clean/cb_requests/07a7e75fd3036158cccce4b985aac875.json

{"doc_id": "07a7e75fd3036158cccce4b985aac875", "text": "1 \n \nClassified as Confidential \n \nCENTRAL BANK OF NIGERIA COMMUNIQUÉ NO. 149 OF THE MONETARY \nPOLICY COMMITTEE MEETING \n HELD ON MONDAY 24th AND TUESDAY 25th JULY 2023 \nThe Monetary Policy Committee (MPC) met on the 24th and 25th of July \n2023, against the backdrop of continued uncertainties in the global and \ndomestic economies. This included geo-political tensions, threats to \nglobalization and the multilateral economic system. On the domestic \nfront, output growth continued at a moderate pace, while the general \nprice level remained elevated as markets adjust to the new policies \nintroduced by the \nFederal \nGovernment. Consequently, these \ndevelopments at both the global and domestic levels continue to pose \nsignificant challenges to the policy environment. \nThe Committee assessed these developments and the outlook for the \nrest of the year. \nEleven (11) members of the Committee attended this meeting. \nGlobal Economic Developments \nThe Committee reviewed developments impeding the smooth recovery \nof the global economy. Notable amongst these, is the continued \nhostility between Russia and Ukraine, as Russia reneged from further \nrenewal of the Black Sea Agreement. This development would likely \npush commodity prices much higher than current levels. In addition, \nChina’s slow recovery is dampening global trade, while the increasing \npolarization of the global economy with several economies seeking \n2 \n \nClassified as Confidential \nmacroeconomic alliances with the group of BRICS countries, is \nincreasing uncertainty in the direction of trade flows. \nInflation across several Advanced Economies has continued to \nmoderate but remains considerably above their respective long-run \nobjectives even as monetary policy tightening progresses. In the \nEmerging Markets and Developing Economies, inflationary pressure \nremains broadly elevated, though there are signs of moderation in some \ncountries. Global Inflation is, thus, expected to remain elevated through \n2023, despite broad measures by several central banks to ease the \npressure. \nIn the global financial markets, financial conditions remain tight and \nmay exacerbate further as monetary policy normalization progresses. \nInvestors’ preference is thus, shifting to advanced economy fixed-\nincome securities with improved yields as well as safe haven assets. \nThe International Monetary Fund (IMF), in its July 2023 World Economic \nOutlook, revised the 2023 output growth forecast for the global \neconomy upwards to 3.2 per cent, from 2.8 per cent in its April forecast. \nThe improved outlook was due to the sustained resilience of the global \neconomy to the prevailing headwinds in the first half of 2023. Global \ngrowth is however, projected to moderate downward to 3.0 per cent in \n2024. \nDomestic Economic Developments \nAvailable output data from the National Bureau of Statistics (NBS) \nshowed that, Real Gross Domestic Product (GDP) grew by 2.31 per cent \n(year-on-year) in the first quarter of 2023, compared with 3.52 per cent \n3 \n \nClassified as Confidential \nin the preceding quarter. While growth moderated, it has remained \npositive since Q4 2020. This steady and positive performance was driven \nlargely by sustained growth in the services and industry sectors, \nsupported by broad-based measures by both the monetary and fiscal \nauthorities. \nStaff projections showed that output growth recovery in 2023 would \nremain positive as economic agents adjust to the recent policies on zero \nsubsidy on the price of Premium Motor Spirit (PMS) and convergence of \nexchange rates. \nOn price development, the Committee noted the continued uptick in \ninflationary pressure, as headline inflation (year-on-year) rose by 38 basis \npoints to 22.79 per cent in June 2023 from 22.41 per cent in the previous \nmonth. This was driven by the moderate increases to both food and \ncore components. Legacy headwinds, including security challenges in \nmajor food-producing areas; high cost of transportation driven by the \nrising cost of energy; and inadequacies in public infrastructure, continue \nto drive the rise in food and core inflation. Key developments that would \nlikely sustain upward pressure on domestic prices, in the short to medium \nterm, are the recent deregulation of petrol price and the transition to a \nunified and market-determined exchange rate. The unfolding dynamics \nin the policy environment and the resultant pass-through to domestic \nprices would thus require greater collaboration between the Bank and \nthe fiscal authority. \nBroad money supply (M3) in June 2023 grew by 24.35 per cent (year-to-\ndate), compared with 6.70 per cent in May, driven largely by the \n4 \n \nClassified as Confidential \nincrease in both Net Foreign Assets (NFA) and Net Domestic Assets \n(NDA). Money market rates reflected the level of liquidity in the banking \nsystem. Consequently, the monthly weighted average Open Buyback \n(OBB) and Interbank Call rates decreased to 9.12 and 11.61 per cent in \nJune 2023, from 12.60 and 12.31 per cent in May, respectively. \nIn the Banking System, Financial Soundness Indicators (FSIs) remained \nstable and strong. The Capital Adequacy Ratio (CAR) stood at 11.2 per \ncent, Non-Performing Loans (NPLs) ratio of 4.1 per cent and Liquidity \nRatio (LR) of 48.4 per cent, as at end June 2023. \nIn the financial market, equities remained bullish through the review \nperiod, with the All-Share Index (ASI) and Market Capitalization (MC) \nincreased to 60,968.27 index points and N33.20 trillion, respectively, on \nJune 30, 2023, compared with 51,251.06 index points and N27.92 trillion \nas at December 30, 2022. This indicates continued investor confidence \nin the Nigerian market as investors foresee a more stable \nmacroeconomic environment once the current policies of the Bank and \nFederal Government fully permeate the economy. \nGross external reserves improved marginally to US$33.97 billion as at July \n20, 2023, from US$33.75 billion in June 2023, as accretion to external \nreserves remains weak while foreign exchange demand pressures \npersist. \n \nOutlook \nThe overall outlook for the recovery of both the global and domestic \neconomies moderated, however uncertainties remain. At the global \n5 \n \nClassified as Confidential \nlevel, legacy headwinds such as the war in Ukraine and slow recovery of \nthe Chinese economy as well as ongoing bricsification are key downside \nrisks to output growth. In the domestic economy, factors precipitating \nthe uncertainties remain the continued insecurity, particularly in farming \ncommunities; high prices of PMS and other energy products; as well as \npressure in the foreign exchange market. \nForecasts for key macroeconomic indicators for the Nigerian economy \nindicate that the economy will continue to recover moderately through \n2023 to grow by 2.66 per cent (CBN), 4.20 per cent (FGN) and 3.20 per \ncent (IMF). \n \nThe Committee’s Considerations \nThe Committee’s considerations focused on the persistent rise in inflation \nand its potential adverse effect on output growth and household \nincome. The continued uptick in inflation (month on month), driven by \nincrease in both the food and core components of the CPI, in the view \nof members, remained a key challenge. The members also expressed \nconcerns that the recent policy decisions around subsidy removal, \nexchange rate liberalization and disbursement of palliatives, would \nhave pass-through effects to inflation. Members therefore called for \ndecisive measures, by the Bank, to address the likely liquidity surfeit from \nthese developments, including using appropriate monetary policy \ninstruments. \nThe Committee urged the monetary and fiscal authorities to sustain its \ncollaboration towards addressing the inflationary pressure and \nincentivise domestic investment to reduce unemployment and boost \n6 \n \nClassified as Confidential \noutput growth. It enjoined the Federal Government to continue to \nexplore policies to improve investor confidence in the Nigerian \neconomy and pave way for foreign and domestic investments. \nMembers emphasized the need to attract investments, particularly, to \nauto manufacturing, aviation, and rail industries to boost non-oil \nrevenues. The Committee, thus, expressed the view that, key policy \nmechanisms to shield the Nigerian economy from persisting global \nshocks and other emerging domestic shocks, are urgently required for \nthe economy to continue to post positive growth. \nThe Committee also recognized the several measures put in place by \nthe Bank to boost foreign exchange liquidity. Particularly, Members were \nof the view that the recent policy on foreign exchange market reform \nwould increase market transparency and encourage more foreign \ncapital inflows. It, therefore, urged the Bank to leverage on effective \npolicies to attract remittances from diaspora to help moderate \nexchange rate pressures. \nThe Committee commended the Bank’s role in the effective oversight \nof the banking system, evidenced by the relative stability in key financial \nsoundness indicators and resilience of the sector, despite tight global \nand domestic financial conditions. Members, however, noted the \npotential impact of the recent policy reforms on financial system stability \nand called on the Management to act proactively to ringfence the \nbanking system from any possible second-round effects. The MPC, thus, \nurged the Bank to sustain its macro-prudential surveillance over the \nbanking system. \n \n \n7 \n \nClassified as Confidential \nThe Committee’s Decision \nFollowing the outlook for the domestic economy, Members were of the \nview that the Committee was confronted with only two policy options, \nto hold or hike the policy rate to offset the moderate increase in \nheadline inflation. \nConsidering the option to hold, the Committee reviewed the impact of \nthe continued rise in inflation on various macroeconomic variables, \nnoting the potential dampening effect on output growth. Members \nagreed unanimously that the previous series of rate hikes had indeed \ngreatly moderated the pace of price increases. \nThe option to continue to hike the policy rate, albeit moderately, also \npresented a strong alternative. This is premised on the expected liquidity \ninjections into the economy from the recent policy developments and \nthe likely impact on inflation. \nThe Committee remained cautious in arriving at a policy decision as \nMembers noted the need to continue to support investment which will \nultimately lead to the recovery of output growth. The balance of these \narguments thus, leaned in favour of a moderate rate hike, to sustain \nefforts at anchoring inflation expectation, narrow the negative real \ninterest rate gap, and improve investor confidence. \nThe MPC, thus, resolved by a majority vote to raise the Monetary Policy \nRate (MPR). Six (6) Members voted to raise the MPR: Four (4) Members \nby 25 basis points and two (2) Members by 50 basis points. Five (5) \nMembers voted to hold the MPR constant. All Members voted to narrow \n8 \n \nClassified as Confidential \nthe asymmetric corridor from +100/-700 to +100/-300 basis points around \nthe MPR. \nIn summary, the MPC voted to: \nI. \nRaise the MPR by 25 basis points, from 18.50 to 18.75 per cent; \nII. \nAdjust the asymmetric corridor to +100/-300 basis points around the \nMPR; \nIII. \nRetain the CRR at 32.5 per cent; and \nIV. \nRetain the Liquidity Ratio at 30 per cent. \nThank you. \n \nFolashodun A. Shonubi, OFR \nAg. Governor, \nCentral Bank of Nigeria \n25th July 2023 \n \n1 \n \nClassified as Confidential \nPERSONAL STATEMENTS BY THE MONETARY POLICY COMMITTEE MEMBERS \n1. ADAMU, EDWARD L. \nThe Monetary Policy Committee (MPC) met in July 2023 against the backdrop of \nslowing global growth prospects owing to geo-political tensions, high energy \nprices, and continued anti-inflation policy stances. In April 2023, the International \nMonetary Fund (IMF) lowered its world output growth projection to 2.8 per cent \nfor 2023 mainly on account of these headwinds. In June, the World Bank \nannounced a much lower projection of 2.1 per cent premised on similar fears. \nIn the domestic economy, the balance of risk remains titled against price \nstability given the short- to medium term economic outlook. Whereas the \nmonetary policy rate (MPR) is at record high, effectively underpinning high \nlending rates and potentially constraining output, interbank rates as well open \nmarket operations (OMO) and Nigerian Treasury Bills (NTBs) rates continue to be \nlow, suggesting a weakening of the interest rate transmission channel. Unless this \nsituation is remedied, the economy could suffer output loses from policy \ntightening without commensurate disinflation gains. I saw the need, in this \nregard, to reinvigorate the monetary policy implementation framework starting \nwith a firmer MPR corridor. I therefore voted at the July meeting to narrow the \ngap between the Bank’s standing/lending facilities, and in furtherance of the \ntightening orientation of monetary policy commenced about a year ago. \nDetails of my considerations are presented subsequently. \nThe period May-July 2023 witnessed two major policy shifts in the economy. First, \nthe subsidy on petroleum motor spirit (PMS) was removed and this led to an \nimmediate jump in the pump price of the fuel. Second, the Bank unified the \nvarious exchange rate windows which translated to a significant devaluation of \nthe naira at the erstwhile investors and exporters (I&E) window. Both policies had \nimmediate effect on prices, partly reflected in upticks in all the measures of \ninflation in June 2023. The outlook for inflation in the rest of the year reflects \n \n2 \n \nClassified as Confidential \ncontinued impact of these policies, justifying therefore a tight policy stance over \nthe short- to medium term. \nAs it is expected, the effect of the recent policy shocks would transcend their \nimpact on prices. We have seen, for example, a jump in government revenue \narising from a higher FX conversion rate. Also noticeable is asset revaluation \ngains (and loses) for corporates including financial institutions majorly. Though \npersuaded by the need to keep monetary policy tight in view of the inclement \noutlook for inflation, the full ramification of the effect of these policies is yet to be \nseen. This, in part, underscored my cautious disposition at the July meeting of \nthe Committee. Among others, we could see a major contraction in activity in \nthe coming months which might change current trade-offs and other policy \ncalculations. \nAlready, major indicators of activity are giving signs of weakness. The composite \npurchasing managers index (PMI) stood at 50.2 index points in June 2023 \nindicating a slower pace of expansion in economic activity compared with 54.4 \nindex points in May 2023, just as Industry Composite Index (ICI) fell to 50.3 in June \n2023 from 53.6 points in May 2023. Services Composite Index (SCI) recorded a \ncontraction, falling below the 50.0 threshold for the first time since April 2022. It \nstood at 49.0 index points in June 2023, compared to 53.9 index points in May \n2023. These trends deserve to be monitored carefully as they broadly suggest \nthat the headroom for tightening might be narrowing faster than previously \nenvisaged. \nIn terms of the choice of policy instrument, I had indicated in my May 2023 \nstatement the possibility of looking at other instruments. The MPR