (see \nTable 5.5 and Figure 5.7). \n \nTable 5.5 \n Monthly Foreign Exchange Flows through the \nCBN (Jan 2014 – June 2015) \n \n* Provisional figure is used for the month of \n June, 2015 \n \n \nFigure 5.7 \nMonthly Foreign Exchange Flows through the \nCBN (Jan 2014 – June 2015) \n \n \n5.2.6 \nForeign Exchange Flow through \nthe Economy \n \nGross foreign exchange inflow to the \neconomy \ndeclined \nsignificantly \nby \n33.43 per cent to US$52,172.80 million in \nthe first half of 2015, from US$78,372.49 \nmillion in the second half of 2014. It also \ndecreased by 31.32 per cent when \ncompared with US$75,966.99 million in \nthe corresponding period of 2014. \nSimilarly, \ngross \nforeign \nexchange \noutflow declined by 19.60 per cent to \nUS$21,837.20 million in the first half of \n2015, from US$27,161.04 million in the \nsecond half of 2014. When compared \nwith US$29,092.92 million in the first half \nof 2014, it declined significantly by \n24.94 per cent. \n \nThus, during the review period, the \ntotal foreign exchange flows through \nthe economy resulted in a lower net \ninflow \nof \nUS$30,335.60 \nmillion, \ncompared with US$51,238.62 million in \nDates\nTotal Inflow\nTotal Outflow\nNet Flow\nJan-14\n2,543.55\n4,652.19\n-2,108.65\nFeb-14\n2,797.57\n6,612.99\n-3,815.41\nMar-14\n4,880.32\n4,430.48\n449.83\nApr-14\n3,779.45\n4,155.76\n-376.31\nMay-14\n3,171.28\n4,819.22\n-1,647.94\nJun-14\n5,716.58\n3,831.34\n1,885.24\n2014: H1 Total\n22,888.75\n28,501.98\n-5,613.24\nJul-14\n5,103.82\n3,299.90\n1,803.92\nAug-14\n3,760.04\n4,254.45\n-494.41\nSep-14\n4,230.38\n4,250.56\n-20.17\nOct-14\n3,228.46\n5,298.36\n-2,069.90\nNov-14\n4,120.82\n5,060.15\n-939.34\nDec-14\n3,284.80\n4,164.42\n-879.62\n2014: H2 Total\n23,728.32\n26,327.84\n-2,599.52\nJan-15\n2,442.00\n4,108.06\n-1666.1\nFeb-15\n2,554.50\n5,338.00\n-2783.5\nMar-15\n3,310.50\n3,429.70\n-119.2\nApr-15\n2,859.50\n2,569.10\n290.3\nMay-15\n1,744.50\n2,916.40\n-1171.8\nJun-15\n2,372.00\n2,709.10\n-337.10\n2015: H1 Total\n15,283.00\n21,070.36\n-5,787.40\n \n \n \n \n CBN Monetary Policy Review \n \n \n40 \n \n \nthe \npreceding \nperiod, \nand \nUS$46,874.06 \nmillion \nin \nthe \ncorresponding period of 2014. This \nrepresented decreases of 40.80 and \n35.28 per cent in the preceding and \ncorresponding periods, respectively. \nThe lower net inflow during the period \nreflected the impact of decreased \nearnings from oil, due largely to falling \noil prices in the international market \ncoupled with the decline in invisible \ninflows through autonomous sources \n(Table 5.6 and Figure 5.8). \n \nTable 5.6 \nMonthly Foreign Exchange Flows through the \nEconomy (Jan 2014 – Jun 2015) (US$ Million) \n \n \n \nFigure 5.8 \nMonthly Foreign Exchange Flows through the \nEconomy (Jan 2014 – Jun 2015) \n(US$ Million \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n0.00\n4,000.00\n8,000.00\n12,000.00\n16,000.00\n20,000.00\nU.S$' Millions \n \nNet Flow\nTotal Inflow\nTotal Outflow\n \n \n \n \n CBN Monetary Policy Review \n \n \n41 \n \n \nBOX 1 \nTHE MANAGED-FLOATING EXCHANGE RATE REGIME IN NIGERIA \nAn exchange rate is theoretically defined as the value of a country‘s currency \nrelative to another currency such as the U.S. dollar. Exchange rate regimes are \nbroadly classified into two, namely fixed and floating regimes. Under the fixed \nregime, the reference currency has a fixed exchange value in relation to another \ncurrency. This is called a fixed peg. A variant of this regime is the crawling peg, \nwhich allows the fixed position to depreciate or appreciate periodically by a pre-\nagreed percentage. \nIn floating regimes, the forces of demand and supply of foreign exchange are \nallowed to determine the value of a currency in relation to another. There are \nthree forms of floating, namely: pure floating, independent floating, and \nmanaged floating. In a pure float regime, the exchange rate is market \ndetermined with no foreign exchange market intervention by the monetary \nauthority. In the independent float regime, the exchange rate is also market \ndetermined and any foreign exchange market intervention is aimed at \nmoderating the rate of change to prevent undue fluctuations in the rate instead \nof setting a level for it. In other words, some intervention may be required from the \nmonetary authority to pull the rate back towards a desired level, if it strays far \naway from the level considered optimal for macroeconomic stability. \nIn a managed float, the monetary authority allows the market forces to operate \nwhile actively intervening to influence the movement of the exchange rate \nwithout specifying, or pre-committing to, a pre-announced path. A variation of this \nmanaged float system is one where the monetary authority announces a mid-\npoint with a floating band around the mid-point, that could range from a \nminimum of 1.0 per cent to a maximum of15.0 per cent on either side of the mid-\npoint. This band operates like a filter, shielding the economy from transitory shocks. \nIt provides the exchange rate, the flexibility to accommodate short-term \nfluctuations in the foreign exchange market, as well as transitory shocks associated \nwith fluctuations in external demand. \nThe broad consensus among economists suggests that purely floating or \ncompletely fixed exchange rates are only practicable among few countries. The \nintermediate regimes, among which is the managed-float have found relevance, \nespecially in a number of emerging market and developing economies, \nconsidering the fact that their financial systems lack depth, liquidity and maturity \n \n \n \n \n CBN Monetary Policy Review \n \n \n42 \n \n \n(Bordo, 2003)1. Another rationale for the adoption of the managed float regime is \nthe lack of a stable relationship between macroeconomic fundamentals and the \nexchange rate (Bofinger and Wollmershauser, 2003)2. \nIn Nigeria, the central bank has experimented with various frameworks of \nexchange rate management since independence, ranging first, from a fixed \ntargeting regime, to a single currency and later to a basket of currencies, in the \n1960s and 1970, to the managed floating regime. Under the regime, while the CBN \ndoes not fix the exchange rate of the naira, it has over the years, actively \nintervened in the foreign exchange market through various strategies. These \nincluded: the Second-Tier Foreign Exchange Market (SFEM), First Tier Foreign \nExchange Market (IFEM), Wholesale Dutch Auction System (wDAS), and Retail \nDutch Auction System (rDAS). The objective of the Bank‘s intervention has been to \nsmoothen short-term fluctuations in the exchange rate. The exchange rate band \nprovides a mechanism that defines the conditions for intervention and flexibility in \nthe exchange rate. It is reviewed as the need arises to ensure that it remains \nconsistent with the underlying fundamentals of the economy. The current band of \n+/- 5 per cent around the mid-point of N197/US$ was widened from an earlier \nband of +/-3% to make room for more flexibility in the exchange rate and to \nreduce the frequency of intervention by the Bank. \nAny exchange rate framework adopted needs to be supported by vibrant \ninstitutions as well as strong and complementary policy measures. Accordingly, \nwhen the exchange rate came under severe pressure from speculative activities, \nthe Bank closed the official foreign exchange window, and followed it up by \nincreasing the list of import items not eligible for accessing foreign exchange \nfunding from formal sources. \n \n1 Bordo, M.D. (2003) ‗‘Exchange Rate Choice in Historical Perspective‖, IMF Working Paper, WP/03/160, \nAugust \n2 Bofinger, P. and Wollmershauser, T. (2003) ―Managed Floating as a Monetary Policy Strategy‖. \nPresentation at BOFIT Workshop on Transition Economics, Helsinki, April. \n \n \n \n \n CBN Monetary Policy Review \n \n \n43 \n \n \n5.3 \nCapital Market \n \nThe decline in the capital market \ncontinued in the first half of 2015. This \nwas \ntraceable \nto \ndomestic \nand \nexternal factors, including: (i) low \ncrude oil prices and accretion to \nexternal reserves; (ii) foreign portfolio \ncapital \nreversals \nand \nsignificant \ndepreciation of the exchange rate; (iii) \ncontinued insurgency in the North-\nEastern part of the country; and (iv) \nuncertainty \nsurrounding \nthe \n2015 \ngeneral elections. In particular, the \nlevel of uncertainty in the Nigerian \ncapital market in the first half of 2015 \nwas a major source of concern to \nglobal investors, leading to increase in \ncapital outflows. \n \n5.3.1 \nEquities Market \n \nThe All-Share Index (ASI) declined by \n3.46 per cent to 33,456.83 at end-June \n2015, from its level of 34,657.15 at end-\nDecember 2014, and by 21.25 per cent \ncompared with 42,482.48 at end-June \n2014. Market Capitalization (MC) of \nequities also declined by 0.52 per cent \nto N11.42 trillion at end-June 2015, from \nN11.48 trillion at end-December 2014, \nand \nby \n18.60 \nper \ncent \nwhen \ncompared with N14.03 trillion at end-\nJune 2014 (Table 4.8 and Figure 4.9). \n \nThe ASI‘s 21.25 per cent year-on-year \ndecrease was driven mainly by weak \nperformance in the Consumer Goods, \nInsurance and Oil and Gas sectors, \nwhich declined by 6.7, 4.0 and 3.0 per \ncent, respectively, below their levels at \nend-December 2014. The NSE Banking \nindex, however, grew by 4.8 per cent. \nTable 5.7 \nNSE All-Share Index (ASI) and Market \nCapitalization (MC) (June 2014 – June 2015) \nDate\nASI\nMC (Equities)\n(N’ Trillion)\nJun-14\n42,482.48\n14.03\nJul-14\n42,097.46\n13.90\nAug-14\n41,532.31\n13.71\nSep-14\n41,210.10\n13.61\nOct-14\n37,550.24\n12.44\nNov-14\n34,543.05\n11.40\nDec-14\n34,657.15\n11.48\nJan-15\n29,562.07\n9.85\nFeb-15\n30,103.81\n10.04\nMar-15\n31,744.82\n10.72\nApr-15\n34,708.11\n11.79\nMay-15\n34,310.37\n11.66\nJun-15\n33,456.83\n11.42\n Source: NSE \nFigure 5.9 \n NSE ASI and MC (June 2014 – June 2015) \n9.50\n10.00\n10.50\n11.00\n11.50\n12.00\n12.50\n13.00\n13.50\n14.00\n28,000.00\n30,000.00\n32,000.00\n34,000.00\n36,000.00\n38,000.00\n40,000.00\n42,000.00\nMC\nASI\nASI\nMC (Equities)\nSource: NSE \n \n \n \n \n \n \n \n \n CBN Monetary Policy Review \n \n \n44 \n \n \nFigure 5.10 \nNSE ASI and MC (December 2014 – June 2015) \nSource: NSE \n \n5.3.2 \nMarket Turnover \nAggregate stock market turnover in \nthe first half of 2015 decreased by 8.92 \nper cent to 50.72 billion shares, valued \nat N557.00 billion, in 534,624 deals, \ncompared with 50.50 billion shares, \nvalued at N758.24 billion, in 591,755 \ndeals in the second half of 2014. \nRelative to the first half of 2014, market \nturnover however, decreased by 3.87 \nper cent from 52.76 billion shares \nvalued at N579.30 billion, in 623,155 \ndeals. \nForeign \nportfolio \ninvestment \noutflows exceeded inflows by 18.19 \nbillion in the first half of 2015. This can \nbe attributed to the continued fall in oil \nprices and divestments due to the sell-\noff pressure being encountered at the \nstock market. \n5.3.3 \nSectoral Contribution to Equities \nMarket Capitalization \n \nThe construction sector remained the \nmost capitalized primarily due to the \nvaluation of the building materials sub-\nsector. The sub-sector‘s share in overall \nmarket capitalization declined to 31.8 \nper cent at end-June 2015 from 32.7 \nper cent in the second half of 2014. \nOther \nleading \nsub-sectors \nwere \nbanking, \nbreweries, \nand \nfood \n& \nbeverages, with respective market \nshares of 22.1, 13.6 and 9.7 per cent, at \nend-June 2015 (Figure 4.12). \n \nFigure 5.11 \nNSE Market Capitalisation by Sector as at End-\nDecember 2014 \nFood and \nBeverages \n10.80%\nBanking\n20.62%\nInsurance\n1.38%\nBreweries\n14.24%\nConglomerates\n1.75%\nOil and Gas\n6.58%\nBuilding Materials\n32.65%\nOther Sectors\n11.97%\nSource: NSE \nFigure 5.12 \nNSE Market Capitalisation by Sector as at End-\nJune 2015 \nBreweries \n13.6%\nBanking\n22.1%\nFood & \nBeverages\n9.7%\nConglomerates\n1.7%\nInsurance\n1.3%\nOil and Gas\n6.9%\nBuilding \nMaterials\n31.8%\nOther Sectors\n12.9%\nSource: NSE \n8.50\n9.00\n9.50\n10.00\n10.50\n11.00\n11.50\n12.00\n26,000.00\n28,000.00\n30,000.00\n32,000.00\n34,000.00\n36,000.00\nMC (N'trillion) \nASI \nASI\nMC (Equities)\n \n \n \n \n CBN Monetary Policy Review \n \n \n45 \n \n \n5.3.4 \nThe Warren Buffett Valuation \nMetric and Nigeria’s Equities \nMarket \n \nThe Warren Buffett valuation metric for \nthe Nigerian stock market stood at 69.0 \nper cent in the second quarter of 2015, \nindicating an undervaluation, as it fell \nbelow the threshold of 75.0 to 115.0 per \ncent. The undervaluation can be \nattributed \nto \na \nnumber \nof \ndevelopments, including sell-off by \nforeign \nportfolio \ninvestors, \ncapital \nreversals and low crude oil prices \nresulting in the depreciation of the \nexchange rate, anxiety surrounding \nthe 2015 general elections, perceived \nsovereign risk of the Nigerian economy \nand improvements in the economy of \nsome advanced countries such as the \nUS and the UK. The undervaluation of \nequities \nprovided \nenormous \nopportunities for investors to take \nadvantage of the Nigerian market. \n \nFigure 5.13 \nWarren Buffet Valuation of Nigerian Equities \nMarket \n \n \n5.3.5 \nBond Market \n \nThe bond market was dominated by \nFederal Government of Nigeria (FGN) \nsecurities. \nSub-national \ngovernment \nand corporate bonds recorded some \nactivities, with the corporate bonds \nsegment having the least share by \nmarket volume. \n \n5.3.5.1 FGN Eurobond \n \nThe yield on the 10-year dollar-\ndenominated bond decreased to 5.91 \nper cent at end-June 2015, from 6.23 \nper cent at end-December 2014, \nlargely \ndue \nto \nimproved \ninvestor \nconfidence in the economy following \nthe successful election and transition to \na new government. It was, however, \nhigher than the 4.80 per cent recorded \nin the corresponding period of 2014 \nwhen election issues were not key risks \nto stability (Figure 5.14). \n \nFigure 5.14 \n10-Year U.S. Dollar-denominated Bond Yield for \nNigeria (June 30, 2014 – June 30, 2015) \n \n -\n 0.20\n 0.40\n 0.60\n 0.80\n 1.00\n 1.20\n 1.40\nPer cent \n0.00\n1.00\n2.00\n3.00\n4.00\n5.00\n6.00\n7.00\n8.00\nYield (%)\nNigeria\n \n \n \n \n CBN Monetary Policy Review \n \n \n46 \n \n \nThe FGN bond yield curve as at end-\nJune 2015 trended downwards by 34 \nbasis points to 11.33, compared with \n11.67 at end- December 2014, and by \n20 basis points compared with 11.53 at \nend-June 2014 (Figure 5.15). At this \nlevel, FGN bond yields were positive \nand exceeded the June 2014 – June \n2015 rates of inflation, reflecting the \nsustained tight monetary policy stance \nof the Bank. \nFigure 5.15 \nFGN Bonds Yield Curves: end-Dec. 2014 vs. end-\nMar. 2015 vs. end- Jun. 2015 \n \n5.3.5.2 State/Local Government Bonds \n \nThere was low activity in the sub-\nnational bonds market segment during \nthe review period. The total value of \noutstanding state/local governments \nbonds at end-June 2015 was N544.43 \nbillion, compared with N524.67 billion \nat end- December 2014 and N528.87 \nbillion at end-June 2014. \n \n \n \n \n5.3.5.3 Corporate Bonds \n \nThere was heightened activity in the \ncorporate bond segment in the review \nperiod. \nThe \nvalue \nof \noutstanding \ncorporate bonds at end-June 2015 \nwas N220.39 billion, compared with \nN144.96 billion at end-December 2014 \nand N169.90 billion at end-June 2014. \nThe surge in activities was due to \nrestored investor confidence, following \nthe \nsuccessful \npolitical \ntransition \nprogramme in the country and the \nweak equities performance, which \nencouraged \npreference \nfor \nfixed \nincome securities by the corporate \nsector. \n \n5.3.5.4 Overall Analysis of the Nigerian \nCapital Market \n \nThe value of FGN bonds increased by \n1.91 per cent to N4.79 trillion at end- \nJune 2015 from N4.70 trillion at end-\nDecember 2014, and by 10.11 per cent \nover the level at end-June 2014. FGN \nbonds accounted for 28.2 per cent of \naggregate \ncapital \nmarket \ncapitalization as at end-June 2015. \nAlso, the value of state/municipal \nbonds, \ncorporate \nbonds \nand \nsupranational bonds were \nN544.43 \nbillion, \nN220.39 \nbillion \nand \nN24.95 \nbillion, accounting for 3.2, 1.3 and 0.1 \nper \ncent \nof \naggregate \nmarket \ncapitalization, respectively. The equity \nmarket accounted for 67.2 per cent of \naggregate market capitalization at \nend-June 2015, while the combined \n0.00%\n2.00%\n4.00%\n6.00%\n8.00%\n10.00%\n12.00%\n14.00%\n16.00%\n18.00%\n20.00%\n0.00\n2.00\n4.00\n6.00\n8.00\n10.00\n12.00\n14.00\n16.00\n18.00\n20.00\nYield\nYears to Maturity\nFGN Bond Yield Curves: Dec 31, 2014 vs. Mar 31, 2015 vs. Jun 30, 2015 \nJun 30, 2015\nMar 31, 2015\nDec 31, 2014\n \n \n \n \n CBN Monetary Policy Review \n \n \n47 \n \n \nshares of FGN bonds, state/municipal \nbonds, \ncorporate \nbonds \nand \nsupranational bonds accounted for \nthe remaining 32.8 per cent (Figure \n5.16). \n \nFigure 5.16 \nStructure of the Nigerian Capital Market (June, \n2015) \n \n \n \n \n \n \n \n \n \n \n \n \n \n \nFGN Bonds\n28.2%\nState/Municipal bonds\n3.2%\nCorporate bonds \n1.3%\nSupranational \nbonds\n0.1%\nEquities\n67.2%\n \n \n \n \n CBN Monetary Policy Review \n \n \n48 \n \n \nBox 2 \nThe Greek Debt Crisis \nThe global economic and financial crisis of 2007/08 triggered economic fragilities \nin many regions of the world. The crisis accentuated the Greek debt problem and \nheightened financial market risks in the euro area. The Greek Debt Crisis, which \nstarted in late 2009 has persisted, becoming the first of five sovereign debt crises in \nthe Eurozone, collectively referred to as the European Debt Crisis. \nThe Greek Debt Crisis was accentuated by some structural weaknesses in the \ncountry‘s economy. The weaknesses included lower GDP growth rates, huge fiscal \nimbalances that developed during the years preceding the crisis, and escalating \ngovernment debt-level due to the higher than expected government deficit and \nhigh debt-service costs. Others were poor budget compliance as well as gross \ncredibility problems in official statistics. Also, there was a sudden loss of confidence \namong creditors as Greece failed to meet its debt obligations. This situation \nworsened because of revelations about the inaccuracy of government data on \ndebt levels and deficits, leading to a further crisis of confidence. Consequently, \nthere was an unprecedented widening of bond yield spreads and increased cost \nof risk insurance on credit default swaps compared with other Eurozone countries. \nDue to the escalation in its debt-servicing costs, the country sought international \nfinancial assistance and in April 2010, received its first loan of €110 billion (£79 \nbillion) from the Eurozone and International Monetary Fund (IMF). The agreement \nspecified strict conditions on macroeconomic policy reforms, which were \ndesigned to enhance the competitiveness of the Greek‘s economy. During the \ncrisis, the Greek Government could not meet its obligations to its international \ncreditors, including the IMF. As a result, Greece sought additional financial \nassistance from the European Commission and the ECB, its major financiers. The \nECB offered Greece emergency funding, which was mainly used to support the \nalready weakened Greek banking system. In March 2012, the crisis intensified, \nprompting the need for a second bail-out, of an even larger loan. In January 2015, \na total of €142.7 billion had been granted to Greece as part of the second bail-\nout. Consequently, Greece‘s government debt became the second highest in the \nworld at over 175 per cent of GDP, or €317 billion (£226 billion). The majority of the \ndebts were owed the Eurozone and the IMF. \nThe latest round of financial assistance was prompted by Greece‘s inability to \nmeet its financial obligations. Given the nature of the austerity measures required \n \n \n \n \n CBN Monetary Policy Review \n \n \n49 \n \n \nand the unsustainability of Greek debts for the euro, the ECB and Euro Zone \noffered a new set of terms for a loans-for-reforms deal. The government held a \nreferendum on the terms offered by creditors, and the Greek electorate decisively \nbacked its government and voted against the terms of the proposal. The other \nEurozone countries viewed this as Greece‘s reluctance to negotiate. In the \ninterim, funds for the second Eurozone bailout programme ceased, exacerbating \nGreece‘s problems, culminating in its default on a €1.5 billion debt to the IMF at \nthe end of June, 2015. The European Central Bank froze its emergency funding of \nGreece‘s banks, leading Greece to introduce capital controls on withdrawals from \nits banks. \nThe Greek Debt Crisis has affected its economy, its people and the Eurozone. \nSince the crisis began six years ago, Greece‘s economy has undergone severe \nrecession, with persistent contraction in economic activity until 2014, when growth \nfinally resumed. In all, Greece‘s real GDP has fallen by over 27 per cent. The fall in \noutput has led to plummeting living standards and worsening social conditions. \nGreece unemployment rate increased from about 8 per cent in 2008 to 28 per \ncent in mid-2013. The youth unemployment rate rose to nearly 60 per cent in 2013 \nand remained at about 53 per cent in mid-2015. \n \nConsequently, Greek wages declined, resulting in poverty and deprivation. This \ndevelopment has been largely blamed for the stringent conditions of the bail-outs \nfrom the IMF, the European Commission and the ECB. \nIn addition, the Greek Debt crisis has reverberated through most of the euro area, \nweakening its currency, the euro, which depreciated in relation to the dollar for \nmost of the crisis period. Recent escalation of the crisis indicates major implications \nfor the European Union, culminating in the debate on Greek‘s continued \nmembership of the Union. \n \n \n \n \n CBN Monetary Policy Review \n \n \n50 \n \n \nNigeria is a major trading partner with the European Union countries, especially the \nUK, Ireland and France. Developments in the Union would impact on Nigeria‘s \ntrade balance with these countries. European banks are highly exposed to Greek \nsovereign debt, with Germany, France and the UK being the most vulnerable. In \nthe event of a Greece default, European banks may experience significant losses \nand, could cut their credit lines to developing countries to restore their capital \nadequacy ratios. Already, growing uncertainties in Greece, in the event of \ndefault, are limiting bank liquidity in the euro area, thereby worsening developing \ncountries‘ access to credit lines. \nIn addition, the European stock markets suffered huge losses, with Germany, Italy \nand France, being the most affected. The volatility of the stock markets in these \neconomies portend grave consequences for developing countries; sell-offs are \nimminent and this may trigger withdrawals that may impact on emerging markets. \nAlso, the spate of austerity measures aimed at mitigating the debt crisis in several \nEuropean economies have slowed growth, with the attendant rise in \nunemployment. The cuts in spending in these economies adversely affected aid \nto developing countries, adding to concerns, as several European countries were \nalready struggling to meet aid targets after the global financial crisis. The \nworsening unemployment problem in Europe would lead to reduced migrants‘ \nremittances, an important source of financing for developing countries. \nThe debt-induced exchange rate depreciation and volatility in Europe presents \nopportunities and challenges for developing economies. Commodity exporters \nmay actually benefit from a weaker euro that makes their exports more \ncompetitive in world markets. The economies that hold their reserves in euro would \nsuffer depreciation in real terms. Trade in services may also be affected by a \nweaker euro, which is also likely to reduce the value of remittances originating \nfrom Europe to the developing countries. \nThe Greek Debt Crisis still remains a waiting time bomb. Developing countries \nshould consider policies that limit their vulnerability to the Eurozone debt crisis and \nencourage alternative drivers of growth. Policy options include fiscal consolidation \nand macroeconomic stability, diversification with respect to trading partners and \nproducts, increased capital buffers for banks, and effective management of \ncapital inflows. \n \n \n \n \n \n \n CBN Monetary Policy Review \n \n \n51 \n \n \n5.4 \nGlobal \nFinancial \nMarket \nDevelopments \n \nThe global financial market remained \nrelatively \nstable, \nalthough \nrisks \nheightened in the euro area, following \nthe Greek debt crisis and continuing \nslowdown in China. Monetary policy \nremained \nbroadly \naccommodating \nboth in the developed and emerging \nmarket economies. Liquidity concerns \nwere shaped by market expectations \nabout the prospects of US monetary \npolicy normalization, the expansion of \nthe \nECB \nquantitative \neasing \nprogramme, continuing quantitative \nand qualitative monetary easing by \nthe Bank of Japan (BoJ) as well as the \nneed to stimulate growth in emerging \nmarket and developing economies. \nThe capital markets improved globally, \npartly fuelled by capital reversals from \nemerging \nmarket \nand \ndeveloping \neconomies and stronger performance \nof the US economy. The weakness in \nthe commodity market persisted on \naccount of continuing appreciation of \nthe US dollar, weak demand and \nample supply. \n \n5.4.1 \nMoney \nMarket \nand \nCentral \nBank Policy Rates \n \nLiquidity \nconcerns \nin \nthe \nglobal \nfinancial market were shaped by \nmarket \nexpectations \nabout \nthe \nprospects \nof \nUS \nmonetary \npolicy \nnormalization, \nand \nthe \nECB \nquantitative \neasing \nprogramme \ninvolving monthly injections of €60 \nbillion over an 18 month period, as well \nas \ncontinuing \nquantitative \nand \nqualitative monetary easing by the \nBank of Japan (BoJ). Accordingly, \nmonetary conditions in the advanced \neconomies \nremained \nbroadly \naccommodating, as the policy rates \nwere largely unchanged in the review \nperiod. Most emerging market and \ndeveloping economies lowered their \npolicy rates to stimulate growth in \nresponse to the dampening effect of \nweak \nexternal \ndemand \nand \ncommodity \nprices. \nThese \nincluded \nChina, Russia and India, while South \nAfrica held rates constant throughout \nthe review period. A few countries, \nincluding Brazil, Ghana and Kenya \nraised their policy rates in response to \ninflationary concerns and exchange \nrate depreciation. \n \n5.4.2 \nCapital Market \n \nThe performance of major world stock \nmarkets improved during the review \nperiod. Major European indices such as \nFrench CAC 40, German DAX and \nRussian MICEX indices increased by \n12.1, \n11.6 \nand \n18.5 \nper \ncent, \nrespectively. In the UK, the FTSE 100, \nhowever, decreased marginally by 0.7 \nper cent. In North America, the S&P \n500 \nand \nMexican \nBolsa \nindices \nincreased by 0.2 and 4.4 per cent, \nrespectively, \nwhile \nthe \nCanadian \nS&P/TSX Composite Index decreased \nby 0.5 per cent. \n \n \n \n \n CBN Monetary Policy Review \n \n \n52 \n \n \nMajor markets in Asia were bullish \nduring \nthe \nreview \nperiod. \nThe \nJapanese \nNikkei, \nthe \nChinese \nShanghai SE A and the Indian BSE \nSensex rose by 16.0, 32.0 and 1.0 per \ncent, respectively. \nIn Africa, the Nigerian NSE ASI, Kenyan \nNSE 20 and Egyptian EGX Case 30 \nindices decreased by 3.5, 4.0 and 6.2 \nper cent, respectively, while the South \nAfrican JSE and Ghanaian GSE All \nShare Indices increased by 4.1 and 4.0 \nper cent, respectively. \nTable 5.8 \nSelected International Stock Market Indices as at \nJune 30, 2015 \n \n \n \n \n \n \n \n \n \n \n \n \n \n5.4.3 \nCommodities \n \nGlobally, \nmost \ncommodity \nprices \ndeclined in the first half of 2015, due to \nweak demand from the appreciation \nof the US dollar, ample supply leading \nto the buildup of inventory as well as \nmacroeconomic risks from Greece and \nChina. Crude oil prices, however, \nrebounded in the later part of the \nreview period on stronger demand but \nhave since weakened owing to large \nglobal \nsupply. \nThese \ntrends \nare \nexpected to persist for the rest of the \nyear, with a modest recovery in 2016. \nEnergy prices rose by 17.89 per cent in \nthe first half of 2015, due to a 29.26 per \ncent increase in oil prices, reflecting \nstronger demand and expected slack \nin supply. The increase in oil prices \nmore than offset continued declines in \nnatural gas and coal prices, due to \nweak demand and excess supply. \nDespite \nhigher \nthan \nexpected \ndemand, the oil market remained \noversupplied with large inventories, \nespecially in the United States. On a \nyear-on-year basis, however, crude oil \nprice fell from US$74.6 per barrel at \nend-June 2014 to US$61.3 at end-June \nof 2015, representing a decline of 17.83 \nper cent. \nThe FAO Food Price Index averaged \n166.4 points in June 2015 from 185.8 in \nDecember \n2014, \nrepresenting \na \ndecline of 10.44 per cent. Compared \nwith 208.9 points in the corresponding \nIndex\nEnd-June, 2014 End-Dec, 2014 End-June, 2015\n \n% Change \nDec 14 - Jun 15\n \n% Change Jun 14 - \nJun 15 \nASI\n42,482.48\n34,657.15\n33,456.83\n-3.5\n-21.2\nJSE African AS\n50,945.26\n49,770.60\n51,806.95\n4.1\n1.7\nNairobi NSE 20 \n4,885.04\n5,112.65\n4,906.07\n-4.0\n0.4\nEGX CSE 30\n8,162.20\n8,926.58\n8,371.53\n-6.2\n2.6\nGSE All Share\n2,373.38\n2,261.02\n2,352.23\n4.0\n-0.9\nS&P 500\n1,960.23\n2,058.90\n2,063.11\n0.2\n5.2\nS&P/TSX Composite\n15,146.01\n14,632.44\n14,553.33\n-0.5\n-3.9\nMexico Bolsa (IPC)\n42,737.17\n43,145.66\n45,053.70\n4.4\n5.4\nBovespa Stock \n53,168.22\n50,007.41\n53,080.88\n6.1\n-0.2\nMerval \n6,537.61\n7,830.30\n11,656.81\n48.9\n78.3\nCOLCAP\n1,705.99\n1,512.98\n1,331.35\n-12.0\n-22.0\nFTSE 100\n6,743.94\n6,566.09\n6,520.98\n-0.7\n-3.3\nCAC 40\n4,422.84\n4,272.75\n4,790.20\n12.1\n8.3\nDAX \n9,833.07\n9,805.55\n10,944.97\n11.6\n11.3\nMICEX\n1,476.38\n1,396.61\n1,654.55\n18.5\n12.1\nNIKKEI 225\n15,162.10\n17,450.77\n20,235.73\n16.0\n33.5\nShanghai SE A \n2,144.74\n3,389.39\n4,479.90\n32.2\n108.9\nBSE Sensex\n25,413.78\n27,499.42\n27,780.83\n1.0\n9.3\n \n \n \n \n CBN Monetary Policy Review \n \n \n53 \n \n \nperiod of 2014, it declined by 20.34 per \ncent. All the sub-indices of meat, \ncereals, vegetable oils and sugar \ndeclined during the review period. \nMetals prices declined by 10.42 per \ncent to 133.2 at end-June 2015 from \n148.7 at end-December 2014, and by \n17.67 per cent compared with 161.8 in \nthe corresponding period of 2014. The \ndevelopment \nreflected \nconcerns \nabout weak demand in China, Greek \ndebt crisis and increases in supply. \nMetal demand from China slowed in \nthe first half of the year due to \nweaknesses in infrastructure spending, \nconstruction, \nmanufacturing, \nand \nindustrial sectors. \nOn \nthe \nsupply \nside, \nproduction \ncontinued \nto \nrise \nfollowing \nlarge \ninvestments and high prices in earlier \nyears. \nFigure 5.17 \nIndices of Primary Commodity Prices July 2014 – \nJune 2015 (2005=100 US$) \n0\n50\n100\n150\n200\n250\nJul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15\nCommodities\nMetal\nFood\nEnergy\n Source: IMF \n5.4.4 Foreign Exchange market \n \nGenerally, most currencies across the \nworld continued to depreciate against \nthe US dollar in the period under \nreview. \nThis \nwas \nlargely \ndue \nto \nsustained improvements in the US \neconomy, \nresulting \nin \nincreased \ninvestor \nappetite \nfor \ndollar-\ndenominated assets, fuelling capital \nreversals \nand \ndecline \nin \nglobal \ncommodity prices. In the advanced \neconomies, the Japanese yen, the \neuro \nand \nthe \nCanadian \ndollar \ndepreciated by 1.92, 7.78 and 4.13 per \ncent, respectively. \nIn \nthe \nemerging \nmarkets \nand \ndeveloping economies, the Brazilian \nreal recorded the highest depreciation \nof 14.19 per cent. Other emerging \nmarket \ncurrencies, \nincluding \nthe \nMexican peso, Indian rupee and South \nAfrican rand depreciated by 5.99, 0.96, \n4.77 per cent, respectively. In sub-\nSaharan Africa, the Nigerian naira and \nKenyan shillings depreciated by 13.85 \nand 8.72 per cent, respectively, while \nthe Ghanaian cedi recorded the \nlargest depreciated of 25.98 per cent. \n \n \n \n \n \n \n \n \n CBN Monetary Policy Review \n \n \n54 \n \n \nTable 5.9 \nExchange Rates of Selected Countries (Value in currency units to US$) \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \nCurrency\n31-Dec-13\n31-Dec-14\n30-Jun-15\nDec 31, \n2014 - June \n30, 2015 \n%App/Dep\nAFRICA \na\nd\nd\nNigeria \nNaira\n157.27\n169.68\n196.95\n-13.85\nSouth Africa \nRand\n10.52\n11.57\n12.15\n-4.77\nKenya \nShilling\n86.30\n90.60\n99.25\n-8.72\nEgypt \nPound\n6.95\n7.15\n7.63\n-6.29\nGhana\nCedi\n2.38\n3.22\n4.35\n-25.98\nNORTH \nAMERICA \nCanada \nDollar\n1.06\n1.16\n1.21\n-4.13\nMexico \nPeso\n13.10\n14.75\n15.69\n-5.99\nSOUTH \nAMERICA \nBrazil \nReal\n2.36\n2.66\n3.10\n-14.19\nArgentina \nPeso\n6.52\n8.47\n9.09\n-6.82\nColombia \nPeso\n1929.51\n2376.51\n2606.00\n-8.81\nEUROPE \nUK \nPound\n0.60\n0.64\n0.64\n0.00\nEuro Area \nEuro\n0.73\n0.83\n0.90\n-7.78\nRussia \nRuble\n32.87\n60.74\n55.27\n9.90\nASIA \nJapan \nYen\n105.26\n119.78\n122.12\n-1.92\nChina \nYuan\n6.05\n6.21\n6.20\n0.16\nIndia\nRupee\n61.80\n63.04\n63.65\n-0.96\nSource: bloomberg \n \n \n \nCBN Monetary Policy Review \n \n55 \n \n \nCHAPTER 6 \nECONOMIC OUTLOOK \n \n6.1 \nOVERVIEW \n \nlobal \neconomic \ngrowth \nin \n2015 was revised downwards \nto 3.3 per cent from its earlier \nprojection of 3.5 per cent by the IMF \n(WEO Update, July 2015). The revised \nestimate was lower than the growth of \n3.4 per cent recorded in 2014, due \nmainly to the slowdown in activities in \nNorth America in the first quarter of \n2015. Nevertheless, the fundamental \ndrivers of growth in economic activity \nin the advanced economies remained \nintact. \nThe \ndownward \nrevision \nto \nglobal growth was traceable to the \ndampening \neffects \nof \nlower \ncommodity \nprices, \ntighter \nexternal \nfinancing conditions, and the ongoing \nrebalancing of the Chinese economy. \nOther factors that slowed growth, \ndespite the broadly accommodating \nmonetary policy in the review period \nincluded weak investment and ageing \npopulation \nin \nthe \nadvanced \neconomies, structural bottlenecks and \ngeo-political tensions in Europe and \nthe Middle East. \n \nIn the advanced economies, growth \nwas projected at 2.1 per cent in 2015 \nup from 1.8 per cent in 2014 largely \ndue to acceleration in consumption \nand investment in the US, driven by \nimproved labour market conditions, \neasing financing conditions, lower fuel \nprices as well as strengthening of the \nhousing market. In the United States, \ngrowth was estimated at 2.5 per cent \nin 2015, up from 2.4 per cent in 2014. In \nthe Euro area, growth was projected \nat 1.5 per cent in 2015 from 0.8 per \ncent in 2014, due to recovery in \ndomestic demand and increase in \ninflation rates. \n \nGrowth in the emerging market and \ndeveloping economies was projected \nto decline to 4.2 per cent in 2015 from \n4.6 per cent in 2014. The projected \ndecline \nwas \nattributed \nto \nthe \ndampening \nimpact \nof \nlower \ncommodity prices, tighter financial \nenvironment, economic rebalancing in \nChina, structural bottlenecks as well as \neconomic distress caused by geo-\npolitical \ntensions \nin \nthe \nCommonwealth of Independent States \n(CIS) and some countries in the MENA \nregion. Growth in China was projected \nto decline to 6.8 per cent in 2015 from \n7.4 per cent in 2014, with indications of \na further slowdown. In Russia, the year-\non-year massive depreciation of the \nruble following the drop in oil prices as \nwell as continuing geopolitical tensions \nweakened economic activity during \nthe review period. The contraction of \nthe Russian economy by 3.4 per cent in \n2015 from 0.6 per cent in 2014, \naffected the performance of other \neconomies in the Commonwealth of \nIndependent States (CIS). \n \nIn Sub-Saharan Africa (SSA), growth \nwas projected to slow to 4.4 per cent in \n2015, \nfrom \n5.0 \nper \ncent \nin \nthe \nG \n \n \n \nCBN Monetary Policy Review \n \n56 \n \n \npreceding year with lower commodity \nprices and Ebola epidemic in affected \nregions accounting for the weaker \nperformance. The Nigerian economy \nslowed to 2.35 per cent in the second \nquarter of 2015 from 6.22 per cent in \n2014, and is projected to grow by 5.5 \nper cent in 2015 (FGN 2015 Budget). \nThe growth slowdown was due to the \ncontinuing weakness in oil and other \ncommodity prices. In South Africa, \ngrowth was projected to improve to \n2.0 per cent in 2015 from 1.5 per cent in \n2014, due to lower oil prices and more \ncompetitive rand exchange rate. \n \n6.2 \nOutlook for Global Output \n \nGlobal growth forecasts for 2015 was \naffected \nby \na \nnumber \nof \ndevelopments in the global economy. \nThe weaker growth of 2.2 per cent in \nthe first quarter of 2015 fell short of the \n3.0 per cent forecast in the April 2015 \nWEO as a result of output contraction \nin the U.S, which had spillover effects \non Canada and Mexico, as well as \nweak growth in output and domestic \ndemand in emerging market and \ndeveloping economies. Although oil \nprices \nrebounded \nin \nthe \nsecond \nquarter \nof \n2015, \noil \ninventories \nremained high and this is