was already at \nrecord high, notwithstanding which, nearly all the measures of liquidity showed \nunfavorable outturns in June 2023. Average open-buy-back (OBB) rate (month-\non-month) declined to 9.12 per cent in June 2023 from 12.60 per cent in May \n2023, due to increased liquidity in the banking system - net liquidity balance \n \n3 \n \nClassified as Confidential \naveraged N567.43 billion in June 2023, up from N328.36 billion in May 2023. \nCorrespondingly, the standing deposit facility (SDF) surged while the standing \nlending facility (SLF) substantially declined. Apparently, actual stance of \nmonetary policy has not fully reflected the intended, owing partly to transmission \nimperfection. Given this consideration, I opted to look at the corridor for further \nadjustment instead of the MPR at the July meeting. \nMeanwhile, it is comforting that the banking system continues to be resilient. \nHowever, it may be too early to judge the impact of recent developments on \nthe industry financial soundness indicators (FSIs). Amongst others, preserving the \nstability of the system continues to be a key priority on its own, and for effective \ntransmission of monetary policy impulses. I see the recent wave of banking \nsystem troubles in the United States and Europe as an important learning point – \nthat we could never take for granted the stability of the domestic banking \nsystem. Already there are warnings coming from some of the indicators like the \ncapital adequacy ratio (CAR) which, though still within the regulatory threshold, \nhas gravitated slowly to 11.23 per cent from 14.11 per cent a year ago. Much as \nthe situation is not yet alarming, ignoring it could prove sub-optimal in the \nmedium- to long-term. Slowing the pace of upward adjustment in interest rate \ncould cushion any underlying vulnerability in the banking system. \nOverall, I see widespread vulnerabilities – from output to inflation to financial \nsystem stability. I see, also, prospects with the extant policy paths. The stock of \ncredit remains sizeable, which is good for economic activity. Besides, the \nproposed targeted fiscal actions in the agricultural sector and transport \npalliatives could also go a long way in supporting economic activity. \nNotwithstanding the shocks from the removal of PMS subsidy and exchange rate \nharmonisation, effective liquidity management should have a significant \ndampening effect on consumer price pressures over time. On financial stability, \nmacro-prudential levers remain very important. Conter-cyclical buffers are \n \n4 \n \nClassified as Confidential \nespecially helpful in preserving stability in periods of macroeconomic \nuncertainty. I therefore support immediate activation of relevant prudential \nlevers by the Bank towards ensuring continued resilience of the banking system. \nUltimately, there can be no better time for effective coordination of monetary \nand fiscal policies than now. This will minimize surprises and enable economic \npolicy to properly anchor market expectation. As more data and analyses \nbecome available, it might then be auspicious to onboard other instruments to \nmore rapidly rein-in excess liquidity and consumer price pressures. \nIn summary, I voted to: \n1. Retain the MPR at 18.5 per cent. \n2. Reduce asymmetric corridor to +100/-300 basis points around the MPR. \n3. Retain the CRR at 32.5 per cent. \n4. Retain the Liquidity Ratio at 30 per cent. \n \n \n \n \n \n \n \n \n \n \n5 \n \nClassified as Confidential \n2. ADENIKINJU, ADEOLA F. \nInternational Economic Developments \nThe Uncertainty persists on global economic growth as most countries continue \nto battle inflationary pressures. The World Bank projected global growth to \nmoderate to 2.1% in 2023 from 3.1% in 2022 but rise to 2.4% in 2024. The factors \ndriving the trend include high but moderating inflationary pressures, tighter \nfinancial conditions, volatile and elevated commodity, and energy prices and \nworsening of geopolitical turmoil. Global PMI declined from 54.4 index points in \nMay 2023 to 52.7 index points in June 2023. Both global manufacturing and \nglobal services indices also declined. Global inflation, though decelerating, is still \nabove central banks’ targets. Inflation in the Advanced Economies (AEs) is \nexpected to decline to 4.7% in 2023 and further to 2.6% in 2024. Similarly in the \nEmerging Markets and Developing Economies (EMDEs), inflation is projected to \ndecline to 8.6% in 2023 and further to 6.5% in 2024. However, the trajectory of \nfood and energy prices would determine the extent of the decline. The crude oil \nmarket was soft on fears of a weakening U.S. economy and slowing Chinese \ndemand. However, the announced production cut by members of the OPEC+ \nmay alter the market balance and moderate fall in crude oil prices. Most \nCentral Banks around the world continue the path of interest rates \nnormalization, albeit at a moderate pace. Interest rates in most countries are at \nthe highest historical levels. Portfolio capital flows to emerging markets surged to \nUS$22.1billion in June 2023 from US$10.4 billion in May 2023 as investors’ \nenthusiasm for Emerging Market securities soars. Finally, global debt is expected \nto remain elevated in 2023 and 2024, as both the AEs and the EMDEs have \nramped up debts to historical levels driven by legacy debts and slow economic \ngrowth. \n \n \n6 \n \nClassified as Confidential \nDomestic Economic Developments \nA Bank Staff presented the report on the Domestic Macroeconomic \nDevelopments and Outlook at the Meeting. Real GDP (y-o-y) growth slowed to \n2.31% in Q1-2023 from 3.52% in Q4-2022. The non-oil GDP grew by 2.77%, while oil \nGDP contracted by -4.21% (y-o-y). Services output expanded by 4.35%, while \nAgriculture contracted for the first time to -0.9%. Real GDP (Q-o-Q) contracted \nby -15.65% in Q1-2023, driven by decline in Non-oil GDP (q-o-q) by 17.30% and \nincrease in Oil GDP by 20.68%. The increase in Oil GDP is driven by improved oil \nproduction in Q1-2023. The contraction in Agricultural Sector output was the first \nin several decades. Information and Communications contributed 1.67% to the \nreal GDP growth in Q1- 2023, followed by Finance and Insurance, 0.96%, Crop \nProduction, 0.38%, Trade 0.21% and construction, 0.14%. The lowest contributing \nsectors were Other Services, -0.81%, Livestock, -0.56% and Mining and Quarrying \n-0.26%. \nMonthly composite PMI declined to 50.2 index points in June 2023, from 54.4 \nindex points in May 2023, indicating a moderation in output in the economy. \nIndustry PMI declined to 50.3 points in June 2023 from 53.6 points in May 2023. \nServices PMI contracted to 49.0 points in June 2023 from 53.9 points in May. \nAgriculture PMI fell to 52.9 points in June 2023 from 56.3 points in May 2023. In \naddition, Industry Employment PMI and Business Expectations also fell between \nMay and June 2023. Business expectation fell from 18.30 points in May 2023 to -\n1.80 points in June 2023. Industry employment declined from 50.8 points in May \n2023 to 49.4 index points in June 2023. \nWith respect to price developments, Headline inflation increased for the sixth \nconsecutive month. Headline inflation increased to 22.79% in June 2023 from \n22.41% in May 2023 driven by food inflation. High costs of energy and logistics \nimpact on the price of staples. Food inflation rose to 25.25% in June 2023 from \n24.82% in May 2023. Core Inflation also increased to 20.27% in June 2023 from \n \n7 \n \nClassified as Confidential \n20.06% in May 2023. The increase in core inflation came from processed foods, \ntransport, and education, in that order. Month-on-month, headline inflation and \nfood inflation also rose between May 2023 and June 2023. However, core \ninflation slowed to 1.75 in June 2023 from 1.81% in May 2023, driven by reduced \ncosts of processed foods, health, and restaurant. Inflation expectations have \nalso been increasing since December 2022, suggesting de-anchoring of inflation \nexpectations. \nApart from Monetary Base, all the domestic components of monetary \naggregate rose between May 2023 and June 2023. Monetary Base reduced \nfrom N17.923 trillion to N17.719 trillion due to decrease in reserve requirements \nand other reserves of ODCs with the Central Bank. Broad Money (M3) rose by \nannualized 48.71% above the 2023 benchmark of 28.21%, between May 2023 \nand June 2023. Net Foreign Assets rose by 119.28% annualised as against the \nprovisional 2023 benchmark of 95.57%. However, Net Domestic Assets rose by \nannualized 36.18%, below the 2023 benchmark of 49.16%. Claims on Central \nGovernment (net) rose by annualized value of 79.28% compared to the 2023 \nbenchmark of 58.63%. Claims in the Private Sector rose at an annualized rate of \n62.9%, compared to the benchmark of 44.09%. Major sources of net liquidity \nincrease into the economy in June 2023 were Net CRR debit (N216.32 billion), \nFAAC N633.46 billion, and SWAP Transaction (N763.32 billion). \n Interest rate spread month-on-month widened to 23.15% in June 2023. On \naverage, maximum lending and average savings rose between May and June \n2023. The average OBB rate month-on-month declined to 9.12% in June 2023 \nfrom 12.6% in May 2023. Other major developments in the financial markets \ninclude lower NTB rates at the primary auction, higher recourse to SDF than SLF \nand increased OBB transactions. The Nigerian Exchange Limited (NGX) was \nbullish between April 28, 2023, and July 21, 2023. All Share Index (ASI) increased \nby 24.04%. from 52,403.51 on April 28, 2023, to 65,003.39 on July 21, 2023. \n \n8 \n \nClassified as Confidential \nThe external account recorded an overall balance of payments deficit position \nof US$1.62 billion (1.4% of GDP) in 2023.Q1. The goods account recorded a \nsurplus of US$2.68 billion in 2023Q1. The services sector deficit narrowed by 3.9% \nto US$3.01 billion. Service payments for the transport, insurance & Pensions and \nTelecommunication sector fell in the review period. The primary income deficit \nnarrowed by 18.7% to US$2.69 billion due to a rise in repatriation of dividends, by \n12.1%. \nAs of July 20, 2023, the Gross External Reserves stood at US$33.97 billion. The \ngross external reserves position at end-June 2023 could provide 10.68 months of \nimport cover. \nRegarding the fiscal sector, both the government revenue and expenditure \nunderperformed between January and May 2023. FG retained revenue stood at \nN1,673.15 billion, lower than the pro-rata target of N1,968.12 billion. This was due \nto the underperformance of FAAC receipts, Gross independent revenue. In the \nsame vein, total FGN Expenditure as of May 2023, was N4,769.26 billion, 27.8% \nlower than the budget estimate of N6,606.02 billion. The shortfall came mainly \nfrom allocation for debt service, interest on Ways and Means, and capital \nexpenditure. Overall budget deficit reduced by -18.15% in the first five months of \n2023. The underperformance of the budget is especially felt in the capital \nexpenditures, thus impacting negatively on economic development. \nThe report on the Banking System Stability Review was presented to members of \nthe MPC. The financial soundness indicators remain positive and showed that \nthe banking system remains strong, sound, and resilient. The capital adequacy \nratio (CAR) declined to 11.2% in June 2023 from 13.0% in May 2023, though still \nwithin the prudential requirement of between 10% - 15%. Non-performing loans \n(NPL) ratio declined from 4.5% in May 2023 to 4.1% in April 2023. Liquidity ratio \n(LR) rose to 48.4% in June 2023, from 44.5% in May 2023. This is above the \nminimum 30% recommended by the prudential requirement. Both the Return on \n \n9 \n \nClassified as Confidential \nEquity and Returns on Asset increased between May 2023 and Junel 2023. ROE \nrose from 22.8% to 32.2%; while ROA increased from 1.7% in May 2023 to 2.3% by \nJune 2023. Interest margins to total operating income declined from 59.8% in \nMay 2023 to 48.2% in June 2023. Similarly, operating cost to total operating \nincome declined from 70.7% to 62.1% between May and June 2023. As I \nreiterated in the last Personal Statement, the high operating cost environment of \nthe banking sector should be concerning and needs to be addressed. In other \nclimes, the ratio is 23.5% in Turkey, 50.6% in Brazil, 41.0% in Malaysia, 62.0% in \nSouth Africa, 43.2% in Angola, 35.2% in Egypt, Kenya is 45.2% and Ghana, 46.1%. \nFinally, all the measures of banking size, assets, deposits, and credits also rose. \nTotal Assets of the banking industry grew by N30.92 trillion or 47.21% between \nend-June 2022 and 2023. Industry credit increased by N10.75 trillion or 39.73% \nbetween end June 2022 and end-June 2023. Gross credit has been on an \nupward trajectory since 2019. Total industry deposits increased by N15.92 trillion \nor 37.86% between the end of June 2022 and 2023. The stress tests conducted \non the industry show that despite the several headwinds in the economy, the \nbanking system remains resilient. \n \nMy Consideration \nThe headwind in the international market persists, including the refusal of Russia \nto sign the grain deal with Ukraine. The softening of the Chinese economy and \nthe ongoing efforts by the AEs to rein in inflation pose significant challenges to \nboth the global and the Nigerian economy. \nThe domestic economy also witnessed significant changes brought by the \npolicy reforms of the Tinubu government. The removal of petrol subsidy and the \nunification of the foreign exchange markets brought significant shocks on the \neconomy. These policy changes have brought about economywide effects \n \n10 \n \nClassified as Confidential \nimpacting on prices and real income. The June inflation figure partly captures \nsome of the price effects, as well as the contraction noted with the PMIs. Hence, \nJune figures reported rise in inflation, and depreciation of the naira. While the \ngap between the official market and parallel market exchange rates seems to \nhave narrowed, there is still an appreciable difference between the rates in the \ntwo markets. \nThe monetary and financial market indicators also showed evidence of liquidity \nsurfeit in the economy. Annualised growth rates of Net Foreign Assets and Net \nDomestic Assets components exceeded the provisional levels. The rise in FAAC \nin July because of the petrol subsidy removal and narrowing of the FX market \nrates must be managed so as not to increase the liquidity in the economy. The \nrise in FAAC overtime would help in managing the recourse of the FG and \nSubnational units on debts to finance government activities. This would also \nreduce Ways and Means finance and eventually reduce inflationary pressures \nfrom the monetary side. \nThe FG and some states have also announced different packages of \ninterventions to boost household incomes, expand agriculture output in the \nmedium to long term, shift demand from petrol to other substitutes like CNG and \nsupport transportation costs. The FG has also announced other tax incentives to \nreduce costs of production for firms, several agricultural support initiatives, as \nwell as several subsidized credits to different categories of firms, especially the \nMSMEs in the economy. \nThe palliatives were suspended because of the public outcry on the amount \nthat was planned to be spent as well as on the integrity of the social register that \nwas to be used to disburse the money. However, I felt that the absence of \neffective communication on the part of the government and a robust defense \nof the essence of the palliative as a short-term compensatory measure to \nsupport the very poor members of society was a missed opportunity. \n \n11 \n \nClassified as Confidential \nThe Bank Management should use the full range of the instruments available to \nit to address the liquidity surfeit including the Open Market Operations, and \nother indirect measures that offer appropriate returns to money market \ninstruments and mop up excess liquidity, as well as attract foreign portfolio \ninvestment that would increase liquidity in the FX market. Private companies \nshould also be incentivized to issue commercial papers to provide alternative \ninvestment instruments to investors. \nThe current economic reforms of the government are much welcomed to \nrestore the economy to the path of long-term economic growth. However, the \ninitial reforms must be complemented by other policies around security, \nincrease in petroleum output, expand electricity supply, and support human \ndevelopment sectors. The government must also invest in timely communication \nto ensure that members of the public continue to support the reform. \nThe continuous closure of the borders should also be reviewed. This is to allow to \nexpand food and non-food supply to the economy and forced down domestic \nprices, especially food. \nMy Vote \nThe MPC needs to sustain its current tight monetary policy stance to dampen \ninflationary pressures. However, I am also aware of the enormous pressures and \nheadwinds that domestic economic agents are grappling with under the \ncurrent economic reforms. The President has also announced policies to boost \nthe supply side of the economy. Hence, I am really torn between raising the \nMPR on the one hand and allowing the Bank to use other measures to control \nliquidity, without further raising lending rates in the economy, on the other hand. \nI chose to pause the interest rate increase at this meeting. Hence, I vote to: \n1. Maintain the MPR at 18.5 per cent. \n \n12 \n \nClassified as Confidential \n2. Reduce the asymmetric corridor around the MPR to +100/-300 basis \npoints. \n3. Retain the CRR at 32.5 per cent. \n4. Retain the LR at 30.0 per cent. \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n13 \n \nClassified as Confidential \n3. AHMAD, AISHAH N. \nDomestic prices remain elevated as markets adjust to consequential fiscal and \nmonetary policy reforms \nThe July 2023 monetary policy committee (MPC) meetings held within an \nenvironment of elevated risks to price stability, slowing output performance and \nexchange rate pressures, amidst continued uncertainty in the global economy. \nThe much-anticipated deregulation of premium motor spirit price and transition \nto a more market-determined exchange rate regime have expectedly exerted \nfurther pressure on domestic prices. Headline inflation year-on-year rose for the \nsixth consecutive month to 22.79 per cent in June 2023 from 22.41 per cent in the \nprevious month, according to the National Bureau of Statistics (NBS), driven by \nthe food and core components which rose to 25.25 per cent and 20.27 per cent \nin June 2023 from 24.82 per cent and 20.06 per cent in May 2023, respectively. \nAlthough the pace of acceleration in headline inflation slowed in recent \nmonths, the trajectory appears to reverse as headline inflation month-on-month, \nrose to 2.13 per cent from 1.94 per cent in May 2023, an indication that the path \nof price movements remains unclear in the near term. Beyond the legacy \nstructural factors driving inflation (inadequate infrastructure, supply bottlenecks, \netc) the surge in liquidity levels pose further threats to price stability as presented \nin staff reports and cannot be ignored. \nBroad money supply (M3) in June 2023 grew by 24.35 per cent (year-to-date), \ncompared with 6.70 per cent in May 2023, driven largely by the increase in both \nNet Foreign Assets (NFA) and Net Domestic Assets (NDA). Money market rates \nalso reflected this surge in banking system liquidity as the monthly weighted \naverage Open Buyback (OBB) and Interbank Call rates decreased to 9.12 and \n11.61 per cent in June 2023, from 12.60 and 12.31 per cent in the previous \nmonth, respectively. This trend may persist in the near term in view of expected \n \n14 \n \nClassified as Confidential \nliquidity injections from possible review of the minimum wage, implementation of \nthe proposed palliatives by the federal government and other sources. \nOverall, the short-term outlook for inflation and its major drivers remains \nuncertain. Indeed, the exacerbated price developments are harmful for \ninflation management and must be addressed decisively. To ensure that the \ndesired decline in absolute inflation numbers is quickly achieved, the stance of \nmonetary policy needs to be firmer to improve inflation expectations; and all \nactions of the Bank must be geared towards moderating domestic prices, \nespecially monetary induced inflation. The CBN, must, therefore remain resolute \nin the use of traditional liquidity management tools such as the Open Market \nOperations and issuance of CBN special bills to strategically mop up excess \nliquidity in the banking system. \nDevelopments \nin \nthe \nforeign \nexchange \nmarket \nare \nalso \nimportant \nconsiderations for policy. The recent foreign exchange market reforms which \nhave resulted in exchange rate convergence, would increase market \ntransparency, and attract more foreign capital inflows. \nAlthough the exchange rate has shown some volatility (depreciated from \nN435/1USD in May 2023 to N763/1USD as of July 11, 2023 and N780/1USD as of \nJuly 20, 2023), stability is expected over the medium term as efforts to ramp up \nexport proceeds intensify, alongside anticipated decline in demand of imported \nrefined petroleum products. Stability of the exchange rate is particularly \nimportant due to its strategic role in anchoring investor confidence and pass-\nthrough to domestic prices. Ongoing efforts to boost foreign exchange supply \nshould therefore be strengthened as a more sustainable approach to stabilizing \nthe foreign exchange market. \nAlthough output growth prospects remain positive, its resilience is threatened. \nData from the National Bureau of Statistics (NBS) showed that, Real Gross \nDomestic Product (GDP) grew by 2.31 per cent (year-on-year) in the first quarter \n \n15 \n \nClassified as Confidential \nof 2023 driven largely by sustained growth in the services and industry sectors \nand supported by broad-based monetary and fiscal measures. While Q12023 \nGDP declined compared to the preceding quarter (3.52 per cent), the \nresilience of the services and industry sectors is a positive development for the \ndomestic economy, given the capacity of these sectors to create jobs, boost \naggregate demand and improve economic inclusion. \nThe moderation in output performance is also expressed in the purchasing \nmanagers Index which declined to 50.2 index points in June 2023 from 54.4 \nindex points in the previous month on account of decline in production levels \nand new orders. This development points to the need for continued fiscal \nstimulus to critical sectors, especially agriculture, manufacturing, and MSMEs to \nboost aggregate supply and moderate inflation over time. \nThankfully, ongoing broad-based economic reforms, sustained credit growth to \nthe real economy and the robust financial system should impact positively on \ngrowth \nperformance \nwith \na \npositive \nmedium-term \noutlook. \nTherefore, \nconsiderations about actively driving economic growth at this meeting, must \nunderstandably take a back seat. The Monetary authority must focus on \ntackling inflation while efforts to mitigate the structural challenges affecting \nproductivity are being pursued. \nThe Banking system retains its resilience and capacity to support the economy \nthrough the headwinds, however, emerging vulnerabilities must be managed. \nCredit to the economy continued to grow while non-performing loans and other \nprudential ratios are within regulatory bands, nonetheless, the Bank must watch \nfor vulnerabilities due to removal of subsidies and other macroeconomic shocks. \nAt end-June 2023 industry credit increased by N10.75 trillion year-on-year and \nhas been in an upward trajectory since 2019. Month-on-month, industry credit \nalso increased significantly by N7.27 trillion between May and June 2023, an \nindication that the tight stance of policy is not adversely impacting the credit \n \n16 \n \nClassified as Confidential \nenvironment as earlier anticipated. Notably, the sectors driving output growth in \nthe economy (manufacturing, agriculture, construction, general commerce \nand information & communication) also attracted increased lending from the \nbanking sector during the period - which should further strengthen output \nperformance. \nPrudential ratios also remain strong as of end-June 2023, with capital adequacy \nat 11.2 per cent, non-performing loans at 4.1per cent (from 5.0 per cent in June \n2022) and liquidity ratio at 48.4 per cent (above the 30.0 per cent minimum) \neven as credit to the real sector continued to grow. Furthermore, total assets of \nthe banking industry grew by N30.92 trillion, while total industry deposits \nincreased by N15.92 trillion over the same period. \nRisks to the financial system remain domestic vulnerabilities and persisting global \nheadwinds. Notwithstanding the risks, stress test results showed that industry \nsolvency and liquidity positions could withstand mild to moderate shocks in the \nshort to medium term. Nonetheless, the CBN shall continue its rigorous regulatory \noversight on the industry credit portfolio while the sector must also continue to \nbuild adequate capital buffers as prescribed in the Basel III capital standards. \nOverall, to bolster domestic investment, household demand, and aggregate \nproductivity, it is important to sustain innovative de-risking of critical sectors to \nfacilitate credit expansion. This will fast-track economic diversification and \nensure strong inclusive growth. \nOn the global front, the priority remains achieving sustained disinflation while \nensuring financial stability as central banks raise rates to curb inflation which \ncontinues to weigh on output recovery. As a result, global growth is projected \nby the International Monetary Fund in its July 2023 World Economic Outlook \n(WEO) to fall from an estimated 3.5 per cent in 2022 to 3.0 per cent in both 2023 \nand 2024. While the forecast for 2023 is modestly higher than predicted in the \nApril 2023 WEO, it remains weak by historical trends. \n \n17 \n \nClassified as Confidential \nIn addition, China’s slow recovery and persistent war between Russia and \nUkraine pose further threats to global economic prospects with likely spillover to \nthe rest of world. Building individual country resilience, thus, becomes imperative \nfor policy makers to minimize adverse pass-through effects and preserve the \nfragile recovery. \nFor Nigeria, inflation, driven by global and domestic shocks, is at a level \ndeemed inimical to growth and forecasts suggest continued ascent, requiring \ndecisive actions to assertively stabilise price at levels that are conducive to \ngrowth and productivity. Building buffers, ensuring targeted support for the most \nvulnerable and improvements to the supply side of the economy would \nfacilitate a smoother decline of inflation toward target levels. \nIn the meantime, the MPC must show commitment to fighting inflation – its \nprimary remit - in view of the detrimental effects of inflation on economic \nactivities (eroding real incomes, entrenching poverty, threat to output growth, \netc). Therefore, at this meeting, I consider it important to re-anchor the \nexpectation of economic agents following several months of double-digit \ninflation, and recent multiple shocks which makes it logical for expectation of \nfurther price increases to build. \nThus, I, vote to raise the MPR by 50 basis points, from 18.50 to 19.00 per cent; \nAdjust the asymmetric corridor to +100/-300 basis points around the MPR; Retain \nthe CRR at 32.5 per cent; and Retain the Liquidity Ratio at 30 per cent. \n \n \n \n \n \n \n \n \n18 \n \nClassified as Confidential \n4. ALIYU, AHMED \nGlobal economic recovery continues to be hindered by tighter financial \nconditions occasioned by the increase in policy rates by many central banks to \ncontrol inflation, and worsening geopolitical tensions particularly the Russia-\nUkraine war, which has had destabilising effects on the global supply chain. The \nIMF in the July 2023 World Economic Outlook, projects global growth to fall from \na projected 3.5 percent in 2022 to 3.0 percent in 2023 and 2024, apiece. Out of \nthis, growth in the Advanced Economies is projected to moderate to 1.5 and 1.4 \npercent in 2023 and 2024, respectively, from 2.7 percent in 2022. Conversely, \nEmerging Markets and Developing Economies (EMDEs) is expected to retain its \n2022 growth rate of 4.0 percent in 2023, and inch up to 4.1 percent in 2024. \nGlobal headline inflation remains high, even though decelerating, and \nprojected to decline from an annual average of 8.7 percent in 2022 to 6.8 and \n5.2 percent in 2023 and 2024, respectively, driven by high input costs. The \ndeceleration in global inflation is linked to monetary policy tightening across the \nworld. In the Advanced Economies, inflation is expected to decline to 4.7 \npercent in 2023 from 7.3 percent in 2022, and further to 2.8 percent in 2024. In \nthe EMDEs, inflation is expected to moderate to 8.3 percent in 2023, from 9.8 \npercent in 2022, and further to 6.8 percent in 2024 (IMF July 2023 WEO). \nDifferences in country circumstances such as exposure to commodity price \nfluctuations and exchange rate volatilities, partly account for the observed \nvariations in the pace of disinflation in EMDEs. Generally, while central banks \nsignal a slow pace in interest rate normalization, further monetary policy \ntightening may be required, should conditions that cause inflationary pressure \nreappear. \nDevelopment in crude oil prices remain moderated amidst fears of a weakening \nUS economy and slowing Chinese demand. In addition, the large build-up of US \ncrude oil stocks, continue to pose serious consequences for oil exporters like \n \n19 \n \nClassified as Confidential \nNigeria. The Food and Agricultural Organization (FAO) has raised its projection of \nworld wheat production to 768 million tonnes for 2023. Expectations of price \nmoderation in 2023, is jeopardised by Russia’s reneging on the Black Sea wheat \npassage deal, which allows Ukraine to export wheat to the international market. \nGlobal trade outlook for the second half of 2023 is dampened by subdued \nglobal demand, tighter global financial conditions and weak global industrial \nproduction, as well as geopolitical tensions. Consequently, the World Bank \nforecasts global trade growth to slow to 1.7 percent in 2023 from 6.0 percent \nrecorded in 2022, before rising to 2.8 percent in 2024. \n \nTHE DOMESTIC ECONOMY \nReal Gross Domestic Product (real GDP) grew by 2.31 percent (year-on-year) in \nthe first quarter of 2023, from 3.11 percent and 3.52 percent, recorded in the first \nand fourth quarters of 2022, respectively. The National Bureau of Statistics (NBS) \nattributes the reduction in growth to the adverse effects of the cash crunch \nexperienced during the quarter. GDP performance in the first quarter was driven \nmainly by the services sector, which recorded a growth of 4.35 percent and \ncontributed 57.29 percent to the aggregate GDP. The agriculture sector grew \nby -0.90 percent, lower than the