expected to \nresult in reduction in oil investment. \n \nGlobal economic growth was forecast \nto rise to 3.3 per cent in 2015 and 3.8 \nper cent in 2016 from an annual rate of \n3.4 per cent in 2014. Growth was \nprojected at 2.1 per cent in 2015 and \n2.4 per cent in 2016 for the advanced \neconomies. In the emerging market \nand developing economies (EMDEs), \ngrowth was projected at 4.2 per cent \nfor 2015, while that of Sub-Saharan \nAfrica was 4.4 per cent (Table 6.1). \nDespite the moderation in the outlook, \ngrowth in 2015 is expected to be driven \nby gradual acceleration in economic \nactivity in advanced economies on \naccount of easy financial condition, \nlower fuel prices, more neutral fiscal \npolicy, and improving confidence and \nlabour market conditions. \n \nIn the US, growth is expected to rise \nslightly to 2.5 per cent in 2015 and to \n3.0 per cent in 2016. The underlying \ndrivers of acceleration in growth in the \nU.S included, improvement in wage \ngrowth and labour market conditions, \nstrengthening housing market, easy \nfinancial conditions and lower fuel \nprices. In the Euro Area, growth \nprojections for 2015 and 2016 are 1.5 \nand 1.7 per cent, respectively, up from \n0.8 per cent in 2014. The improved \noutlook came from the generally \nrobust recovery in domestic demand \nand the gradual uptick in inflation. \nHowever, the unfolding developments \nin Greece are expected to continue to \nweigh heavily on economic activities. \nThe forecast for the United Kingdom is \ncomparatively robust at 2.4 and 2.2 \nper \ncent \nin \n2015 \nand \n2016, \nrespectively. \nGrowth \nforecast \nfor \nJapan is 0.8 and 1.2 per cent in 2015 \nand 2016, respectively. The improved \nforecast was anchored on the stronger \n \n \n \nCBN Monetary Policy Review \n \n57 \n \n \nthan expected performance in the first \nquarter \nof \n2015. \nHowever, \nthe \nunderlying momentum of real wages \nand consumption spending, remained \nweak. \n \nIn the EMDEs, growth was forecast at \n4.2 per cent in 2015, down from 4.6 per \ncent in 2014, owing to the negative \nimpact of lower commodity prices and \ntighter external financing conditions, \nespecially \nfor \noil \nexporters, \nand \nstructural bottlenecks and economic \ndistress related to geopolitical factors \nin the MENA and the CIS regions. \nGrowth for EMDEs was forecast at 4.7 \nper cent for 2016 on account of \nexpected improvement in economic \nconditions in a number of countries, \nincluding Russia and a number of \neconomies in the MENA region. For oil \nimporters, lower oil prices may reduce \ninflation \npressure \nand \nexternal \nvulnerabilities, and provide some fiscal \npolicy space. Oil exporters would have \nto adjust to the terms-of-trade shocks \nwith \ngreater \nfiscal \nand \nexternal \nvulnerabilities. Growth in China was \nforecast to moderate to 6.8 per cent in \n2015, as the economy continues to \nundergo a rebalancing towards a \ngrowth pattern that is less reliant on \ninvestment. The reforms, along-side \nlower oil and commodity prices, are \nexpected to boost consumer-oriented \nactivities. However, slower growth in \nChina is expected to have implications \nin much of emerging Asia. Brazil is \nforecast to contract by 1.5 per cent in \n2015, \nowing \nto \ntighter \nfinancial \nconditions, as oil prices remain low and \nweakness in business and consumer \nconfidence continues. \n \nIn \nSub-Saharan \nAfrica, \ngrowth \nis \nprojected at 4.4 per cent in 2015, \ndown from 5.0 per cent in 2014, as a \nresult of headwinds from declining \ncommodity prices and the epidemic in \nEbola-affected countries. Growth in \nthe oil-exporting economies in the \nregion will be severely affected by \nlower oil prices, but the effect of that \non the region‘s growth prospect is \nexpected \nto \nbe \noffset \nby \nthe \nfavourable impact of lower oil price on \noil importing countries in the region. \nThe region‘s growth projection for 2016 \nis 5.1 per cent, due largely to the \nexpected recovery, as headwinds to \ngrowth wane. Growth in South Africa is \nprojected at 2.0 and 2.1 per cent in \n2015 and 2016, respectively. \n \nGrowth in the Middle East and North \nAfrica (MENA) region is projected at \n2.6 per cent in 2015, down from 2.7 per \ncent in 2014. The downward revision \nwas accounted for by the region‘s oil \nexporting economies, mostly as a result \nof the decline in oil prices. Growth was, \nhowever, projected at 3.8 per cent in \n2016 as economic activity in the \nregion‘s oil importers is expected to \nstrengthen. \n \n \n \n \n \n \n \nCBN Monetary Policy Review \n \n58 \n \n \n6.3 \nDownside \nRisks \nto \nGlobal \nOutlook \n \nThe possibility of disruptive asset price \nshifts and a further increase in financial \nturmoil, remain a key risk to global \neconomic outlook in the near to \nmedium-term. This is because term and \nrisk premium on longer-term bonds \nhave continued to remain low, with the \npossibility of markets reacting strongly \nas accommodative monetary policies \nin the major advanced economies \nstart changing in 2015. Such asset price \nshifts also bear the risk of capital flow \nreversals from emerging market and \ndeveloping economies. \n \nIn \nadvanced \neconomies, \noil \nalso \npresents a downside risk, if prices rise \nfaster than expected, especially, if the \nnegative supply response to low oil \nprices is strong. In that case, the \nexpected boost to global demand \nfrom low oil price will be short-lived and \nsmaller. Other risks to output growth in \nadvanced economies include a low \nreturn to full employment amid a very \nlow inflation. \n \nIn the Euro area, the recent increases \nin sovereign bond yields in some \neconomies have reduced the upside \nrisks to economic activity in these \neconomies. There is also the risk of re-\nemergence of financial stress in the \nregion. In the emerging market and \ndeveloping economies, the balance \nsheet and fund risks remain, especially \nif US dollar appreciation continues. This \nis, in addition to the fiscal stress that oil \nand \nother \ncommodity \nexporting \neconomies are already going through. \nThe risk of sharper slow-down in China, \nreflecting the difficulty in transiting to a \nnew growth model, and still-lower \npotential output growth in emerging \nmarkets remain. \n \nIn sub-Saharan Africa, the downside \nrisks to output growth in the region \ninclude the continuing plunge in oil \nand other commodity prices, which \ntranslate to low reserves and fiscal \nrevenue to finance capital budgets, \nexchange \nrate \npressure \nand \nrisks \nassociated with capital reversals, as \nmarket \nconditions \nin \nadvanced \neconomies improve. Others include \nthe disruption of farming and other \ncommercial activities and increase in \nthe number of internally displaced \npersons, as a result of insurgency in \nsome parts of the region. \n \nTo overcome the downside risks, the \nIMF \nrecommends \ndemand \nmanagement and structural reforms in \nthe advanced economies, in order to \ntackle \ncrisis \nlegacies \nand \nraise \npotential output. Similarly, advanced \neconomies \nshould \ncontinue \nto \nimplement accommodative monetary \npolicy to support economic activity \nand lift inflation back to target. In \ncountries with fiscal space, increase in \ninfrastructure investment should be the \nnear-term objective. \n \n \n \n \nCBN Monetary Policy Review \n \n59 \n \n \nIn emerging market and developing \neconomies, structural reforms should \nalso be a policy priority as investment \nin infrastructure necessary to close \noutput gaps. Macroeconomic policy \nspace to support demand is generally \nmore limited, but should come from \nfiscal policy rebalancing aimed at \nboosting longer-term growth, through \ntax \nreform \nand \nspending \nreprioritization. \nFor \noil \nexporting \neconomies, adjusting public spending \nto lower oil revenue will be necessary. \nExchange rate depreciation can help \nto offset the demand impact of oil-\nrelated \nterms-of-trade \nlosses \nin \ncountries with flexible exchange rate \nregimes. In oil importing economies, \nlower oil prices have reduced price \npressures and external vulnerabilities, \nwhich \nwill \nease \nthe \nburden \nof \nmonetary policy. The situation presents \nan opportunity for savings from low oil \nprices to be ploughed into growth-\nenhancing activities. \n \nTable 6.1 \nGlobal Output and Inflation Outlook \n \n \n2013 \n2014 \n2015 \n2016 \nA. World Output \n \n \n \n \nWorld Output \n3.4 \n3.4 \n3.5 \n3.8 \nAdvanced \nEconomies \n1.4 \n1.8 \n2.1 \n2.4 \nUSA \n2.2 \n2.4 \n2.5 \n3.0 \nEuro Area \n-0.4 \n0.8 \n1.5 \n1.7 \nJapan \n1.6 \n-0.1 \n0.8 \n1.2 \nUK \n1.7 \n2.9 \n2.4 \n2.2 \nCanada \n2.0 \n2.4 \n1.5 \n2.1 \ner Advanced Economies \n2.2 \n2.8 \n2.7 \n3.1 \nEmerging & \nDeveloping \nEconomies \n5.0 \n4.6 \n4.2 \n4.7 \nCommonwealth of \nIndependent States \n2.2 \n1.0 \n-2.2 \n1.2 \nLatin America and \nthe Caribbean \n2.9 \n1.3 \n0.5 \n1.7 \nMiddle East and \nNorth Africa \n2.4 \n2.7 \n2.6 \n3.8 \nSub-Saharan Africa \n5.2 \n5.0 \n4.4 \n5.1 \nB. Commodity Prices \n(US' Dollars) \n \n \n \n \nOil \n-0.9 \n-7.5 \n-38.8 \n9.1 \nNon-fuel \n-1.2 \n-4.0 \n-15.6 \n-1.7 \nC. Consumer Prices \n \n \n \n \nAdvanced \nEconomies \n1.4 \n1.4 \n0.0 \n1.2 \nEmerging & \nDeveloping \nEconomies \n5.9 \n5.1 \n5.5 \n4.8 \nSource: IMF WEO Update, July 2015 \n \n6.5 \nGlobal Inflation Outlook \n \nGlobal \ninflation \ncontinued \nto \nbe \nsubdued in the first half of 2015. This \nreflected the decline in energy prices, \nand weak global demand. The trend is \nlikely to continue, with the possibility of \na further fall in commodity prices as \ndemand slows. \n \nIn the US, falling oil prices and a \nstrengthening U.S. dollar have pushed \nheadline inflation temporarily below \nzero in the first quarter of 2015. Core \n \n \n \nCBN Monetary Policy Review \n \n60 \n \n \ninflation is projected to stay below the \nFed‘s 2 percent target until the end of \n2015, but gradually increase during \n2016. \nIn the Euro area, inflation was negative \nin the first half of 2015, but could edge \nup to 1. 5 per cent as the effects of \nlower energy prices dissipate and \nmonetary easing is stepped up. In \nJapan, inflation, which has fallen close \nto zero, is projected to begin rising in \nthe second half of 2015, reaching 1.5 \nper cent by end-2016. \nIn \nthe \nemerging \nand \ndeveloping \neconomies, inflation is projected to rise \nto 5.4 per cent in 2015 from 5.1 per \ncent in 2014. China‘s consumer-price \nindex rose 1.2 per cent in May, the \nlowest in four months, and well within \nChina‘s target of keeping consumer \ninflation below 3 per cent this year, \nrenewing concerns about deflationary \npressure in the world‘s second largest \neconomy. In India, inflation is projected \nto drop to 6.3 percent in 2015 from 6.7 \npercent in 2014. The trend of lower \ninflation \nwould \nprovide \nfurther \nheadroom for monetary policy easing \nto support growth. \nIn Sub-Saharan Africa (SSA), inflation is \nforecast to marginally edge up to 6.6 \nper cent in 2015, up from 6.3 per cent \nin 2014. This development reflects the \nnet effects of factors that serve to \nexacerbate and attenuate inflationary \npressures in the region. On the one \nhand, \ndollar \nappreciation \nmakes \nimports more expensive in the region, \nin addition to lower investment and \nslowing growth, which fuel inflationary \npressures. On the other, low global \nfood and fuel prices, is expected to \ncontain inflation, albeit with a small \nuptick in 2015. \n \nOutlook for Domestic Output Growth \nIn real terms, Gross Domestic Product \n(GDP) grew by 2.35 per cent (year-on-\nyear) in the second quarter of 2015, \ncompared with 3.96 per cent in the \npreceding quarter. The decline in \nglobal oil prices as well as other \ncommodity \nprices \nwas \nin \npart, \nresponsible for the slowdown in growth \nacross major sectors of the economy, \nespecially \nthe \noil \nsector, \nwhich \ncontracted significantly by 6.79 per \ncent in the second quarter of 2015. The \nnon-oil sector, which grew by 3.46 per \ncent in real terms compared with 6.71 \nper cent in the corresponding quarter \nof 2014, continues to be the driver of \ngrowth. \n \nThe outlook for growth for the rest of \n2015, \naccording \nto \nthe \nFederal \nGovernment Budget estimate, remains \nat 5.5 per cent. This weaker outlook \nwhen compared to 6.22 per cent \nachieved \nin \n2014, \nis \noccasioned \nprimarily by the lower than anticipated \nglobal \noil \nprices. \nThe \nAfrican \nDevelopment \nBank \n(AfDB) \nhas \nprojected output growth in 2015 at 5.0 \nper cent, which is close to the FGN \nprojection. The IMF, however, released \na moderate forecast of 4.5 and 5.0 per \ncent in 2015 and 2016, respectively, \ndue to perceived vulnerabilities in the \n \n \n \nCBN Monetary Policy Review \n \n61 \n \n \nglobal economy, which may transmit \nto the domestic economy. \n \nThe inception of the new government \nis considered a stabilizing factor for \nimprovements in the outlook, as fiscal \nshocks are expected to moderate to \nmake room for the accumulation of \nrevenue and building of buffers, to \nhelp insulate the economy from the \nadverse effects of oil price shocks. \n \nThe key risk to the outlook remains the \nslowdown in global oil prices, which \nhas had adverse impacts on global \ncommodity prices, global inflation and \naccretion to external reserves. \n \nOutlook for Domestic Inflation \nHeadline \ninflation \n(year-on-year) \nincreased throughout the first half of \n2015, despite the tight monetary policy \nstance of the Bank. Although within a \nsingle \ndigit \nrange, \nit, \nhowever, \nexceeded the upper limits of the \nBank‘s inflation threshold of 6 – 9 per \ncent during the review period. \n \nThe IMF projects headline inflation in \nNigeria to accelerate to 9.6 per cent in \n2015 and 10.7 per cent in 2016 (WEO \nUpdate, April 2015). Staff estimates \nindicate that headline inflation (year-\non-year) is expected to rise for most of \nthe second half of 2015. It is expected \nto increase to 9.3 and 9.8 per cent in \nAugust \nand \nSeptember, \n2015, \nrespectively, and stabilize at 10.0 per \ncent in October and November, 2015. \nThereafter, it would decline marginally \nto 9.9 per cent in December 2015 \n(Table \n6.2 \nand \nFigure \n6.1). \nThe \nanticipated rise in inflation would be \nmainly due to the combined effects of \nthe depreciation of the naira and its \npass-through and disruptions to food \nsupply chain due to insurgency, which \nis expected to impact on food prices. \nOn \nthe \nupside, \nreceding \nglobal \ninflation is expected to ameliorate the \nimpact of import costs on domestic \nprices. \n \nOn the other hand, the gradual \nnormalization of petroleum products \nsupply, reflected in the availability of \nPMS \nat \nofficial \npump \nprices, \nis \nexpected to cushion the impact of \ntransient factors on domestic prices. \nThe \nBank‘s \ntight \nmonetary \npolicy \nstance may help to rein-in excess \nliquidity and moderate inflationary \npressures. \n \nTable 6.2 \nInflation Forecasts (Staff Estimates) \n \n \n \n \n \nCBN Monetary Policy Review \n \n62 \n \n \nFigure 6.1 \nFan Chart for Inflation from 2015:6 -2016:6 \n \nOutlook for Monetary Policy in 2015 \nDevelopments in the domestic and \nglobal economy would continue to \nshape the formulation and outcomes \nof monetary policy in the second half \nof 2015 and beyond. The policy \ninstruments \navailable \nto \nmonetary \nauthority seems almost stretched to its \nlimit \nand \nthus, \nwould \nrequire \ncomplementary \nfiscal \npolicies \nto \ndefine the path of growth and create \nthe basis for stabilization. Continuous \nreassessment and evaluation of the \nprevious policy pronouncements is \nneeded, to respond to the ever-\nchanging \neconomic \nand \nfinancial \nenvironment. \nThe continued decline in global crude \noil prices and its negative impact on \nthe fiscal position of government poses \na great challenge to monetary policy. \nIn addition to the low prices, the \nmarket \nshare \nof \nNigerian \ncrude \ncontinued \nto \nbe \nthreatened \nby \nsustained global over-supply, leading \nto non-availability of buyers for the \ncountry‘s crude, a situation that forced \nthe authority to offer further discount in \norder to attract buyers. Crude oil \nreceipts accounted for over 90 per \ncent of the country‘s foreign exchange \nearnings, and with the price of the \nbonny light below US$50 per barrel, \ncompared with over US$100 per barrel \nin the corresponding period of 2014, \naccretion to reserves continued to be \nthreatened, resulting in a sustained \npressure on the exchange rate with \nhigh pass-through to domestic prices. \nFurthermore, \nthe \nexpected \nnormalization of the US monetary \npolicy could accentuate capital flow \nreversals from emerging market and \ndeveloping economies, and further \ntighten global monetary conditions, \nthus \nexerting \ngreater \npressure \non \nexchange \nrates. \nAlso, \nthe \nimprovements in growth performance \nof some advanced economies could \nfurther compound the problem of \ncapital flow reversals, and make the \nmonetary policy environment more \nchallenging in the coming months. \nThe continued excess liquidity in the \nbanking system despite the various \ntightening measures by the monetary \nauthority, \nremained \na \nsource \nof \nconcern. The direct consequence is \nthat real sector activity continued to \nbe stifled by high cost of loan able \nfund. The Bank would continue to \nformulate proactive policies that would \nencourage DMBs to lend to the real \nsector, \nin \naddition \nto \nits \nvarious \ninterventions in the critical sectors such \nas power, manufacturing and SMEs. \nHowever, the recent upticks in inflation \nand a forecast of further rise in the \n \n \n \n \nCBN Monetary Policy Review \n \n63 \n \n \ndomestic price level would continue to \nbe closely watched, and appropriate \npolicy measures deployed to counter \nthe risks of inflation. \n Overall, there is optimism that investor \nconfidence \non \nthe \neconomy \nwill \nimprove \nas \nthe \nnew \ngovernment \nunfolds \nits \neconomic \nplans \nand \nimprove the business environment. In \naddition, \nsome \nof \nthe \nreassuring \nmeasures \nof \nthe \nadministration \nincluding efforts aimed at resolving \nfiscal challenges at the sub-national \nlevels, the fight against corruption and \ncounter insurgency in some parts of \nthe country are expected to unlock \neconomic recovery and boost capital \ninflows. \nNonetheless, \nimproved \ncoordination between the fiscal and \nmonetary policies would be necessary \nto minimize risks in the short-to-medium \nterm. \n \n \n \n \nCBN Monetary Policy Review \n \n64 \n \n \nAppendices \n \nCentral Bank of Nigeria Communique \nNo. \n99 \nof \nthe \nMonetary \nPolicy \nCommittee Meeting of Monday 19th \nand Tuesday 20th January, 2015 \n \nThe Monetary Policy Committee (MPC) \nmet on January 19 and 20, 2015 \nagainst the backdrop of challenging \nexternal conditions and downside risks \nin \nthe \ndomestic \neconomic \nenvironment. In attendance were all \nthe \neleven \nmembers \nof \nthe \nCommittee. The Committee reviewed \nkey external developments as well as \ndomestic \neconomic \nand \nfinancial \nconditions and outlook for 2015. \nInternational Economic Developments \n \nThe \nCommittee \nnoted \nthe \ntepid \nrecovery of the global economy in \n2014. The major impetus for global \ngrowth in 2014 came from the U.S, and \nsupported later in the year by the drop \nin \noil \nprices. \nHowever, \nboth \ndevelopments fell short of returning the \nglobal \neconomy \nto \nthe \npre-crisis \ngrowth path. This was mainly due to \nthe weakness in Europe and the much \nslower pace of expansion in the \nemerging \nmarket \neconomies \nin \nparticular. Specifically, global growth \ncontinues to be constrained by a \nnumber of old and new adversities \nincluding \nhigh \ndebt \nand \nrising \nunemployment \nin \nmany \ncountries; \ngeopolitical tensions and conflicts; the \nnegative impact of commodity price \nshocks \non \ncommodity \nexporting \ncountries; weak external demand; and \nthe tapering and eventual exit of the \nUS \nFederal \nReserve \nBank \nfrom \nquantitative easing; triggering sharp \ncorrections in the financial markets. \nConsequently, global output rose by \nabout 3.3 per cent in 2014, which was \nthe same rate of growth attained in \n2013. It is estimated to strengthen to \nabout 3.5 per cent in 2015. \n \nThe Committee, however, noted many \ndownside risks to the outlook. The Euro \nArea and Japan appear trapped in \nlow \ninflation \nand \nlow \ngrowth \nconditions. High unemployment and \ndebt could persist much longer in the \nEuro Area in particular while a possible \ndeflation is likely if inflation continues \non \nthe \ndownward \ntrend. \nThe \nCommittee also acknowledged the \nhigh likelihood of an increase in interest \nrates in the United States; which \nportends negative consequences for \nemerging and frontiers economies. \nAlready, growth is moderating in most \nindustrial countries and could further \nbe dampened by the strengthening of \nthe U.S dollar, more volatile capital \nflows \nand \nfinancial \nsystem \nvulnerabilities arising from currency \ndepreciations. All of these could be \ncompounded \nby \nincreased \ngeopolitical \nrisks \narising \nfrom \nthe \nUkrainian stand-off, militant terrorism, \narmed insurgency and the aftermath \nof \nthe \nEbola \nepidemic \nin \nsome \ncountries in the West African sub-\nregion. Furthermore, the divergence \nbetween \nthe \nUS \nand \nEuro \nArea \n \n \n \nCBN Monetary Policy Review \n \n65 \n \n \nmonetary policy stance, non-inclusive \ngrowth and the regional impact of \nfalling oil prices with acute revenue \nshortages in countries like Nigeria, \nVenezuela and Russia add to the risk \nfactors. \nEvidently, the outlook for growth in the \nvarious economic clusters continued to \nbe shaped by the identified risks and \nopportunities. The IMF projects the \nmajor advanced economies to grow \nat a modest pace of about 2.3 per \ncent \nin \n2015, \npremised \non \nthe \nsustained growth in the U.S and some \nimprovements in Europe. The decision \nof the European Central Bank (ECB) to \ncontinue with the existing provision of \nunlimited short-term liquidity as well as \nthe \nimplementation \nof \nnew \nprogrammes will be critical to the \nglobal economic performance in 2015. \nFor \nthe \nemerging \nmarkets \nand \ndeveloping economies, , growth could \nbe modestly maintained in 2015 at \nabout 4.3 per cent, driven essentially \nby \ndomestic \nconsumption \nand \nincreased investment as net exports \ncontinue to moderate in response to \nsoftening commodity prices. \n \nInflation is not an immediate global \npriority as most of Europe and Japan \ngrapples \ninstead \nwith \npotential \ndeflation and high unemployment. The \noutlook for monetary policy suggests \ncontinued divergence amongst the \nvarious economic blocs. The Euro Area \nand Japan are expected to sustain this \naccommodative \nmonetary \npolicy \nstance while the U.S authorities appear \nto \nbe \nleaning \ntowards \nmonetary \ntightening. Similarly, monetary policy is \nlikely to remain restrictive amongst \ndeveloping and emerging economies \nin order to stabilize their local currency, \nand \nto \nrein-in \npotential \ninflation \npressures. \nThe \nCommittee \nwas \ngenerally of the view that monetary \npolicy play a pivotal role in restoring \neconomic activity to optimum levels \nglobally, \nespecially \nwhen \ncomplemented by structural reforms, \nfiscal \nadjustments \nand \nbetter \ncoordination of policy actions. In fact, \ncurrent conditions call for engagement \nof \nmultiple \nmacroeconomic \nand \nstructural policy levers. \n \nDomestic \nEconomic \nand \nFinancial \nDevelopments Output \n \nThe National Bureau of Statistics (NBS) \nestimated real Gross Domestic Product \n(GDP) growth rate at 6.23 per cent in \nthe third quarter of 2014 compared \nwith 6.54 per cent in the second \nquarter. The Committee noted the \ncontinued dominance of the non-oil \nsector, \nparticularly \nServices \nwhich \ncontributed 2.53 percentage points, \nAgriculture (1.21 per cent) and Trade \n(1.08 \npercentage \npoint). \nThe \nCommittee noted with satisfaction the \nFederal Government‘s efforts to boost \npower generation and supply, among \nothers, \nwhich \nwould \nimprove \nthe \neconomy‘s job creation prospects in \nthe medium- to long-term. \nThe \nCommittee \nwas, \nhowever, \nconcerned \nabout \nthe \nweakening \n \n \n \nCBN Monetary Policy Review \n \n66 \n \n \ncontribution of the oil sector to overall \ngrowth, \nwhich \nis \nnow \nbeing \nexacerbated by the rapid drop in oil \nprices since June 2014. In addition, the \nCommittee noted that the security \nchallenges in some parts of the country \nmight also be contributing to the \ndampening effects on overall growth \nin the country. \n \nPrices \n \nHeadline inflation at end-December \n2014 was 8.0 per cent, which was \nwithin the range of 6.0-9.0 per cent \nbenchmark for inflation set by the \nCentral Bank of Nigeria. The inflation \nrecorded in December 2014 reflects a \nreduction in core inflation, seasonal \nfactors \nrelated \nto \nthe \nYuletide \ncelebrations, as well as the stabilization \nin \nfood \nprices. \nThe \nCommittee, \nhowever, recognized some upside risks \nto inflation in the near-term including \nthe likely higher import prices on the \nstrength of an appreciating dollar and \npossible food supply bottlenecks linked \nto insurgency and insecurity in some \nmajor agricultural zones of Nigeria. \nMonetary, Credit and Financial Market \nDevelopments \n \nBroad money supply (M2) grew by 7.29 \nper cent at end-December 2014 over \nthe level in 2013. This represented a \nmarked improvement over the 1.32 per \ncent increase in 2013, but lower than \nthe benchmark of 15.02 per cent for \n2014. The relatively slower growth of \ntotal monetary liabilities (M2) reflected \ndevelopments \nin \nboth \ncredit \nto \ngovernment and the net foreign assets \n(NFA). During the period, credit to \ngovernment contracted by 21.8 per \ncent, far below the growth benchmark \nof 28.4 per cent. Similarly, the NFA \ndeclined by 15.02 per cent. Credit to \nthe private sector, however, grew by \nabout 12.1 per cent, essentially pushing \naggregate domestic credit growth of \nabout \n11.0 \nper \ncent. \nThe \nweak \nperformance of NFA was largely due \nto the lower oil prices with the \nattendant consequence of reduced \naccretion to external reserves. The \nCommittee welcomed the posture of \nfiscal policy, which reflected in the \ndecline \nin \ncredit \nto \ngovernment \ncoming especially at a time when \ngovernment \nrevenue \nwas \ngreatly \npressured \nby \nadverse \noil \nprice \ndevelopments. The Committee noted \nthat this orientation of fiscal policy \nwould have an overall beneficial \neffect by leaving DMBs with greater \nroom to support the real sector with \nthe \nmuch-needed \ncredit. \nThe \nCommittee \nencouraged \nthe \nManagement of the Bank to continue \nto implement measures aimed at \nproviding support to enable increased \nflow of credit to the private sector. \nInterest rates in all segments of the \nmoney \nmarket \ntrended \nupward \nbetween 26th November 2014 and 13th \nJanuary 2015. The interbank call rate \nopened at 8.98 per cent on 26th \nNovember 2014 and closed at 26.15 \nper cent on 16th January 2015. Similarly, \nthe OBB and 30-day NIBOR increased \n \n \n \nCBN Monetary Policy Review \n \n67 \n \n \nfrom 10.2 and 11.38 to 23.46 and 11.63 \nper cent, respectively, during the \nperiod. The significant increase in these \nrates particularly for interbank and OBB \nwas \nmainly \ndue \nto \nthe \nfurther \ntightening measures introduced at the \nNovember 2014 meeting of the MPC. \nThe Committee observed that the \nbearish \nconditions \nin \nthe \ncapital \nmarket continued as the equities \nmarket indicators trended downwards \nin the review period. The All-Share \nIndex (ASI) declined by 16.1 per cent \nfrom 41,329.19 to 34, 657.15 between \nDecember \n31, \n2013 \nand \nend-\nDecember \n2014. \nSimilarly, \nMarket \nCapitalization (MC) decreased by 13.2 \nper cent from ₦13.23 trillion to ₦11.48 \ntrillion during the same period. The \nCommittee noted that the downward \ntrend has continued into January 2015 \nas, year-to-date, both have declined \nby 16.2 and 15.7 per cent, respectively. \nAlthough this phenomenon is driven by \nglobal economic conditions, in Nigeria \nin \nparticular, \nthe \nsituation \nis \nexacerbated by the declining oil prices \nas foreign portfolio investors divest from \nthe country. These developments call \nfor closer monitoring and proactive \ninterventions \nby \nall \ninstitutions \nconcerned. The Committee reiterated \nits commitment to sustaining and \ndeepening \nmeasures \naimed \nat \nfostering confidence and stability in \nthe financial system. \n \n \nExternal Sector Developments \n \nThe Committee noted that significant \npressure \npersisted \nin \nthe \nforeign \nexchange market during 2014 resulting \nin further weakening of the Naira \nacross the three segments of the \nmarket. The exchange rate at the \nrDAS-Spot \nopened \nat \nN157.34/US$ \n(including 1% commission) and closed \nat \nN164.08/US$, \nrepresenting \na \ndepreciation of N12.34 or 4.28 per \ncent. \nThe \ninter-bank \nselling \nrate \nopened at N165.7/US$ and closed at \nN180/US$, representing a depreciation \nof N14.73 or 8.63 per cent in the \nperiod, while at the BDC segment, the \nselling rate opened at N170/US$ and \nclosed at N191.50/US$ representing a \ndepreciation of N21.50k or 12.64 per \ncent. \nGross official external reserves as at \nDecember 31, 2014 stood at $34.25 \nbillion compared with $42.85 billion at \nthe corresponding period of 2013. The \ndecrease in the reserves level was \ndriven largely by increased funding of \nthe \nforeign \nexchange \nmarket \ninterventions to stabilize the exchange \nrate in the face of decline in reserve \naccretion. \nThe \ncountry‘s \nexternal \nreserves as at the end of December, \n2014 could finance 7.44 months of \nimports, which we considered very \ngood given the average of 3 months \nof import that is the standard. \n \n \n \n \n \n \n \nCBN Monetary Policy Review \n \n68 \n \n \nConsiderations \n \nThe Committee noted with satisfaction \nthe \ngrowth \nperformance \nof \nthe \neconomy as well as the year-end \ninflation outcome. It was, however, \nconcerned about a number of risks \nincluding the security challenge in \nparts \nof \nthe \ncountry, \nwhich \nhas \ncontinued to disrupt farming and \nrelated activities; and the sustained \ndecline in oil GDP. With regard to \ninflation, the Committee noted the \nrecurring challenge of excess liquidity \nin the banking system and the possible \ncomplications arising from capital flow \nreversal, as well as the demand \npressure \nin \nthe \nforeign \nexchange \nmarket. \nOn the external front, falling oil prices, \nslowing \nglobal \noutput \nrecovery, \ndivergent monetary policy postures \nbetween the US and Euro Area as well \nas non-inclusive growth remain very \nimportant \nrisks. \nThe \ngradual \nnormalization of monetary policy by \nthe US Fed could exacerbate the \ncurrent retrenchment of portfolio flows \nand increase pressure on currencies in \nemerging and developing countries \nincluding Nigeria. \nIn \nthe \nlight \nof \nthe \nabove \nconsiderations, \nthe \nCommittee \nobserved \nthat \nits \ndecisions \nof \nNovember 2014 needed sometime for \nthe \neffects \nto \ncrystallize \nin \nthe \neconomy and therefore, voted to \nretain the current position. \n \nConsequently, \nthe \nCommittee \ndecided as follows: \nDecision \n \n(1) \nAll eleven members voted to \nretain the MPR at 13 per cent; \nretain the CRR on Private Sector \ndeposits at 20 per cent; retain \nCRR on Public Sector deposits \nat 75 per cent; and retain the \nliquidity ratio at 30 per cent. \n(2) \nOne member, however, voted \nfor \nan \nasymmetric \ncorridor \naround the MPR. \nI thank you all for Listening \n \nGodwin I. Emefiele, CON \nGovernor \nCentral Bank of Nigeria \n \n20th January, 2015 \n \n \n \n \n \n \nCBN Monetary Policy Review \n \n69 \n \n \nCentral \nBank \nof \nNigeria \n(CBN) \nCommuniqué No. 100 of the Monetary \nPolicy Committee Meeting of Monday \n23rd and Tuesday 24th March, 2015 \n \nThe Monetary Policy Committee (MPC) \nmet on 23rd and 24th March, 2015, \nagainst the backdrop of harsh external \neconomic environment and significant \nrisks in the domestic economy. In \nattendance were eleven (11) out of \nthe twelve (12) members, including Dr. \nO. J. Nnanna, who assumed duty as \nDeputy Governor (Financial System \nStability) at the end of January 2015. \nThe \nCommittee \nanalyzed \nkey \ndevelopments \nin \nthe \nglobal \nand \ndomestic \neconomic \nand \nfinancial \nconditions as well as the outlook for the \nrest of 2015. \n \nInternational Economic Developments \nThe Committee noted that the pace of \nglobal \neconomic \nrecovery \nhad \nremained moderate and uneven. In \nparticular, the Committee noted that \nlower \ncommodity \nprices \nwere \nweighing heavily on output growth, \nespecially in the oil exporting countries. \nIn addition, expectations of a rise in US \nshort-term interest rates continue to \nfuel capital outflows and currency \nweaknesses in the emerging markets \nand developing countries. Against the \nbackdrop of sustained weakness in the \nEuro zone and softening growth in the \nemerging markets, global output has \nremained largely tapered. \nDuring the first quarter of 2015, the \nUnited States led the global impetus to \noutput growth as consumer demand \nstrengthened on the heels of falling oil \nprices, \nlower \nUS \noil \nimports \nand \naccommodative monetary policy. In \ncontrast, in the Euro area, continued \noutput decline, in the face of positive \noil price shocks, made the European \nCentral Bank (ECB) to introduce a \nmassive €1.1 trillion asset purchase \nprogramme, commencing in March \n2015, involving a €60 billion monthly \nasset \npurchase. \nThe \nprogramme, \nalthough open-ended, is expected to \nlast at least until September 2016 by \nwhich time inflation may have gained \nreasonable traction. \n \nThe Committee, however, noted a \nnumber of important downside risks to \nglobal \noutlook \nin \n2015 \nincluding \ngeopolitical tensions and conflicts; the \nnegative impact of commodity price \ndeclines; weak external demand and \nthe \npossibility \nof \nMonetary \nPolicy \nnormalization in the US. Growth could, \nhowever, remain subdued in most of \nthe Euro Area and Japan, in the short-\nto-medium \nterm. \nGrowth \nin \nthe \nemerging markets may exhibit wide \nvariations with sharp deceleration in \nmost of the large emerging market \neconomies, especially in Latin America \nand Eastern Europe, due to the \nheadwinds from softening commodity \nprices \nand \nslowdown \nin \nexternal \ndemand \nfrom \nthe \nadvanced \neconomies. \nIn \naddition, \ncountry \nspecific risks, such as political crisis, \nstructural factors, adverse weather \nconditions, \nand \nlarge \nswings \nin \ncurrencies \nmay \ncontinue \nto \nslow \n \n \n \nCBN Monetary Policy Review \n \n70 \n \n \naggregate demand in a number of \ncountries. \n \nGlobal inflation continues to be low \ndue \nto \ndeclining \noil \nprices \nand \ncontinuing slack in global output. Core \ninflation has continued to sag due \namongst \nother \nthings \nto \nthe \ndampening effect of low oil prices and \nlack \nof \nappreciable \nwage \ngains. \nAverage inflation for the developed \neconomies is projected to remain flat \nat 1.5 per cent in 2015 due to the \nincreasing output gap, weak recovery, \nand strong regional currencies. This \ndevelopment appears to be offsetting \nthe risk of imported inflation in the \nemerging and developing countries, \nmost of which have experienced \nmoderate to severe depreciation in \ntheir \nlocal \ncurrencies. \nDeveloping \neconomies are thus expected to have \nmoderate inflation in the medium term. \n \nThe Committee observed that the \noutlook for global monetary policy \nsuggested \na \npredominantly \neasy \nstance. The Euro Area and Japan are \nexpected \nto \nremain \nin \nthe \naccommodative \nmode. \nEven \nin \ncountries where growth appears to be \nstrengthening like the US, UK and \nCanada, there are indications of \ndelayed switch to tight monetary \npolicy stance. Owing to currency \nconcerns, however, the Committee \nfurther noted that some emerging and \ndeveloping \neconomies \nmay \nexperience moderate tightening in the \nshort to medium term. Growth in sub-\nSaharan Africa is projected to average \n4.9 per cent in 2015. \n \nDomestic \nEconomic \nand \nFinancial \nDevelopment Output \nThe National Bureau of Statistics (NBS) \nestimated real Gross Domestic Product \n(GDP) growth rate at 5.94 per cent in \nQ4 of 2014 lower than the 6.77 per \ncent recorded in the corresponding \nperiod of 2013 and the 6.23 per cent \nrecorded in Q3 2014. The Committee \nnoted that the slowdown in growth \nresulted mainly from the non-oil sector, \nwhich grew by 6.44 per cent in Q4, \n2014 compared with 8.78 per cent in \nQ3 \n2014. \nAgriculture, \nindustry, \nconstruction, \ntrade \nand \nservices \ncontributed, 0.89, 1.30, 3.64, 0.87 and \n2.45 percentage points, compared \nwith 1.21, 1.04, 0.36, 1.08 and 2.53 \npercentage points, respectively, in Q3 \n2014. The softening non-oil GDP was \npartly traced to the spill over effects of \nlow \noil \nprices \nwhich \nnegatively \nimpacted agricultural output, trade \nand services. \n \nOil-GDP on the other hand, grew by \n1.18 per cent in Q4, 2014 compared \nwith a decline of 3.60 per cent in the \npreceding quarter. The growth in oil-\nGDP \nis \nparticularly \nnoteworthy \nbecause it came at a time when the \nsector \nwas \nexperiencing \nexternal \nnegative price shocks. \n \n \n \n \n \n \nCBN Monetary Policy Review \n \n71 \n \n \nPrices \nHeadline inflation remained within the \n6.0—9.0 per cent band established by \nthe CBN. However, the Committee \nnoted \nwith \nconcern, \nthe \ngradual \nincrease in the year on year headline \ninflation during the first two months of \nthe \nyear \nfrom \n8.0 \nper \ncent \nin \nDecember 2014 to 8.2 per cent in \nJanuary and further to 8.4 per cent in \nFebruary \n2015. \nThe \nunderlying \ninflationary \npressures \ncame \nlargely \nfrom food (particularly imported food) \nand \nthe \ncore \ncomponents. \nFood \ninflation rose from 9.2 per cent in \nDecember 2014 to 9.4 per cent in \nFebruary 2015 while core inflation \nincreased from 6.2 to 7.0 per cent \nduring the same period. The major risks \nto inflation, the Committee noted, \ninclude elevated aggregate spending \nin the run-up to the 2015 general \nelections, the likely higher import prices \non the strength of an appreciating \ndollar and possible food supply shocks \nlinked to insurgency and insecurity in \nsome major agricultural zones of the \ncountry. \n \nMonetary, \nCredit \nand \nFinancial \nMarkets’ Developments \nBroad money supply (M2) declined by \n1.70 per cent in February 2014 over the \nlevel at end-December 2014. This \ntranslated to an annualized decline of \n10.23 per cent compared with the \nprovisional growth benchmark of 15.24 \nfor fiscal 2015. The decline in M2 \nprimarily reflected the contraction of \n18.14 and 8.22 per cent in net foreign \nassets (NFA) and other assets (net), \nrespectively, during the period. The fall \nin NFA is attributed to the combined \neffects of weakening oil price and \nreversal of portfolio \ncapital flows. \nDuring the period, net domestic credit \n(NDC) grew by 9.89 per cent in \nFebruary 2015, annualized to a growth \nrate of 59.31 per cent, compared with \na growth rate 7.89 per cent recorded \nin the corresponding period of 2014 \nand an indicative benchmark of 29.3 \nper cent for 2015. \nThe credit-to-\ngovernment (net) component grew \nsharply by 54.69 per cent relative to a \ndecline of 21.81per cent at end-\nDecember 2014. \n \nThe Committee noted that money \nmarket interest rates were relatively \nvolatile in the intervening period but \nstabilized on average during the first \ntwo months of 2015, as banking system \nliquidity fluctuated. Thus, average inter-\nbank call and OBB rates, which \nopened at 10.58 and 10.52 per cent on \n5th and 6th January 2015, closed at \n11.00 and 9.23 per cent, respectively, \non February 27, 2015. Average inter-\nbank call and OBB rates for the period \nwere \n15.21 \nand \n18.36 \nper \ncent, \nrespectively. \n \nThe Committee observed that the \nbearish \nconditions \nin \nthe \ncapital \nmarket continued in the review period. \nThe All-Share Index (ASI) decreased by \n13.1 per cent from 34,657.15 at end-\nDecember \n2014 \nto \n30,103.81 \nby \nFebruary \n27, \n2015. \nMarket \n \n \n \nCBN Monetary Policy Review \n \n72 \n \n \ncapitalization also moved in the same \ndirection, falling by 12.5 per cent from \nN11.48 trillion to N10.04 trillion during \nthe period. The Committee noted that \nthe situation, though reflecting current \ntrends \nglobally, \nneeded \nto \nbe \nmonitored closely. \n \nExternal Sector Developments \nFollowing the closure of the Retail \nDutch Auction System (rDAS) window \nof the foreign exchange market on 18th \nFebruary 2015, the foreign exchange \nmarket is now unified. Consequently, \nthe naira exchange rate opened at \nN180.1/US$ and closed at N198.0/US$, \nwith \na \ndaily \naverage \nrate \nof \nN198.0/US$. \nThis \nrepresented \na \ndepreciation of N17.9k or 9.04 per cent \nfor the period. \n \nConsiderations \nThe Committee expressed satisfaction \nwith the impact of the decisions taken \nto harmonise the foreign exchange \nmarket. As a consequence of those \nactions, the interbank exchange rate \nhas \nstabilized \nafter \nan \ninitial \nadjustment. The Committee, however, \nexpressed concern about the wide \ndivergence between the interbank \nand the bureau-de-change exchange \nrates, which provides an avenue for \narbitrage and speculative activities in \nthe market. The Committee noted with \nconcern the phenomenon of currency \nsubstitution and partial dollarization in \nthe economy, a development which \nmay have significantly fuelled the high \ndemand for foreign exchange. The \nCommittee, therefore, reiterated that \nthe naira remained the currency of \ntransaction \nin \nthe \neconomy \nand \nadvised the Bank to take all possible \nmeasures to address this development. \nThe \nCommittee \nalso \nexpressed \nconcern about the outlook for growth, \nwhich had moderated partly due to \nthe effects of low oil prices, naira \nexchange \nrate \ndepreciation, \nand \nelection-related \nconcerns. \nThe \nCommittee was however, optimistic \nthat the situation would improve once \nelections were successfully conducted \nwith the expected improvement in \nbusiness confidence. \n \nThe Committee took note that while \nadverse developments in international \noil prices had affected government \nrevenues and reserves accretion and \nimpacted negatively on capital flows, \nthe financial system remained stable \nwith key banking stability indicators \nshowing robustness. In the light of this, \nthe Committee directed the Bank to \ntake all necessary measures to improve \nthe resilience of the financial system as \nwell \nas \nthe \noverall \neconomic \nenvironment and functioning of the \nfinancial markets. \n \nThe Committee also took note of the \nadministrative measures implemented \nby the Bank since the last meeting of \nthe MPC to achieve stability in the \nforeign exchange market. The Bank \nhad on 18th February 2015 taken the \nbold supply management measures to \nclose the official window of the foreign \n \n \n \nCBN Monetary Policy Review \n \n73 \n \n \nexchange market in order to create \ntransparency and minimize arbitrage \nopportunities in the foreign exchange \nmarket. Furthermore, to deepen the \nmarket and enhance the efficacy of \nthe demand management measures, \nthe Bank gave specific directives on \nthe \neffective \nmonitoring \nand \nrepatriation of both oil and non-oil \nexport proceeds. In addition, the \nutilization of export proceeds has been \nrestricted to eligible transactions only, \nto minimize leakages. The Committee \nenjoined the Bank to continue to fine-\ntune demand management measures \nas well as implement appropriate \nsupply-enhancing strategies to ensure \neffective demand and utilization of \nforeign exchange in the country. \nThe Committee noted the gradual rise \nin headline inflation, driven mainly by \nexchange rate-induced high prices of \nimported (processed) food and output \nsupply \nshocks. \nHowever, \nthe \nCommittee was of the view that the \nprevailing tight monetary policy stance \nand some of the recent administrative \nmeasures would among others help to \nlock-in \ninflation \nexpectations \nand \nfurther stabilize the naira exchange \nrate. \n \nDecision \nIn \nthe \nlight \nof \nthe \nabove \nconsiderations, \nthe \nCommittee \nobserved that its previous decisions \nneeded time for their effects to fully \npermeate the economy and therefore, \nvoted to maintain the current position. \nConsequently, \nthe \nCommittee \ndecided as follows: \n \nAll eleven members unanimously voted \nto retain the MPR at 13 per cent; retain \nthe CRR on Private Sector deposits at \n20 per cent; retain CRR on Public \nSector deposits at 75 per cent; and \nretain the liquidity ratio at 30 per cent. \n \nI thank you all for Listening \n \n \nGodwin I. Emefiele, CON \nGovernor, \nCentral Bank of Nigeria \n \n24th March, 2015 \n \n \n \n \n \n \n \n \n \nCBN Monetary Policy Review \n \n74 \n \n \nCentral Bank of Nigeria Communiqué \nNo. \n101 \nof \nthe \nMonetary \nPolicy \nCommittee Meeting of Monday and \nTuesday, May 18 and 19, 2015 \n \nThe Monetary Policy Committee met \non 18th and 19th May, 2015 against the \nbackdrop of fragile but moderate \ngrowth \nand \naccentuating \ndiscrepancies in global output across \nregions \nand \nintensification \nof \nweaknesses in the domestic economy. \nIn attendance were 11 out of the 12 \nmembers. The Committee reviewed \nthe fragilities in the global economic \nand financial environment in the first \nfour months of 2015, and reassessed \nthe \nshort \nto \nmedium-term \npolicy \noptions for the domestic economy. \n \nInternational Economic Developments \nThe Committee noted that global \neconomic recovery continued at a \nmodest \nbut \nuneven \npace \npartly \nbecause most countries were just \nshedding the deadweights of 2014. The \nIMF has projected a marginal increase \nin global output from 3.4 per cent in \n2014 to 3.5 per cent in 2015, although \nwith \nconsiderable \nvariation \nacross \nregions and major economies. The \nsoftening oil prices have continued to \nsupport an uptick in growth of oil \nimporting countries but dampening \ngrowth prospects in major oil exporting \neconomies. \nOverall, \neconomic \nactivities have gained some traction \nparticularly in the US, underpinned by \nsustained monetary easing, ebbing \nfiscal consolidation, improvements in \nhousing \nmarket \nconditions, \nlower \nfinancing \ncost, \nrising \nprivate \nconsumption and increase in real \nhousehold \nincome. \nElsewhere, \nlow \ncommodity prices continued to boost \nhigher aggregate demand in addition \nto \ncreating \nconditions \nfor \naccommodative \nmonetary \npolicy \nespecially in Japan and the euro area \nwhere recovery appears to suffer \nsevere setbacks due to structural \nbottlenecks \nand \nthe \nthreat \nof \ndeflation. For the Eurozone, however, \nthe massive quantitative programme \nof the ECB opens a new growth vista, \nhalting the slide in potential output and \nengendering a more solid recovery. \n \nGlobal \ngrowth \nis \nexpected \nto \naccelerate to 3.8 per cent in 2016 but \nwith \nsignificant \ndownside \nrisks. \nProtracted stagnation in the Euro area \ncould constrain global trade while the \nanticipated end of monetary easing in \nkey industrial countries could limit \ninvestment \ngrowth. \n \nIn \naddition, \nstronger currencies in both the US and \nUK may likely moderate net exports \ncoupled \nwith \nlower \ncapital \nexpenditure in the energy sector due \nto the softening oil prices. Furthermore, \nthe huge asset purchase program by \nthe UK Treasury and the Bank of Japan \nis an indication of divergent monetary \npolicy stance among key advanced \neconomies \nwith \nthe \nattendant \nwidening of long-term interest rate \ndifferentials. We are of the view that \nwith the UK inflation at -0.1 per cent in \nApril, the size of its asset purchase \n \n \n \nCBN Monetary Policy Review \n \n75 \n \n \nprogramme of £385 billion may be \nrevisited by the Treasury. \n \nFor \nmany \nemerging \nmarkets, \nthe \noutlook for growth is less optimistic, \nreflecting cyclical factors, domestic \npolicy tightening, political tension, and \nstructural factors. In China, growth is \nexpected to decline below the long \nrun target of 7.0 per cent in 2015 owing \nto \nfinancial \nmarket \nvulnerabilities, \ndeclining \nproductivity, \nexcess \ncapacity, and weakening domestic \ndemand. It is however, envisaged that \nrecent \npolicy \nstimuli \nby \nboth \ngovernment and the Peoples Bank of \nChina would help unwind the excess \ncapacity and strengthen the financial \nsystem with the ultimate goal of \nrestoring growth to the historical path \nin the long run. \n \nDeveloping economies as a group \ncontinue to show relative resilience \nwith growth projected to accelerate \nfrom 4.4 per cent in 2014 to 4.8 per \ncent in 2015. Growth in the developing \neconomies is also expected to remain \nuneven in the near term, reflecting the \npattern in the advanced economies. \nCountries with high trade exposure to \nUS and UK would likely gain substantial \nmomentum while those depending on \nthe \nEuro \nArea \nmay \nexperience \ncontinuing \nslow \ndown \nin \nexport \ndemand in the near to medium-term. \n \nKey risks to growth in the developing \ncountries include the possible tightness \nin the global financial markets and the \ndiverging stance of monetary policy in \nthe \nadvanced \neconomies \nwhich \nportend \ngrave \nconsequences \nfor \ncapital flows, exchange rate stability, \nand inflation expectations. In addition, \nsudden \ndeterioration \nin \nliquidity \nconditions, volatility in commodity and \nfinancial \nmarkets, \nnarrowing \nfiscal \nspace, and rising geopolitical tensions \nare headwinds that could constrain \nglobal output growth. Thus, monetary \npolicy in a number of developing \ncountries has to contend with the \ndelicate choice among supporting \ngrowth, \nreining \nin \ninflation \nand \nstabilizing currencies and the financial \nsystems. \n \nGlobal inflation remains benign and is \nexpected to be moderate in 2015-16 \ndue to the tailwinds from the sharp \ndrop in the prices of crude oil, excess \ncapacity \nand \nappreciation \nof \ncurrencies \nin \nkey \nadvanced \neconomies. \n \nDomestic \nEconomic \nand \nFinancial \nDevelopments Output \nThe deceleration in growth, which \ncommenced in the third quarter of \n2014, intensified in the first quarter of \n2015 in the aftermath of declining \ncrude oil prices. The National Bureau \nof Statistics (NBS) estimated Real GDP \ngrowth at 3.96 per cent in the first \nquarter of 2015, which is significantly \nlower than the 5.94 and 6.21 per cent \nin the preceding quarter and the \ncorresponding \nperiod \nof \n2014, \nrespectively. \nReal \nGDP \ngrowth \nis \n \n \n \nCBN Monetary Policy Review \n \n76 \n \n \nprojected to decline to 5.54 per cent in \n2015 from 6.22 per cent in 2014. In line \nwith trend, the non-oil sector remained \nthe main driver of growth in the first \nquarter of 2015, recording 5.59 per \ncent. The key growth drivers in the non-\noil sector during the period were \nservices, trade, and agriculture which \ncontributed \n2.82, \n1.27, \nand \n1.05 \npercentage points, respectively. The \nmodest improvements recorded in the \noil sector in the fourth quarter of 2014 \nappear to have been reversed as oil \nGDP contracted by 8.15 per cent in \nthe first quarter of 2015 compared with \nan increase of 1.2 per cent in the \npreceding quarter. \n \nThe Committee expressed concern \nabout \nthe \nweakening \neconomic \nmomentum \nbut \nrecognized \nthe \nrelative similarity in the condition to the \nevolving economic environment in \nvirtually all oil exporting economies, \nsuggesting the need for acceleration \nof various ongoing initiatives to diversify \nthe economic base of the country. \n \nWith the successful completion of the \n2015 \ngeneral \nelections \nand \nthe \nprogress recorded so far in the fight \nagainst insurgency, the Committee \nwas optimistic that the slow pace of \neconomic momentum would reverse in \nthe near term. \n \nPrices \nThe Committee noted that the year-\non-year \nheadline \ninflation \ncrept \nupwards for the fourth consecutive \nmonth in April 2015. The inflation rate \nrose from 8.2 per cent in January 2015 \nto 8.5 per cent in March and further to \n8.7 per cent in April. The increase in \nheadline inflation in April reflected \nincreases in both the core and food \ncomponents. Core inflation rose to 7.7 \nper cent in April from 7.5 per cent in \nMarch, while food inflation increased \nto 9.5 per cent from 9.4 per cent over \nthe same period. \n \nThe Committee noted that the uptick \nin inflationary pressures, year-to-date, \nwas largely traceable to transient \nfactors such as high demand for \ntransportation, \nfood \nand \nenergy, \nespecially in the period around the \ngeneral elections as well as the Easter \nfestivities. It also noted the roles played \nby system liquidity and the pass-\nthrough \neffects \nof \nthe \nrecent \ndepreciation of the naira exchange \nrate. When the transient causes are \nisolated, the Committee observed the \ndecline in month-on-month inflation \nacross all the measures in April as \nheadline inflation moderated to 0.8% \nfrom 0.9% in March; core inflation \nmoderated to 0.6% from 0.8% and food \ninflation moderated to 0.9% from 1.0%. \n \nThe \nCommittee \nreiterated \nits \ncommitment to price stability noting \nthat given the already tight stance of \nmonetary policy and the transient \nnature of the incubators of the current \ninflationary trend, which are outside \nthe direct control of monetary policy, \nthe \nspace \nfor \nmaneuver \nremains \n \n \n \nCBN Monetary Policy Review \n \n77 \n \n \nconstrained, \nnecessitating \nthe \nintervention of fiscal and structural \npolicies to stimulate output growth. \n \nMonetary, \nCredit \nand \nFinancial \nMarkets Developments \nBroad money supply (M2) increased by \n1.80 per cent in April 2015, over the \nlevel at end-December 2014. When \nannualized, M2 increased by 5.39 per \ncent, which is lower than the growth \nbenchmark of 15.24 per cent for 2015. \nThe modest increase in money supply \nreflected \nthe \ngrowth \nin \nthe \nnet \ndomestic credit (NDC) of 9.66 per \ncent. Annualized, net domestic credit \ngrew by 28.98 per cent over the end-\nDecember, 2014 level, which was \nwithin the provisional benchmark of \n29.3 per cent for 2015. The significant \ngrowth in aggregate credit was traced \nmainly \nto \nFederal \nGovernment \nborrowing which increased by 177.26 \nper cent in April 2015 or 531.78 per \ncent on annualized basis. \n \n In the period under review, money \nmarket interest rates were relatively \nvolatile, reflecting the fluctuations in \nliquidity \nin \nthe \nbanking \nsystem. \nAverage inter-bank call and OBB rates, \nwhich opened at 11.92 and 10.75 per \ncent on 2nd March 2015, closed at \n15.00 and 13.26 per cent, respectively, \non April 17, 2015. Average inter-bank \ncall and OBB rates for the period were \n19.02 and 17.45 per cent, respectively. \n \nThe \nCommittee \nnoted \na \nmodest \nimprovement in the equities segment \nof the capital market during the review \nperiod. The All-Share Index (ASI) rose by \n9.3 per cent from 31,744.82 on March \n31, 2015 to 34,708.11 on April 30. \nSimilarly, Market Capitalization (MC) \nincreased by 10.0 per cent from N10.72 \ntrillion to N11.79 trillion in the same \nperiod. However, relative to end-\nDecember 2014, the indices increased \nmarginally by 0.1 and 2.7 per cent, \nrespectively. The recovery in share \nprices particularly in April 2015 was \nlargely \ndue \nto \nimprovements \nin \nearnings \nand \nsentiments, \namid \nsuccessful conclusion of the 2015 \ngeneral elections. \n \nExternal Sector Developments \nThe average naira exchange rate was \nrelatively stable at both the interbank \nand Bureau-de-Change segments of \nthe foreign exchange market during \nthe review period. The exchange rate \nat the interbank market opened at \nN197.80./US$ \nand \nclosed \nat \nN197.00/US$, with a daily average of \nN197.04/US$. \nThis \nrepresented \nan \nappreciation of N0.80k for the period. \nAt the Bureau-de-Change segment, \nthe \nexchange \nrate \nopened \nat \nN225.00/US$ \nand \nclosed \nat \nN217.50/US$, with a daily average of \nN216.75/US$. \nThis \nrepresented \nan \nappreciation of N7.50k for the period. \n \nThe stability and modest appreciation \nin the two segments of the market was \nlargely due to the closure of the rDAS \nmarket and the modified two-way \nquote \ntrading \nat \nthe \ninter-bank \n \n \n \nCBN Monetary Policy Review \n \n78 \n \n \nsegments of the market. Gross official \nreserves rose from US$29.34 billion at \nend-March 2015 to US$30.05 billion on \nMay 15, 2015. \n \nCommittee’s Consideration \nThe Committee noted the salutary \neffects of the successful conduct of \nthe 2015 general elections on the \nmacroeconomic environment. The \nCommittee expressed optimism that \nthe confidence and goodwill arising \nfrom the successful elections would \nstem the spate of capital reversal, \nreduce \npressure \nin \nthe \nforeign \nexchange market and stabilize the \nfinancial \nmarkets \nin \nthe \nshort \nto \nmedium term. A combination of the \nrenewed \nconfidence \nand \nrecent \nadministrative measures around the \nforeign exchange market have eased \npressure on the naira, resulting in \nrelative stability in all segments of the \nforeign exchange market. \n \nThe Committee was concerned about \nthe creeping headline inflation since \nJanuary 2015 but noted that the \ncausal factors were largely transient \nand outside the purview of monetary \npolicy. \nFurthermore, \nthe \nsignificant \nrising trend in credit to government \nwas regarded as potential headwinds \nto growth with negative spillovers to \nthe already elevated lending rates, \ncredit to the private sector and \naggregate \ndomestic \ninvestment \nincluding inflationary pressures. \n \nThe \nCommittee \nexpressed \ndeep \nconcern \nover \nthe \nlackluster \nperformance of the external sector \narising from a number of significant \nglobal shocks. \n \nFirst, the prospects of monetary policy \nnormalization in the US with attendant \nincrease in global interest rates and \naccentuating \ncapital flow \nreversal \nwhich \ncould \nfurther \nexacerbate \ntightness in global financial conditions \nand create further pressure on the \nnaira. \n \nSecond, the continued glut in crude oil \nsupplies \namidst \nsoftening \nprices, \nanchored by sluggish global output \nexpansion \ncould \nfurther \nthreaten \nforeign \nexchange \nearnings \nand \naccretion to external reserves over a \nmuch longer period. A near- term rally \nin oil prices is further undermined by \nthe diminishing market power of the \nOrganization \nof \nthe \nPetroleum \nExporting Countries (OPEC). \n \nThird, the anemic recovery in the Euro \nArea and Japan and tepid growth \nconditions \nin \nChina constitute \nan \nadditional drag on crude oil exports \nprospects. Consequently, the decline \nin trade balance, which commenced \nin the second half of 2014, could persist \nover a much longer period with further \nimplications for public revenues and \nexternal reserves. \n \nIn the light of these developments, the \nCommittee \nstressed \nthe \nneed \nfor \n \n \n \nCBN Monetary Policy Review \n \n79 \n \n \nproactive measures to protect the \nreserve buffer to safeguard the value \nof \nthe \ndomestic \ncurrency \nand \nengender \noverall \nstability \nof \nthe \nbanking system. It was, however, noted \nthat \nmonetary \npolicy \nis \ngradually \napproaching the limits of tightening \nand \nwould, \ntherefore, \nrequire \ncomplementary fiscal and structural \npolicies. \n \nFurthermore, \nthe \nCommittee \nconsidered \nthat \nthe \ncurrent \ndiscriminatory CRR on public and \nprivate sector deposits has not only \nconstrained the policy space but \ncould inspire moral hazard by private \nmarket participants. Consequently, it \nwas recognized that while additional \ntightening \nmeasures \nmay \nnot \nbe \nappropriate now to avoid overheating \nthe economy, a harmonization of the \nCRR was imperative in order to curb \nabuses and improve the efficacy of \nmonetary policy. \n \nThe Committee’s Decisions \nIn view of these developments, the \nCommittee decided by a unanimous \nvote to retain the current tight stance \nof monetary policy. One member \nvoted to increase CRR on private \nsector deposits from 20 to 25 per cent \nand retain CRR on public sector \ndeposits at 75 per cent while another \nmember voted to retain the CRR on \nprivate sector deposits at 20 per cent \nand increase CRR on public sector \ndeposits from 75 to 100 per cent. Nine \nmembers, voted to harmonize the \npublic and private sector CRR at 31 \nper cent. Two members voted to \nremunerate a portion of the CRR. All \nmembers voted to retain all other \ndecisions taken at the last meeting of \nthe \nMPC \nwhile \nimproving \nthe \nimplementation of the CRR regime. \nConsequently, the MPC voted to: \n \n(i) \nRetain the MPR at 13 per cent \nwith a corridor of +/- 200 basis \npoints around the midpoint; \n \n(ii) \nRetain the Liquidity Ratio at 30 \nper cent; and \n \n(iii) \nHarmonize the CRR on public \nand private sector deposits at \n31.0 per cent. \n \nThank you. \n \nGodwin I. Emefiele \nGovernor, Central Bank of Nigeria \n \n19th May 2015 \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \nCBN Monetary Policy Review \n \n80", "source": "CBN", "stratum": "cb_requests", "fetch_date": "2026-05-11", "url": "file:///CBN/Monetary_Policy_Review/MPR August 2015.pdf"}