growth of 3.16 percent recorded in the first \nquarter of 2022. Although, the growth of the industry sector improved to 0.31 \npercent relative to - 6.81 percent recorded in the first quarter of 2022, agriculture \nand the industry sectors contributed less to the aggregate GDP in the first \nquarter of 2023 compared to the first quarter of 2022 (NBS 2023). \nIt is noteworthy that Non-oil GDP (year-on-year) grew by 2.77 percent, the \nslowest growth since Q4 2020. This is followed by Oil GDP which grew by -4.21 \npercent, even though, it was its best performance since Q1 2021, driven by \nimproved crude oil performance in Q1 2023. \n \n20 \n \nClassified as Confidential \nThe first quarter 2023 real GDP outcome, is mirrored in the widening of the output \ngap, due to underutilization in the industry, agriculture and services sectors. \nConsequently, the negative output gap widened by 1.19 percentage points, to \n-7.54 percent in Q12023, from -6.26 percent in Q42022. Similarly, the monthly \ncomposite PMI, declined to 50.2 index points in June 2023 from 54.4 index points \nin May 2023, indicative of a moderation in output in the economy. \nHeadline inflation remains elevated, increasing by 0.38 percentage points to \n22.79 percent in June 2023. Increase in Headline inflation was driven by food \ninflation, which rose year-on-year by 0.43 percentage points to 25.25 percent in \nJune 2023, on account of the increase in the cost of farm produce. \nCore inflation, year-on-year, increased by 0.21 percentage points to 20.27 \npercent in June 2023, due to the increase in transport cost. In the same vein, \ncore inflation (excluding energy goods) year-on-year, rose by 0.23 percentage \npoints to 20.06 percent in June 2023, attributed to increased growth in money \nsupply. Month-on-month, inflation rose to 2.13 percent in June 2023. \nNotwithstanding, inflation expectation at a high of 20.58 percent was below \nactual inflation in June 2023. \nBroad Money Supply (M3) increased by 24.35 percent (year-to-date) to N64.91 \ntrillion in June 2023, driven by increase in both Net Foreign Assets (NFA) and Net \nDomestic Assets (NDA). Open Buy Back (OBB) rates at 9.12 percent in June 2023, \nwas below the lower band of the Monetary Policy Rate, signalling liquidity surfeit. \nThe current account posted a surplus position of US$2.49 billion, following \nsustained trade surplus and lower payment for services and improved surplus in \nthe secondary income account. Average crude oil price increased to US$81.87 \nper barrel on July 21, 2023, from US$77.64 per barrel at end June 2023. As at July \n20, 2023, the gross external reserves stood at US$33.97 billion. Reserves position at \nend-June 2023 could provide 10.68 months of import cover. \n \n21 \n \nClassified as Confidential \nStaff report indicated that the naira/US$ exchange rate depreciated by 66.43 \npercent from N462.88/US$ on June 9, 2023 to N770.39/US$ on July 21, 2023 after \nthe convergence of all foreign exchange windows. \nFinancial soundness indicators, sustained their resilience as the industry Capital \nAdequacy Ratio (CAR) at 11.2 percent at end-June 2023 was above the 10 \npercent regulatory requirement. Industry Non-Performing Loans (NPLs) improved \nfrom 4.4 percent in April 2023 to 4.1 percent in June 2023, and was below the 5 \npercent supervisory requirement. Return on Equities (ROE) and Return on Assets \n(ROA) improved from 17.3 percent and 1.4 percent in June 2022, respectively, to \n32.2 percent and 2.3 percent in June 2023, respectively. At 48.4 percent, \nLiquidity Ratio remained in excess of the regulatory requirement of 30.0 percent. \nIndustry Total Credit increased by N10.75 trillion or 39.73 percent between end-\nJune 2022 and end-June 2023, respectively. It is noteworthy that total credit \nincreased significantly month-on-month by N7.27 trillion or 23.82 trillion between \nMay and June 2023. \nOn fiscal developments, the recent removal of Petroleum Subsidy is expected to \nengender significant fiscal space and improvement in Federal Government of \nNigeria’s (FGN’s) overall fiscal operations. \n \nCONSIDERATION FOR VOTING \nAt the July 2023 MPC meeting, I noted from the economic report a triad of \nlukewarm economic growth, high inflation rate, and exchange rate volatility \nand depreciation. I was in no doubt that observed inflationary pressure was \npropelled by a mix of monetary and structural factors. There was evidence of \nliquidity surfeit as indicated by the significant growth in Broad Money Supply \n(M3). \n \n22 \n \nClassified as Confidential \nThe recent decision by Russia to end the crucial Black Sea grain deal, the \nnegative impact on cost of production and transportation of the increase in the \nprices of Premium Motor spirit (following the removal of subsidy on PMS), the \nfears about an impending domestic food crisis - heightened by the contraction \nin the agriculture sector in the first quarter, exchange rate pressures, high \ninflation expectations and other seasonality factors, pose significant upside risk \nto inflation. \nMoney market rates seem not to reflect the hikes in the Monetary Policy Rate \n(MPR) to be able to address the demand side inflation, as well as deal with the \nsupply side dynamics. It is worrisome indeed, that the expected multiplier effect \nof the increase in total credit on output has not crystallised, suggesting that \ncredit may have ended up in the foreign exchange market, which may erode \nasset quality, in the medium to long term. \nOn economic growth, it is notable that the output gap widened in the review \nperiod, due to slower economic activities. This is corroborated by the decline in \nthe Composite Performance Managers Index, indicative of a moderation in \noutput and economic activities. \nThe decline in growth in the agriculture sector is particularly worrisome, given its \nrole in food production and employment generation. Targeted intervention by \nthe fiscal and monetary authorities in the agriculture sector is crucial to ensuring \nmedium to long term food security and price moderation. Recent initiative by \nthe CBN to offload grains from the national strategic grain reserves to lower food \nprices could not have come at a more auspicious time. There is also need to \nleverage on the African Development Bank (AfDB) Agro Pocket Wallet to \nsupport farmers in the production of grains and fertilizers. \nExpectations of the monetary authority should also reflect fiscal developments. \nIn line with the norm, I continue to advocate for a stronger collaboration \nbetween the monetary and fiscal authorities. The decision by the Federation \n \n23 \n \nClassified as Confidential \nAccounts Allocation Committee (FAAC) to save about 50 percent of funds \nallotted for distribution to State Governments in July, brought some calm on \nprice developments, and reflect some of those collaborations that I am looking \nto see. \nIn view of the persisting increase in headline inflation, and having raised \nmonetary policy rate by 700 basis points since May 2022, I am keen to see that \ninflation is aggressively tackled from the supply side also, by addressing structural \ndeficiencies that cause food and core inflation to rise. Policy should be focused \nat achieving sustained disinflation, while ensuring financial stability and \neconomic growth. I align with the opinion that other liquidity mopping tools like \nadjustment in the standing facilities should be explored. Whilst not being \ninsensitive to the role a tightening policy stance could play in anchoring \ninflationary expectations and improving the real interest rate, I vote at this \nmeeting to hold the Monetary Policy Rate at its extant level, whilst adjusting the \nasymmetric corridor to +100/-300 basis points around the MPR.. \n \n \n \n \n \n \n \n \n \n \n24 \n \nClassified as Confidential \n5. ASOGWA, ROBERT C. \nBackground: \nSince the previous MPC meeting in May 2023, both the domestic and external \neconomic environments have been characterized by key policy issues which \nhave direct implications for price stability. At the domestic level, the removal of \nfuel subsidy and foreign exchange unification in June 2023, are largely \nperceived as drawbacks to curbing the accelerating consumer price levels. At \nthe external level, recent production cuts by OPEC+ and the increase in the \nglobal price for cereals after Russia’s withdrawal from the Black Sea Grain \nInitiative are also new threats to the decelerating global inflation rates. \nRemarkably, many advanced and emerging market economies are already \ncelebrating downward inflation surprises, but a persistent upward price level \ntrajectory still exist in several developing economies. In some of these countries, \nthe prolonged inflation fight is already causing a loss of momentum on the \neconomic recovery drive. As such, recent interest rate decisions are now being \nanchored on a duality purpose. The considerations in this meeting will require an \nassessment of the outlook of inflation and growth based on the evidence of \nlatest economic developments at the domestic and external levels. \nExternal Economic Developments: \n \nThe pace of global economic activity appears to be moderating lately. Official \nGDP figures for the second quarter of 2023 have not been released for many \ncountries but preliminary flash estimates seem to suggest that the global \neconomy weakened in the second quarter of 2023 with indicators of \nconsumption and manufacturing all subdued. Growth however improved \nsomewhat in a few countries in the second quarter compared with the first \nquarter. In the United States for instance, economic growth was stronger than \nexpected in the second quarter with rising consumer spending and strong \n \n25 \n \nClassified as Confidential \nbusiness investment. In the UK, GDP growth for the second quarter of 2023 is also \nexpected to be marginally stronger than the quarter one levels. In the Euro Area \nhowever, growth probably stayed at low levels in the second quarter of 2023 \nfollowing a contraction in the earlier quarters especially for manufacturing, while \nthe service sector continues to grow. According to CBN Staff report, growth in \nChina slowed to 0.8 per cent for 2023 second quarter compared with 2.2 per \ncent in the first quarter of 2023 amidst declining exports and weakness in the \nproperty sector, despite the end of its zero-Covid policy in December 2022. \nThere are still considerable amounts of uncertainties about the future outlook for \nglobal economic growth as higher core inflation and interest rates persist with \nthe worsening geopolitical turmoil. For now, global growth is projected to slow in \n2023, but pick up modestly in the second half of 2024 before strengthening fully \nin 2025. CBN staff report shows that growth in advanced economies for 2023 is \nprojected to decline to 0.7 per cent compared with 2.6 per cent in 2022, but will \nrise moderately to 1.2 per cent in 2024. \nGlobal disinflation has continued up to June 2023 as energy and commodity \nprices are falling together with further easing of global supply chain constraints. \nCore inflation however remains elevated in a number of countries. CBN staff \nreport shows that the US year-on-year inflation rate slowed to 2.97 per cent in \nJune 2023 compared with 4.05 per cent in May, while in the Euro Area, the year-\non-year measure fell to 5.5 per cent compared with 6.1 per cent in May 2023. \nHowever, for both the USA and Euro Area, month-on-month inflation rose in June \n2023. In the UK, while year-on-year inflation measure remained unchanged in \nJune 2023, the month-on-month rates moderated. In Canada, Chile, Indonesia \nand Malaysia, both headline and core inflation have fallen faster than \nexpected in June 2023 amid lower cost factors. Overall, the inflationary \nbehaviour and outlook in many countries remains complex and uncertain for \nseveral reasons. First, future global supply disruption is still an upside risk to prices \nespecially for food. Second, the persistence of core inflation which is more \n \n26 \n \nClassified as Confidential \naffected by the economy’s aggregate demand and interest rate policy may \ncontinue for a very long period as it responds to output gap and future inflation \nexpectations. \n Global financial conditions appear to be less tight in June and July 2023 \ncompared to the position at the last MPC meeting in May 2023 but yields on \ngovernment bonds across several advanced economies have also risen \nmodestly while equity markets improved further but not as much as at the start \nof 2023. In terms of currency issues, CBN staff report shows that the dollar has \nrecovered against a broader basket of currencies between April and June 2023. \nThe Euro however weakened against the dollar on average in June 2023, but \nthe pounds sterling appreciated on average during the same period. \nFor most Central Banks in the advanced economies, the moderated tightening \nregime may be extended to the future as the disinflation process may take \nlonger than expected. There are however some countries especially in the \nemerging markets that will likely focus on smoothing domestic economic growth \nfluctuations, but without compromising the central bank’s fundamental \nobjective of ensuring price stability. The US Fed raised interest rates in July 2023, \nwhich is the 11th increase in its last 12 meetings but by only 25 basis points while \nthe European Central Bank raised policy rates for a ninth consecutive time \nrecently by 25 basis points. At its end June 2023 meeting, the Bank of England \nincreased rates by 50 basis points. The scenario is somewhat different in several \nemerging markets. The Central Bank of Chile lowered policy rates by 100 basis \npoints in July 2023 while the Central Banks of Malaysia, Brazil and South Africa at \ntheir respective July MPC meetings kept policy rates unchanged as \nconsiderations for economic growth deepen. \n \n \n \n27 \n \nClassified as Confidential \nDomestic Economic Developments: \nRegarding the domestic scenario, recent economic indicators suggest some \nmixed performance which have evolved in line with expectations. In 2023 first \nquarter, real GDP (year-on-year) slowed to 2.31 per cent compared with 3.52 \nper cent in the fourth quarter of 2022. Surprisingly, agricultural sector contracted \nin the first quarter, which is the first time since 1987, while services and industry \nsector expanded. The poor performance of the agricultural sector has been \nattributed to persistent insecurity, weather conditions and other supply related \ndisruptions. The return of the industry sector to positive GDP territory is on the \nback of the improving investment and consumer confidence despite recent \ninterest rate hikes. GDP growth results for 2023 second quarter are not yet out, \nbut timely indicators point out that it may be slightly above the levels in the first \nquarter of 2023. The composite PMI moved from 42.6 index points in March 2023 \nto 51.1 index points in April 2023 and further up to 54.4 index points in May, \nbefore declining to 50.2 index points in June 2023. Consumer and business \nexpectations for the months ahead remain pessimistic but GDP projections by \nkey institutions for the third and fourth quarters of 2023 are positive. \nThe domestic headline inflation rates have continued an upwards trend, unlike \nin the advanced and emerging economies. The year-on year headline inflation \nrates in Nigeria rose further to 22.79 per cent in June 2023 from 22.41 per cent in \nMay, which is the sixth consecutive month of increase. Both food inflation and \ncore inflation increased on a year-on-year basis in June 2023. Also on a month-\non-month basis, while headline inflation and the food component increased in \nJune 2023, core inflation which is more sensitive to monetary policy changes \ndecelerated by a marginal 0.07 per cent point at the same time. For now, \ninflation expectations for the remaining months in 2023 show slight upwards \nadjustments with increases in all components especially in the next few months. \nThis reflects the effects of recent policy changes in petrol subsidy and exchange \n \n28 \n \nClassified as Confidential \nrate unification as well as global financial market developments. There are \nhowever expectations of some relative stability before the end of 2023. \nLiquidity in the domestic economy remains ample as reflected in broad money \n(M3) growth, similar to the position at the last MPC meeting in May 2023. Broad \nmoney (M3) grew by 24.3 per cent, (year-to –date) in June 2023, and was below \nthe 2023 benchmark of 28.21 per cent. The recent normalization of CRR and the \nincrease in FAAC allocations may have contributed to the surge in overall \nliquidity in the banking system, but the effect on interest rate conditions remain \nminimal. Both the maximum lending rate and the average savings rate rose only \nmarginally in June from the May 2023 levels. \nFinancial system resilience in Nigeria remains solid and robust. The banking \nsystem’s position looks stronger than during the last MPC meeting in May 2023 \nwith significant improvements in the intermediation functions. Net loans \naccelerated from 25.65 trillion Naira in May to 31.97 trillion Naira in June 2023, \nwhich may have been propped up with the exchange rate unification. Bank \naggregate deposits rose by 15.85 per cent between May and June 2023 with \ndomiciliary account deposits also reflecting the effects of exchange rate \nunification. The capital adequacy ratio (CAR) of the banking industry declined \nto 11.2 per cent in June 2023 mainly because of the foreign exchange \nunification but remains above the prudential requirement. The non-performing \nloans (NPLs) ratio declined further from 4.5 per cent in May 2023 to 4.1 per cent \nin June 2023. Industry profitability also increased recently, partly because of the \nforeign exchange rate unification. The return on equity moved from 22.8 per \ncent in May 2023 to 32.2 per cent in June 2023, while the return on assets also \nincreased from 1.7 per cent to 2.3 per cent during the same periods. The \ndomestic stock market has also remained strong and bullish, similar to the \nposition at the last MPC meeting in May 2023. Both the All-Share Index and the \n \n29 \n \nClassified as Confidential \nMarket Capitalization have increased significantly between end-May to end-\nJuly 2023. \nOn the external sector, the available 2023 first quarter data shows some mixed \nperformance. There was an overall balance of payments deficit, equivalent to \n1.4 per cent of GDP in 2023 first quarter, but the economy recorded a current \naccount surplus of about 2.2 per cent of GDP supported by a positive trade \nbalance during the same period. For the second and third quarters of 2023, the \ncurrent account balance will probably sustain its momentum, while the capital \nand financial accounts are expected to be more favourable than earlier \nprojected especially as foreign capital inflows improve on the back of \neconomic reforms by the new government. At the end of June 2023, the \nposition of external reserves remained high at equivalent of 6.7 months of \nimports of goods and services and 9.1 months of import of goods only which is \nabove the international adequacy standard of around 3 months of imports. The \nNaira exchange rate suffered a sharp depreciation in recent times as a result of \nrecent domestic reforms and global financial market uncertainty, but there are \npositive prospects at controlling volatility with recent stabilization and \nstrengthening measures by the Central Bank of Nigeria. \nThe fiscal deficit is expected to decline in the third and fourth quarters of 2023 \non the back of recent efforts by the new government to manage expenditures \nbetter and also improve oil and non-oil revenues. With expenditure re-\nprioritization and fiscal wisdom at both the federal and State levels, there is an \nexpectation that the government debt ratio may fall at least marginally by the \nend of 2023. \nPolicy Decision: \nWith inflation rates still rising up to June 2023 but now at a moderated pace, a \npartial shift of focus on boosting domestic economic activity which has been \n \n30 \n \nClassified as Confidential \nimpaired by rising costs becomes necessary. As such, future monetary policy \ndecisions must seek to be conducive to both economic growth and price \nstability. Rather than increasing policy rates at this MPC meeting which will only \nadd to the cost burden of key sectors, adjustments to either the asymmetric \ncorridor or the cash reserve ratio may be required so as to contain the high \nsystem liquidity. There is however a real possibility of having to raise MPR in future \ndecisions as the MPC monitors incoming data. \nI will therefore vote to: \n1. Retain the MPR at 18.50 per cent. \n2. Retain the CRR at 32.5 per cent. \n3. Adjust the Asymmetric Corridor to +100/-300 basis points. \n4. Retain the Liquidity Ratio at 30.0 per cent. \n \n \n \n \n \n \n \n \n \n \n \n \n31 \n \nClassified as Confidential \n6. OBADAN, MIKE I. \nINTRODUCTION \nThe global economy has remained vulnerable considering the following \nfeatures: \n \nHigh but moderating inflationary pressures; \nTighter global financial conditions in the face of persistent central bank interest \nrate hikes, which caused poor liquidity and decline in asset prices; \nVolatile and elevated commodity and energy prices; and \nWorsening geopolitical tensions, especially the Russian war in Ukraine. \n \nThese features have continued to elicit concerns as uncertainty and risks persist \nin global growth as the outlook remains closely linked to inflationary trends and \ncentral banks’ monetary policy response. Various headwinds are expected to \ncontinue to impede the speed of recovery of global output growth. \n \nGLOBAL ECONOMIC TRENDS \nDespite ongoing efforts to reconcile both Russia and Ukraine, the war between \nboth countries has continued to rage. This has invariably increased global \npolarization and deepened the East-West geo-political divide as more countries \nseek to form an economic alliance with the China-Russia group. The tightening \nof global financial conditions to contain global inflation and Russia’s war in \nUkraine continue to slow down global economic activity with heightened risk for \nlong-term growth. Prospects for a robust global economic recovery remain dim, \ndue to stubborn inflation, rising interest rates and heightened uncertainties. In \nthe developing countries, monetary tightening has exacerbated fiscal and debt \nvulnerabilities, as rising borrowing costs and a strong dollar have increased debt-\nservicing burdens and debt default risks. \n \n32 \n \nClassified as Confidential \nIn light of the elevated inflationary trends and tighter monetary policy stance of \nseveral countries, global growth forecasts had maintained a downward trend \nsuch that the global growth forecast as at June, 2023 was 2.1 per cent \ncompared with an earlier forecast of 2.5 per cent. However, the July growth \nforecast by the International Monetary Fund reflects optimism, standing at 3.0 \nper cent compared to 2.8 per cent in its April World Economic Outlook. \nNevertheless, global growth remains weak due to higher interest rates and \nvolatile energy prices. \nGlobal inflation rate and the inflation rates in the Advanced Economies (AEs) \nportray good news of deceleration. In the same way, inflation in the Emerging \nMarkets and Developing Economies (EMDEs) is projected to decline from 9.8 per \ncent in 2022 to 8.6 per cent in 2023 and 6.5 per cent in 2024. However, the rates \nachieved are still far above the long run targets of most central banks. \nConsequently, the priority of most economies remains to achieve a sustained \nreduction in inflation toward target levels by raising real policy rates until \nunderlying inflation clearly declines. However, policy rate hike is being done at \nless aggressive pace than previously. \nThere has been a general decline in commodity prices in recent months on \nfears of a weakening U.S economy, concern over future interest rate hikes by \nthe US Federal Reserve Bank alongside a large build up of US crude oil stocks, \nand slowing Chinese demand despite OPEC+ decision to extend production \ncuts through 2024. Indeed, OPEC+ announced a production cut which took \neffect at the beginning of April, 2023. However, the data as of July 21st, indicate \nupward price movement. In this direction, Brent crude price rose to US$ 81.07 \nper barrel on 21st July 2023, from US$ 75.41 per barrel at end-June and $72.60 \nper barrel at end-May 2023. The extension of OPEC+’s 1.16 million barrels a day \nproduction cuts to the end of 2024 may raise oil prices in the second half of 2023 \nand early-2024. In Nigeria, according to Nigerian Upstream Petroleum \n \n33 \n \nClassified as Confidential \nRegulatory Commission, oil production for June 2023 rose to 1.249 mbpd. \nHowever, the menace of oil theft remains a continued threat to the country’s \ncapacity to meet its OPEC quota and earn more revenue. \nGlobal trade in goods slowed further during the first half of 2023 mirroring the \nweakening global industrial production, while trade in services continued to \ntrend upwards as the last few COVID-19 related restrictions diminished. The \noutlook for global trade in the second half of 2023 is dampened by subdued \ndemand, reflecting weak global industrial production. Several downside risks \ncontinue to shape global trade outlook: worsening trade tensions between \nmajor economies, weaker than expected global demand, tighter global \nfinancial conditions, mounting geopolitical uncertainty, and further rise in \nprotectionist measures. \nAgainst the backdrop of tighter financial conditions and high interest rates, \nglobal public debt is expected to rise in 2023 and 2024 with the driver being the \nrising debt levels in some Advanced and Emerging Market Economies. Most \nEMDEs are witnessing rising debt levels while high interest rates (highest since the \nfirst quarter of 2022) have pushed up debt service costs. Stakeholders in some \nEMDEs are already calling for debt forgiveness. \n \nNIGERIA’S KEY ECONOMIC FEATURES \nAs at the last Monetary Policy Committee Meeting held in May, 2023, I wrote in \nmy Personal Statement as follows: “The Nigerian economy has remained in a \nvulnerable state with many worrisome economic issues that would confront the \nnew Federal Government expected to be inaugurated on the 29th of May, 2023. \nThe economy remains vulnerable to both internal and external shocks without \nmeaningful fiscal buffers to withstand the shocks. Against the backdrop of weak \nfiscal management, monetary policy has been seriously stressed from attempts \n \n34 \n \nClassified as Confidential \nto accommodate fiscal inadequacies and keep the economy afloat”. Upon \ninauguration on May 29, 2023, the new Government appreciated the enormity \nof the economic challenges and swiftly went into action, leveraging on the \nopportunity of change of government, to introduce strong fiscal and monetary \nreforms, key among which are the stoppage of petrol subsidies payments, and \nunification of foreign exchange markets and exchange rates. Upward \nadjustment of electricity tariffs is also in the offing. These reform measures, \nthough highly desired, have serious implications for growth which has shown \nweakness recently, inflation which has remained stubborn, and exchange rates \nwhich have witnessed very sharp depreciation following the floating of the \nnational currency, the naira. The reforms appeared to have addressed some \nproblems, but others have also been thrown up, including growth concerns. \nThe latest economic growth indicators do not portray cheering news amid \nescalating inflation rates, suggesting that the economy may be gravitating \ntowards a new era of stagflation. The impact of the various shocks since the last \nquarter of 2022 has been very heavy on growth and inflation control. An erratic \nyear-on-year growth pattern has been displayed since the first quarter of 2022: \nQ1 2022, 3.11%; Q2 2022, 3.54%; Q3 2022, 2.25%; Q4 2022, 3.52%; and Q1 2023, \n2.31%. In Q1 2023, the quarter-on-quarter real GDP growth contracted by -\n15.65%; non-oil GDP by -17.30%; agricultural output declined by -30.95%; \ncontinued reduction in the growth of services; continued low share of industrial \noutput in GDP (21.05% in Q1) which is unhealthy for the economy. In the same \nway, the Composite Purchasing Managers’ Index (PMI), the Sectoral PMIs, the \nIndustrial Employment PMI, and Business Expectations PMI all declined in Q1, \nsuggesting moderation in output in the economy The impact of the various \npolicy shocks on output indicators must thus be of policy concern. \nPrice inflation in the country has stubbornly maintained an upward trend. All the \nthree measures of inflation – headline, food, and core inflation – have \n \n35 \n \nClassified as Confidential \nmaintained their upward trend. Headline inflation (year-on-year) increased for \nthe sixth consecutive month to 22.79 per cent in June 2023 from 22.41 per cent in \nMay 2023, driven by food inflation. Food inflation (year-on-year) increased to \n25.25 per cent in June 2023 from 24.82 per cent in May 2023. Core inflation \nsimilarly increased to 20.27 per cent in June 2023 from 20.06 per cent in May \n2023. Although there are monetary elements in the inflation which should \nrespond to the various tight monetary measures, the persistence of structural \nfactors, legacy infrastructure bottlenecks, and the recent policy shocks – sharp \nincreases in petrol prices, significant depreciation of the exchange rate \nfollowing the liberalisation of the foreign exchange market – have continued to \nblunt the effectiveness of monetary policy actions. The recent suspension of the \nBlack Sea Cereals Agreement by Russia may block Ukrainian export of \ncereals/agricultural products and energy products and create scarcity resulting \nin escalation of global inflation and of import-dependent countries like Nigeria. \nThe foreign exchange market situation remains very worrisome. Following the \nunification of all the foreign exchange windows, arbitrage has apparently \nminimised. But the naira has depreciated sharply to about N800 : US$ 1.0 as the \ndemand for foreign exchange continues to outstrip supply. No doubt, the \ndepreciation benefits fiscal policy through monetisation of foreign exchange \nreceipts from the oil sector at very high exchange rates. However, the resulting \nliquidity injections is a source of worry for inflation control. The external reserves \nstock has depleted to US$ 33.97 billion as of 20th July, 2023. Amidst unabating \ndemand, the fundamental problem of the foreign exchange market remains \ninadequate foreign exchange supply reflecting low productivity of the \neconomy, inadequate export earnings, limited foreign capital inflows. Therefore, \nthe Bank must continue to manage available supply of foreign exchange in the \ncontext of a managed float exchange rate regime. It must also evolve ways to \nmanage demand. Also, the fiscal authority needs to maximise the revenue \nbenefits of the exchange rate depreciation by dealing decisively with oil theft in \n \n36 \n \nClassified as Confidential \nthe oil producing areas. A good handle on oil theft will improve the \ngovernment’s fiscal space and foreign exchange earnings through increased oil \nproduction and export. \nThe fiscal deficit of the country is a structural factor that has continued to drive \ninflation upwards. In the first five months of 2023, the Federal Government \nrecorded a fiscal deficit of -N3,677.28 billion and this has implications for inflation \nconsidering the monetary methods of financing it. The President Bola Ahmed \nTinubu government is carrying out tax reforms aimed at boosting revenue \ngeneration. The Government has set up a Presidential Committee on Fiscal \nPolicy and Tax Reforms which aims to address the issue of multiple taxes, \nimproved ease of doing business and business growth. The legacy petrol subsidy \nthat has burdened government finances for years has finally been removed \nfrom the budget. However, deeper and broader reform of public expenditure is \nimperative. The new government needs to beam its searchlight on the structure \nof public expenditure with a view to eliminating unproductive and wasteful \nexpenditures. This means that the government should carry out meaningful fiscal \nconsolidation to complement the Central Bank’s tight monetary policy stance \naimed at reining in the apparently stubborn inflation. \nDevelopments in the Monetary Sector indicate rising liquidity in the economy \nwhich could undermine the efforts to tame inflation. Growth in liquidity has \narisen from several sources: cash reserve requirement (CRR) normalisation, \nrepayment of matured CBN bills, maturing Federal Government Bonds, Nigerian \nTreasury Bills (NTBs), and fiscal disbursements to the three tiers of Government. \nDuring the period, May to June 2023, the Monetary Base decreased while the \nBroad Money Supply (M3) increased. Although both were below their provisional \nbenchmarks, growth in liquidity is of concern in a period of tight monetary policy \naimed at taming inflation. \n \n \n37 \n \nClassified as Confidential \nOPINION \nIn arriving at my opinion, cognisance was taken of the current state of the \nglobal economy, characterised by continued monetary policy normalisation \naimed at taming inflation, tight financial market conditions and growing public \ndebt, unabating geopolitical tensions coupled with uncertainties and \nvulnerabilities, and weakening growth. On the domestic front, the key \nconsiderations are the weakening growth performance, escalating inflation rate \namidst recent domestic policy shocks, serious foreign exchange market \nchallenges, depreciating naira, and uncomfortable external reserves position. \nOn the fiscal front, although the new government is making serious efforts to \nboost revenue generation, fiscal deficits and associated public debt \naccumulation will continue to elicit deep concerns. Not least of the concerns is \nthe build-up of liquidity in the economy arising from various sources. \nInflation has moderated notably for some time now in the Advanced \nEconomies, especially the United States and Euro Area, as energy and food \nprices have fallen significantly. Yet, the priority of most economies remained the \nachievement of a sustained reduction in inflation toward target levels by raising \nreal policy rates. Accordingly, in June, the Federal Reserve Bank, European \nCentral Bank, and the Bank of England raised their policy rates. In Canada, the \nCentral Bank raised its policy rate and gave an indication to sustain the policy \nrate hike cycle as the need arises. \nIn Nigeria, growth concerns have emerged, and the inflation outlook is not \nfavourable. In view of the surging energy and food prices and the effects of \npetrol subsidy removal, and the exchange rate depreciation occasioned by the \nforeign exchange market liberalisation, the inflation rate will further increase in \nthe short term. If Russia’s suspension of the Black Sea Cereals Agreement is not \nrescinded, global prices of food and energy might further escalate and worsen \ninflation in Nigeria as an import-dependent country. Thus, it is important to \n \n38 \n \nClassified as Confidential \nsustain a tight monetary policy stance that reflects a reduced pace of policy \nrate hike. \nThe concern for growth, and desire for a low interest rate regime by some \nstakeholders is legitimate. However, it is important to have a good handle on \nthe inflation rate which has far exceeded the Bank’s 12-13 per cent target, \nbeyond which inflation becomes detrimental to growth. When inflation peaks \nand begins to decelerate, there will be an acceptable basis to begin to loosen \nthe tight monetary policy stance. Meanwhile, the Fiscal Authority should \nendeavour to implement programmes and measures that aid growth, for \nexample, boosting security in the food producing areas, and in the oil \nproducing areas to check oil theft and enhance both naira revenue to the \nGovernment and external reserves accretion to stabilise the naira at an \nacceptable level. On the side of the Monetary Authority, it is desirable for it to \ncontinue to complement the Fiscal Authority’s efforts by assisting with targeted \ninterventions in the growth and employment enhancing sectors of the real \neconomy. \nGoing forward, there is need to minimise policy shocks that tend to undermine \nmonetary and financial stability, ensure appropriate coordination of monetary \nand fiscal policies to achieve optimal economic outcomes. \nConsidering the forgoing, I vote to maintain the tight monetary policy stance \nbut with a gradual reduction in the pace and magnitude of tightening. \nSpecifically, I vote to increase the Monetary Policy Rate (MPR) by 25 basis points, \nmaintain the CRR and Liquidity Ratios at their extant levels, and adjust the \nAsymmetric Corridor to -300/ +100 basis points. \n \n \n \n \n39 \n \nClassified as Confidential \n7. OBIORA, KINGSLEY I. \n \nIn the face of high inflation, negative real interest rates, and the need to re-\nanchor inflation expectations, I voted for another raise of the Monetary Policy \nRate (MPR) from 18.5 percent to 18.75 per cent, retain the Cash Reserve Ratio \n(CRR) at 32.5 per cent, the Liquidity Ratio (LR) at 30.0 per cent and the \nAsymmetric Corridor of +100/-700 basis points around the MPR. This stance in my \nview will contain inflationary pressures in the short- to medium-term while \nsustaining growth recovery and safeguarding financial system stability. \n \nThe global economy continues to recover with slowing economic activity, \nmoderating but high inflation. The global economy is grappling with slowing \ngrowth, moderating but high inflation despite improved recovery from the shock \nof the pandemic and the Russia-Ukraine war. The supply-chain disruptions have \neased to the pre-pandemic levels. Oil and non-oil commodity prices continue to \ndecline, leading to moderating headline inflation. Financial stability risks have \nsubsided after the March 2023 banking turmoil due to the swift response by the \nFed Reserve and Swiss National Bank. External financial conditions are gradually \neasing, thereby reducing exchange rate pressures on emerging markets and \ndeveloping economies. However, amid these improved developments, the \nGlobal Manufacturing Purchasing Manager’s Index (PMI) continues to contract. \nIt further contracted to 48.8 index points in June 2023 from 49.6 index points in \nMay 2023, making it the fourth consecutive month of contraction due to \noperating challenges and declining global demand. Also, the pace of China’s \neconomic activity is moderating after an improved performance in the first \nquarter of 2023. Recent data showed China’s Purchasing Managers Index \ncontracted for the third consecutive month. It Increased only slightly to 49.0 \npoints in June from 48.8 points in May 2023, which is below the benchmarks of 50 \n \n40 \n \nClassified as Confidential \npoints, reflecting weak post-covid recovery. All these continue to weigh on \nglobal economic activity. \nAs a result of these mixed developments, global growth is projected to \nslowdown in 2023. The recent baseline forecast from the International Monetary \nFund (IMF WEO July 2023 Update) suggests that global growth will slow to 3.0 per \ncent in 2023 from 3.5 per cent in 2022, driven by a tighter monetary policy \nstance, the Russia-Ukraine war, a slowdown in China’s economic activity and \ngeopolitical fragmentation. The bulk of the expected slowdown will be driven by \nAdvanced Economies (AEs), where growth will decline to 1.5 per cent in 2023 \nfrom 2.7 per cent in 2022. As a result, growth in the United Kingdom and the Euro \nArea is expected to decline significantly to 0.4 and 0.9 per cent in 2023 from 4.1 \nper cent and 3.5 per cent in 2022, respectively. In the United States and \nCanada, growth rates are also expected to fall to 2.1 and 1.7 per cent in 2023 \nfrom 2.1 and 3.4 per cent, respectively, in 2022. In contrast, growth in Emerging \nMarkets and Developing Economies (EMDEs) will remain unchanged at 4.0 per \ncent in 2023, driven by China and India, which are expected to expand by 5.2 \nper cent and 6.1 per cent in 2023, respectively. In Sub-Saharan Africa, growth \nwill slightly decline to 3.5 per cent from 3.9, with Nigeria and South Africa \nexpected to grow by 3.2 per cent and 0.3 per cent, respectively. \nMany central banks remain committed to fighting inflation despite its potentially \ncooling effect on economic activity. Global headline inflation is moderating but \nremains high. It is projected to decelerate to 6.8 per cent in 2023 from 8.7 per \ncent in 2022, before dropping further to 5.2 per cent in 2024 (IMF WEO July 2023 \nUpdate). In Advanced Economies and Emerging Market and Developing \nEconomies, headline inflation is projected to moderate from 7.3 and 9.8 per \ncent to 4.7 and 8.3 per cent, respectively —all driven by the decline in food and \nenergy prices, the easing of disruptions to global supply chains, and monetary \npolicy tightening. However, in Sub-Sahara Africa (SSA), inflation, particularly food \n \n41 \n \nClassified as Confidential \ninflation remains persistently elevated, as about 80.0 per cent of SSA are facing \ndouble-digit food inflation (IMF regional outlook, sub-Saharan Africa, April 2023). \nWhile global headline inflation is moderating, core inflation remains sticky and \nwell above many central banks’ target. Core inflation is projected to decline \nonly gradually from an average of 6.5 per cent in 2022 to 6.0 per cent in 2023, \ndriven by an increase in the prices of services and continuous labour market \ntightness. In the United States, for example, core inflation marginally decreased \nto 4.8 per cent in June from 5.3 per cent in May 2023. In the United Kingdom, \ncore inflation also marginally decreased from 7.10 per cent in May to 6.90 per \ncent in June 2023. In France, it slightly declined from 6.30 per cent in May to 6.20 \nper cent in June 2023. In the Euro Area, however, core inflation rose to 5.5 per \ncent in June from 5.3 per cent in May 2023. Overall, it is forecast that 96 per cent \nof countries with inflation targeting framework will remain above target in 2023, \nbefore declining to 89 per cent in 2024 (IMF WEO July 2023 Update). As a result \nof this persistence and stickiness of core inflation, many central banks in \nadvanced economies, including the US Federal Reserve (Fed), the European \nCentral Bank (ECB), and the Bank of England (BoE), among others, continue to \nhike interest rates to firmly contain inflation and bring it down to the central \nbanks’ target. \nFollowing these global developments, Nigerian economic activity has \npredictably abated but remains resilient. Official data from the National Bureau \nof Statistics (NBS) revealed that Nigeria’s real GDP (year-on-year) grew by 2.31 \nper cent in Q1 2023, downed from 3.52 per cent in Q4 2022, representing a \ndecline of 1.21 percentage points. This is the tenth (10) consecutive quarter of \nGDP growth since the country exited recession in the fourth quarter of 2020.The \nmoderate growth rate was driven by the non-oil sector, especially the services \nand industries sectors, which grew by 4.35 and 0.31 per cent, respectively. The \nagriculture sector, however, contracted by 0.90 per cent in Q1 2023, compared \n \n42 \n \nClassified as Confidential \nwith a positive growth of 1.88 per cent in Q4 2022. The sub-sectors that \nrecorded significant growth included Agriculture (Crop Production), Trade, \nInformation and Communication (Telecommunication), Crude Petroleum and \nNatural Gas, and Real Estate, with growth of 19.48, 15.97, 14.13, 6.21, and 5.38 \nper cent, respectively. In terms of relative contribution to GDP, the services, \nagriculture, and industries sectors contributed 57.29, 21.66 and 21.05 per cent, \nrespectively. The oil sector continued to contract although at a slower pace, as \nit contracted by 4.21 per cent, compared with a contraction of 13.38 per cent \nin Q4 2022, reflecting an increase of 21.38 percentage points. Overall, the oil \nsector’s contribution to aggregate GDP increased from 4.34 per cent in Q4 2022 \nto 6.21 per cent in Q1 2023. The increased performance was attributed to the \nimproved security in the oil-producing areas. Also, the monthly composite PMI \nhas remained above the 50.0 benchmark for the third consecutive month. \nAlthough it slowed down to 50.2 index points in June from 54.4 index points in \nMay 2023, it was above the benchmarks, indicating the resilience of Nigerian \neconomy. As a result, the IMF (WEO July 2023 Update) projected the Nigerian \neconomy to grow by 3.2 per cent in 2023 from 3.3 per cent in 2022, driven by the \nnon-oil sector and expected improved oil production. \nThe financial soundness indicators showed that the banking system remained \nstable and resilient. The capital adequacy ratio (CAR) and Liquidity Ratio (LR) \nhave remained above the minimum thresholds. Although CAR decreased to \n11.2 per cent in 2023 from 14.1 per cent, it remained above the 10.0 per cent \nprudential requirement. The liquidity (LR) was also above the 30.0 per cent \nregulatory minimum ratio. It increased significantly from 42.6 per cent in June \n2022 to 48.4 per cent in June 2023. The Non-performing Loans (NPLs) ratio \nremained below the maximum prudential requirement of 5.0 per cent. It \ndeclined from 5.0 per cent in June 2022 to 4.1 per cent in 2023. The continuous \ndecline in NPL was attributable to write-offs, restructuring of facilities, Global \nStanding Instruction (GSI) and sound credit risk management. Total assets of the \n \n43 \n \nClassified as Confidential \nbanking industry grew by N30.92 trillion or 47.21 per cent between June 2022 \nand June 2023, largely driven by the effects of new FX policy. As a result, total \ngross credit increased by N10.75 trillion or 39.73 per cent between the end of \nJune 2022 and the end of June 2023 due to the increase in the industry funding \nbase, the CBN’s directive on Loan-to-Deposit Ratio (LDR), business strategy and \ncompetition, and changes in valuation of FX denominated loans due to \noperational changes in the FX market. The credit growth was largely recorded in \noil and gas, manufacturing, general commerce, and government. \n \nGrappling with these conditions are tricky because the outlook is fraught with \ndomestic and external downside risks. Global headline inflation is moderating \nbut remains high and continues to add to the cost-of-living crisis. The Russia-\nUkraine war could escalate, especially given the suspension of the Black Sea \nGrain Initiative. This could not only disrupt trade and investment flows but also \nadd to the double-digit food inflation in many sub-Saharan African countries. \nExternal financial conditions remain elevated and could increase capital \noutflows and exert exchange rate pressures in EMDEs, leading to high-cost \nborrowing, increasing debt distress, and severely impacting the domestic \ninvestment and economic growth of EMDES, including Nigeria. Domestic \nheadwinds include inflationary pressures, which remain elevated. Headline \ninflation (year-on-year) increased to 22.79 per cent in June 2023 from 22.41 per \ncent in May 2023, driven largely by food inflation, which rose to 25.25 per cent in \nJune 2023 compared with 24.82 per cent in May 2023. Core inflation also \nincreased to 20.27 per cent in June from 20.06 per cent in May 2023, driven by \nprocessed foods, education, clothing and footwear, and transport. The \neconomy continues to face external vulnerabilities, particularly oil price volatility \nand low oil production, leading to more pressure on exchange rates. As a result, \nthe Balance of Payments (BOP) position recorded a deficit of 0.85 per cent of \nthe GDP in Q4 2022. Other structural challenges include lingering infrastructural \n \n44 \n \nClassified as Confidential \ndeficits, rising unemployment, power supply shortages, rising insecurity, \ninequality, and poverty. \nAmid these headwinds lie opportunities to put the economy on a sustainable \npath of economic growth. The Bank and the Federal Government have recently \nalready taken some bold measures that would lay the foundation for \nsustainable macroeconomic stability. The recent adoption of a single, market-\ndetermined exchange rate will engender investors’ confidence, attract more \ncapital inflows, stabilize exchange rates, and decline inflationary pressures in the \nshort to medium term. Also, the elimination of the petrol subsidy by the Federal \nGovernment has removed the unsustainable fiscal burden, thereby creating \nmore fiscal space for investment in public goods and services. However, more \naction is required to return the economy to a sustained recovery. This would \ninclude the need to further promote inclusive growth through increased \ncompetitiveness, private sector investment, and innovation in various sectors of \nthe economy. This would help create quality jobs and accelerate poverty \nreduction in the country. Also, developing a sustainable fiscal path through \nincreased revenue mobilization and efficient tax administration will attenuate \nthe impact of oil price volatility; thereby making resources available for \ninvestment in human capital and infrastructure. \n \nOverall, these pieces of evidence overwhelmingly suggests the need for the \nMPC to remain committed to containing inflation immediately. The rising costs of \nfood and other necessities are eroding the purchasing power of ordinary \nNigerians. The Bank must, therefore, continue to act to bring inflation under \ncontrol by raising the monetary policy stance. This will not only help to tame \ninflationary pressures in the short to medium term but also sustain growth \nrecovery, anchor inflation expectations, attract capital inflows and minimize the \neffect of exchange rate pass-through to domestic prices. \n \n45 \n \nClassified as Confidential \nBased on persisting negative real interest rate and the need to be consistent \nand credible, I vote to raise MPR by 25 basis points. \n• Increase the Monetary Policy Rate (MPR) from 18.5 percent to 18.75 \npercent. \n• Retain the Cash Reserve Ratio (CRR) at 32.5 percent. \n• Retain the Liquidity Ratio (LR) at 30.0 percent; and Retain the Asymmetric \nCorridor to +100/–700 basis points around the MPR. \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n46 \n \nClassified as Confidential \n8. OMAMEGBE, MO’ \nGlobal Economic Developments \nThe global economic outlook has become somewhat optimistic following \nupturns in global economic developments. Global growth improved albeit with \nmixed outcomes across countries, against analysts’ expectations of a possible \nrecession at the beginning of the year. The improvement in Global growth was \ndriven by rising business and consumer sentiment, the opening up of the \nChinese economy as well as lower energy prices. Together, these have brought \nabout a deceleration in global headline inflation although core inflation has \nremained sticky downwards. The global economy in 2023, despite facing \nsignificant challenges, mainly stemming from the repercussions of the war in \nUkraine and elevated global inflation, has demonstrated remarkable resilience. \nHowever, downside risks to global growth namely, persistent high core inflation, \nrising debt levels and servicing costs still persist that put a damper on the overall \neconomic outlook. \nThe United Nations’ World Economic Situation and Prospects report for June \n2023 emphasized the uncertain trajectory of the global economic recovery. \nPersistent inflation, rising interest rates, and increased uncertainties were \nidentified as substantial challenges to global growth. Instead of a robust \nrebound, there is a growing risk of prolonged low growth. Factors contributing to \nthis include the enduring effects of the COVID-19 pandemic, and unresolved \nmacroeconomic structural issues. According to the report, the projected growth \nrate for the world economy in 2023 is 2.3%, with a slightly improved forecast of \n2.5% for 2024. These projections reflect the prevailing economic conditions and \nhighlight the cautious outlook for global growth in the coming years. \nThe World Bank reports that emerging economies like China and India are \nexperiencing stronger growth compared to developed economies. Sub-\n \n47 \n \nClassified as Confidential \nSaharan Africa on the other hand, is equally encountering sluggish economic \ngrowth, \nprimarily \nattributed \nto \nhigh \ninflation \nrates, \nglobal \neconomic \nuncertainties, underperforming major economies on the continent, and a \nsignificant deceleration in investment growth. \n \nDomestic Economy \nNigeria's economic growth weakened in the first half of 2023, primarily due to \nhigh and rising inflation, fiscal challenges, and global economic conditions. The \ncombination of declining revenues and increasing expenditures has led to a \ngrowing fiscal deficit, necessitating borrowing and potentially fuelling \ninflationary pressures. The underperformance of the oil sector, coupled with \nunsustainable fuel subsidies, further exacerbates the fiscal issues. \nIn June 2023, the Purchasing Managers’ Index (PMI) decreased to 53.2, falling \nfrom a five-month high of 54.0 in the previous month. This indicates an expansion \nin the private sector for the third consecutive month, albeit at a slower rate than \nthe previous month. The expansion in new business and output lessened, as \ninflationary pressures impacted demand. Input and output costs soared partly \nas a result of the removal of fuel subsidy. There was an overall drop in business \nconfidence bringing it to a near record low. \nHeadline inflation rates in June 2023 rose to 22.79%, a 0.38% increase compared \nto the previous month. This marked the 6th consecutive monthly increase and \nthe highest inflation rate since 2005. Food inflation increased to 25.25%, and \ncore inflation reached 20.27% during the same period. The year-on-year \nheadline inflation rate was 4.19% higher than in June 2022. Although core \ninflation showed a slight decrease year-on-year, overall persistent inflationary \npressures remain a cause for concern. \n \n48 \n \nClassified as Confidential \nExport earnings continue to decline despite higher oil prices recorded in the first \nhalf of the year. Revenues from oil exports will further depress in the future if the \nperennial structural challenges plaguing the petroleum sector are not \naddressed. \nThe recent PMS and foreign exchange reforms have significant implications for \nthe economy. These reforms if well implemented present a tremendous \nopportunity to address the growing fiscal challenges in the medium to long term \nand creates a foundation to build long term fiscal sustainability and economic \ngrowth. In the near term, the reforms will lead to sharp price increases which will \ndirectly and significantly impact the poor and most vulnerable households. The \nneed for government targeted assistance to this demographic to cushion the \neffects of the price increases cannot be over emphasized. Further, these reforms \nprovide an added opportunity to grow the fiscal space if spending is controlled \nand targeted while utilization of additional revenues mobilized should be \nprudently and optimally deployed. \n \nOverall consideration \nDespite consistent and synchronous monetary tightening, high inflation persists \nglobally. The effect of tightening has started to yield some fruit in certain parts of \nthe world with reduction in headline inflation and resilience displayed by \nwestern economies despite bleak growth forecasts. On the domestic front, a \ncombination of factors keep prices elevated. The surge in consumer price \ninflation is attributable to factors such as increased money supply, fiscal \nimbalance, monetization of the fiscal deficit, exchange rate depreciation and \nthe impact of recent policy reforms. Global food and energy price spikes have \nfurther exacerbated the situation. A recent World Bank report notes that the \n \n49 \n \nClassified as Confidential \ninflationary pressure escalated in 2022, resulting in the fastest consumer price \nincreases in 17 years. \nThe pace of consumer price increases defied market expectations in June 2023 \nas the anticipated price increase due to the newly introduced policy reforms \nwas somewhat muted. However, Headline inflation still increased to a new 18-\nyear high. The fuel subsidy removal and the impact of managed float of the \ncurrency may not have been fully reflected in the CPI numbers for June 2023. \nThe expectation is that July 2023 numbers will further bake in the impact of these \npolicy changes and the rates will likely trend higher. \nForeign exchange inflows remain limited and The Nigerian Upstream Petroleum \nRegulatory Commission reported that total crude oil production, both blended \nand unblended including condensates recorded a moderate increase of 1.47 \nmbpd in June 2023. This bodes well for our foreign exchange reserves but \nproduction increase should be consistent and sustained. Increasing crude oil \nproduction and consequently revenues is critical to improving our foreign \nexchange liquidity position in the short to medium term. This will no doubt \npositively impact our foreign exchange reserves with important exchange rate \nimplications. \nOverall inflation remains sticky, and the trilemma – an attempt to simultaneously \nreduce persistent inflation, contain downside growth risks while maintaining \nfinancial stability – remains a major challenge. The significant and rapid \nmonetary policy tightening undertaken to combat rising prices reflects the \ncentral bank's commitment to its price stability mandate. Some have called for \ncaution as the effects of continuous rate increases could pose systemic risk to \nthe financial system and negatively impact growth. This is a legitimate concern. \nHowever, the evidence suggests a less than moderate stress in the financial \nsystem due to tightening and does not reflect a high risk of stress that will lead to \na systemic crisis at this time. \n \n50 \n \nClassified as Confidential \nWe continue to see the impact of fiscal factors as the significant drivers of rising \nprices. This calls for the need for fiscal policy tightening to complement the \nmonetary policy efforts. Supply side reforms especially a reduction in \ngovernment spending, growing non-oil tax revenues, increasing crude \nproduction and fiscal policy coordination remain areas that need urgent \nGovernment attention. \nThe growth of money supply continues on the uptrend and the consequent \nchallenge of taming rising prices remains daunting. Though the fight to reduce \ninflation presents downside risks to growth, the focus should remain steadfast on \nthe primacy of price stability to keep inflation within target levels. This is more so \ngiven that we cannot sustain growth without keeping inflation under control. \nThe calls for a handshake between monetary and fiscal policy to control rising \nprices are credible and will be positively impactful, however, the role of tackling \nthe menace of inflation remains primarily that of the Bank. Consequently, all the \nmonetary tools should be deployed to stem rising price levels. \nWith the recent policy pronouncements and the potential upside inflation risk in \nthe near term, it will be harmful to prematurely stop tightening as this will likely \ndislodge inflation expectations. We should remain resolute and forceful in \naddressing persistent price pressures and resist a premature policy reversal at this \ntime. \nMy Policy Decisions \n I therefore vote to: \n \n1. Raise MPR by 25 basis points to 18.75 per cent; \n2. Adjust the Asymmetric Corridor to +100/-300 basis points around the MPR; \n3. Retain the CRR at 32.50 per cent; \n \n \n51 \n \nClassified as Confidential \n9. SALISU, MOHAMMED A. \nGlobal Developments and Outlook \n \nGlobal recovery of global supply chains from the COVID-19 pandemic has \nlargely contributed to the expansion of global output. However, some of the \nforces that hindered growth in the past year or so have continued to slow the \npace of global economic recovery. For example, the repercussions of the \nongoing war in Ukraine as well as high food and energy costs have continued to \nconstrain economic activity. Despite these challenges, global economic activity \nwas resilient in the first quarter of 2023, driven largely by the services sector. The \nInternational Monetary Fund (IMF) projected global growth to decelerate from \nan estimated 3.5 per cent in 2022 to 3.0 per cent in 2023 and 2024 (IMF, World \nEconomic Outlook – WEO – July 2023), with the balance of risks to global growth \ntilted to the downside, including slow recovery of the Chinese economy and the \nongoing efforts at the enlargement of the BRICS (Brazil, Russia, India, China and \nSouth Africa) economy. \n \nGlobal inflation has continued to decline on account of moderation in prices \nacross several Advanced Economies (AEs). As a result, the IMF has projected \nglobal headline inflation to fall from 8.7 per cent in 2022 to 6.8 per cent in 2023 \nand 5.2 per cent in 2024 (WEO July 2023), while core inflation is projected to \ndecline more gradually. In the Emerging Markets and Developing Economies \n(EMDEs), however, inflation remains high and will remain elevated in the \nforeseeable future despite broad measures by several central banks to ease the \ninflationary pressure. Thus, inflation across EMDEs could remain high and may \neven rise if unexpected global shocks occur, including those from an \nintensification of the war in Ukraine and extreme climate change related events. \n \n \n \n52 \n \nClassified as Confidential \nDomestic Economic Developments \nDespite rising inflation and high unemployment, the Nigerian economy has \ncontinued to sustain positive output growth since it exited from recession in 2020. \nThe National Bureau of Statistics (NBS) reported that Real Gross Domestic \nProduct (GDP) grew by 2.31 per cent (year-on-year) in the first quarter of 2023, \ncompared with 3.52 per cent in the fourth quarter of 2022. While growth \ndecelerated, the sustained positive performance of the economy was driven \nlargely by rapid growth in the services and industry sectors, supported by broad-\nbased measures by both the monetary and fiscal authorities. The positive \neconomic growth is projected to continue following the removal of subsidy on \nthe price of Premium Motor Spirit (PMS) and convergence of multiple exchange \nrates in the medium- to long-terms. These factors could, however, exacerbate \nuncertainties due to high prices of PMS and other energy products and pressure \nin the foreign exchange market. The general level of insecurity in the country, \nparticularly in the farming communities, could also precipitate uncertainties. \nDespite the perceived uncertainties, the economic outlook for Nigeria for 2023 \nremains solid based on the forecasts by the CBN (2.66 per cent), Fiscal \nAuthorities (4.20 per cent) and the IMF (3.20 per cent). \n \nOn inflation, the headline inflation (year-on-year) continued its upward \npressures, rising to 22.79 per cent in June 2023, from 22.41 per cent in the \nprevious month, driven largely by the food prices. For instance, food inflation \nrose to 25.25 per cent in June 2023, from 24.82 per cent in the preceding month. \nSome of the key drivers of food inflation include the continued security \nchallenges in major food-producing areas; rising cost of energy, high cost of \ntransportation; poor rural road infrastructure; and post-harvest losses. Uptick in \ncore inflation also contributed to inflation pressures. For instance, according to \nNational Bureau of Statistics (NBS) data, year-on-year core inflation excluding \nenergy items rose from 19.83 per cent in May to 20.06 per cent in June 2023, As \n \n53 \n \nClassified as Confidential \nthe MPC’s Communique rightly states, “The unfolding dynamics in the policy \nenvironment and the resultant pass-through to domestic prices would thus \nrequire greater collaboration between the Bank and the fiscal authority.” \n \nIn terms of monetary aggregates, CBN Staff report shows that broad money \nsupply (M3) grew by 24.35 per cent (year-to-date) in June 2023, compared with \n6.70 per cent in May, driven largely by the increase in both Net Foreign Assets \n(NFA) and Net Domestic Assets (NDA). The monthly weighted average Open \nBuyback (OBB) and Interbank Call rates decreased to 9.12 and 11.61 per cent in \nJune 2023, from 12.60 and 12.31 per cent in May, respectively. \n \nIn the Banking System, Financial Soundness Indicators (FSIs) remained stable and \nstrong, as the Capital Adequacy Ratio (CAR), Non-Performing Loans (NPLs) ratio, \nand Liquidity Ratio (LR) stood at 11.2 per cent, 4.1 per cent, and 48.4 per cent, \nrespectively, at the end June 2023. \n \nFurthermore, the recently introduced government policies have spurred a surge \nin investor confidence in the Nigerian financial market as investors foresee a \nmore stable macroeconomic environment. Consequently, equities remained \nbullish with the All-Share Index (ASI) and Market Capitalization (MC) increasing \nto 60,968.27 index points and N33.20 trillion, respectively, on June 30, 2023, \ncompared with 51,251.06 index points and N27.92 trillion as at December 30, \n2022. \n \nIn the foreign exchange market, the policy on convergence of the multiple \nexchange rates led to market-determined rate for the naira, effectively \nabolishing the Investors and Exporters (I&E) Window. Gross external reserves \nremained relatively flat at US$33.75 billion and US$33.97 billion in June and July \n \n54 \n \nClassified as Confidential \n2023, respectively, due primarily to weak accretion to external reserves and \ndemand pressures on the foreign exchange. \n \nPolicy Decision \nBased on the foregoing analysis on the international and domestic \ndevelopments, it is apparent that inflation pressure poses a serious threat to \noutput growth in Nigeria as the recent policy decisions around subsidy removal, \nexchange rate liberalization and disbursement of palliatives, would have pass-\nthrough effects to inflation. This calls for decisive measures, including use of a mix \nof monetary policy instruments by the CBN to address the potential adverse \nliquidity challenges. \n \nIt is noteworthy, that despite hiking the policy rate in the past eight meetings of \nthe MPC, inflation has continued to rise, albeit at a slower pace. This shows that \neither the monetary policy rate (MPR) has not been effective enough or that \nother monetary and fiscal factors are driving inflation in Nigeria. In this case, \ntightening the policy rate may not help matters. Similarly, loosening the MPR \nnow may not be a good option as it will boost spending. This leaves us with a \n“hold” option, that is holding the MPR constant in combination with other \nmonetary and fiscal policy instruments, including sustained collaboration \nbetween monetary and fiscal authorities on joint policies that would attract \ndomestic and foreign investments to shore up the economy, create jobs, boost \noutput and reduce prices. \n \nAccordingly, I voted to: \n1. Hold the MPR constant at 18.5%. \n2. Retain the CRR at 32.5%. \n3. Retain the Asymmetric Corridor at +100/-700 basis points around the MPR. \n4. Retain the Liquidity Ratio at 30.0%. \n \n55 \n \nClassified as Confidential \n10. SANUSI, ALIYU R. \nDecision \nMy decision to vote for a raise on the MPR is predicated on the need to \ncontinue to tighten the monetary policy stance as inflationary pressure \ncontinues unabated. Indeed, as economic agents adjust to the two major \npolicy reforms of the new government, inflationary pressure is expected to rise in \nthe short to medium term. On the one hand, for example, I expect the resultant \nexchange rate depreciation to elevate the inflationary pressure directly, given \nthe substantial exchange rate pass-through and its second-round effects, and \nindirectly through the consequential liquidity injections as the exchange rate for \noil revenue monetisation adjusts upward. On the other hand, the substantial \nupward adjustment of the pump price of PMS due to the subsidy-removal would \nraise costs and exert additional inflationary pressures. In my opinion, these new \npolicies would exacerbate the existing inflationary pressures arising from food \nand energy occasioned by the external and domestic legacy headwinds. Data \nand staff forecasts show that output growth will remain moderately positive but \ninflation will rise. With inflation sticking above the growth-retarding level and \nthreatening to continue rising, I believe the optimal monetary policy response to \nrein in inflation is further tightening. \nBackground and Justification \nGlobal Economic Development \nThe global economic and political environment has continued to remain \nuncertain as Russian-Ukraine hostilities continue to exert pressure on global food \nand energy prices amidst rising threats to multilateralism, while the slow recovery \nin China and continued cycles of rate hikes weigh on global trade and \nexacerbate debt vulnerabilities. \n \n56 \n \nClassified as Confidential \nThe policy environment has continued to be challenged by the continued \nuncertainties in global economic and geopolitical developments. These \ndevelopments include the rising geo-political tensions arising from the continued \nhostilities between Russia and Ukraine, especially the failure by Russia to renew \nthe black sea grains agreements that allowed safe passage of food exports \nfrom Ukraine; the increasing global polarisation that is deepening the East-West \ngeopolitical divide as more countries show interest in joining the new BRICS \ncurrency challenging the dominance of the dollar in global trade and reserve \ncurrency. This bricsification, if successful, is expected to have a substantial effect \non global trade volumes and directions as about 41 countries have already \nindicated an interest in joining the new BRICKS reserve currency as of the end of \nJune 2023. The World Bank has forecasted global output growth to moderate to \n2.1% in 2023 but rise to 2.4% in 2024 due to the high, but moderating global \ninflationary pressures, volatile but elevated energy prices, tighter financial \nconditions and worsening geopolitical tensions. In the Advanced Economies \n(AEs), output growth is forecasted to moderate to 0.7% in 2023 from 2.6% \nachieved in 2022, but rise to 1.2% in 2024 due mainly to the monetary tightening, \nand slow growth in the Euro area and the UK. Output in the US expanded by \n2.0% in Q1 2023 compared with 2.6% in Q4 2022 and is expected to rise by 1.6% \nin 2023. Output in the UK economy remained flat at 0.1% in Q1 2023 but is \nexpected to contract by -0.3% in 2023. In the Euro area, output growth declined \nby -0.1% in Q1 2023, the same as in Q4 2022 due to decreased household and \npublic spending. Japan’s output expanded by 0.7% in Q1 2023, from 0.1% in Q4 \n2022 but is forecasted to rise to 1.3% in 2023. The composite Global Composite \nPMI of JP Morgan has moderated to 52.7 index points in June 2023 from 54.4 \nindex points in May 2023, indicating moderation in global economic activity \n(both manufacturing and services). \n \n \n57 \n \nClassified as Confidential \nOutput in the Emerging Market and Developing Economies (EMDEs) is \nforecasted to grow by 4.0% in 2023, from 3.7% in 2022, but is expected to \nmoderate to 3.9% in 2024. Output growth in China declined to 0.8% in Q2 2023 \nfrom 2.2% in Q1 20123. It is forecasted to grow by 5.2% in 2023. In Russia, output is \nforecasted to expand by 0.7% in 2023 and is expected to expand by 1.2 in 2024. \nIn South Africa, output contracted q-o-q by -0.4% in Q1 2023, compared with an \nexpansion of 1.1% in Q4 2022. In 2023, output is expected to grow by 0.1%. In \nNigeria, q-o-q output declined by 15.65% in Q1 2023 compared with 10.99% in \nQ4 2022, driven largely decline in the oil sector. Output is expected to grow by \n3.2% in 2023. \nGlobal inflation has continued to decline but is expected to remain elevated \nabove pre-pandemic levels throughout 2023. IMF forecasts global inflation to be \n7% in 2023 from 8.7% in 2022, but decline to 4.9 in 2024. In the AEs, IMF \nforecasted inflation to decline to 4.7% in 2023 from 7.3% in 2022 due to a decline \nin non-fuel commodity prices and the effects of the ongoing monetary \ntightening. It is expected to decline further to 2.6% in 2024. In the US, inflation has \ncontinued to decline since July 2022 and dropped to 3.0 % in June 2023, while it \nstood at 5.5% in the Euro area and 7.9% in the UK. In the EMDEs, inflation is \nforecasted to decline to 8.8% in 2023 and further to 6.5% in 2024 due to the \nexpected decline in food and energy prices, continued monetary tightening, \nand easing of disruptions to the global supply chains. As of June 2023, year-on-\nyear inflation declined in China to 0.0%, in Saudi Arabia to 2.7%, in South Africa \nto 5.40% but increased in India to 4.8%, in Russia to 3.2%, and in Nigeria to \n22.72%. \nDomestic Economic Developments and Their Implications \nIn addition to the legacy headwinds that confront the domestic economy, \nincluding the security challenges in the major food-producing areas and, the \nhigh cost of transportation caused by rising energy costs, the recent \n \n58 \n \nClassified as Confidential \ngovernment policies are expected to increase inflationary pressure as well as \ndampen the slow output recovery in the short to medium term. The two major \nreforms of the new administration, which aim to improve the government's fiscal \nspace and long-term growth prospects of the economy, are expected to have \na substantial influence on the evolution of the domestic economy over the \nshort-to-medium term. Output, Money and Prices are expected to adjust to \nboth the zero-subsidy policy on the pump price of PMS and the substantial \ndepreciation of the naira as the bank attempts to unify the various exchange \nrate windows. On the one hand, the zero-subsidy policy will have a direct effect \non prices and output through higher costs of production and transport and \ndampened demand. The resultant depreciation of the naira following the \nexchange rates unification will directly, via the pass-through effect, raise prices. \nOn the other hand, the monetization of the resultant higher revenue (owing to \nsubsidy savings) from oil with a more depreciated exchange rate will be a \nsignificant source of liquidity injections. This impending liquidity, if not sterilized, \nwill be an additional source of inflationary pressure. These policies and their \npotential impact on output and inflation have underscored the greater need for \ncoordination of fiscal and monetary policies going forward. As the positive \neffects of policies crystalise and expand the fiscal space, a new framework for \neffective macroeconomic policy coordination will be required to achieve \noutput growth with low inflation. This would allow the central bank to return to \nthe traditional use of its market-based tools for liquidity management. \nAvailable data shows that output recovery has remained positive, for ten \nconsecutive quarters, but weak. In Q1 2023, the domestic output slowed to \n2.31% (y-o-y) from the 3.52% achieved in Q4 2022. This was driven by the non-oil \nsector, which grew by 2.77%, particularly Services, (4.35%). Agriculture declined \nby -0.9%. However, the oil output contracted by a much smaller rate of -4.21% \ndue to improved oil production in Q1 2023. On a q-on-q basis, output \ncontracted by -15.65% in Q1 2023, driven by the decline in the Non-oil GDP. \n \n59 \n \nClassified as Confidential \nAgricultural output contracted by -30.95% while services output contracted by-\n14.12%. These contractions reflect the effects of the cash crunch as a result of \nthe cashless policy during the quarter. Oil GDP, however, expanded by 20.68% \nreflecting improved production. \nIn June 2023, inflation continued to increase for six consecutive months. Year-\non-year, the headline inflation increased by 38 basis points, from 22.41% in May \n2023 to 22.79% in June 2023, driven by both the food and core components. \nFood inflation rose to 25.25% in June 2023 from 24.82% in May 2023, driven by a \n38-basis point increase in prices of farm produce. Core inflation also increased in \nJune 2023 by 0.21 percentage point to 20.27% from 20.06% in May 2023, due \nmainly to increased prices of processed foods, education, and transport. Survey \ndata shows that expected inflation continued to rise in June 2023 but has \nremained below actual inflation since September 2022. \nMonetary sector developments showed that broad money (M3) growth \nincreased by 24.35% in June 2023 year-to-date (annualized at 48.71%, above \nthe benchmark of 17.18% for 2023). This increase was driven by the rise in the Net \nDomestic Asset (NDA), which grew 18.09% (year-to-date) in June 2023 \n(annualized at 36.18%, above the benchmark of 15.78%). The key driver of the \ngrowth in NDA was net claims on government which grew by an annualized \nrate of 79.28% (y-t-d) in June 2023, above the 2023 benchmark of 19.64%. Net \nForeign Assets (NFA) also increased by 59.64% in June 2023 (annualised at \n119.28%, above the benchmark of 38.82% for the year). \nStaff forecasts showed that headline inflation would increase from 22.79% in \nJune 2023 to 23.22% in July 2023 due to the high cost of Premium Motor Spirit \n(PMS) and Automotive Gas Oil (AGO) leading to high costs of transport and \nlogistics, high electricity tariff, exchange rate pass-through, and seasonality in \nfood production. \n \n60 \n \nClassified as Confidential \nA review of the banking system stability report shows that the banking system \ncontinues to remain safe, sound, and resilient. Capital Adequacy Ratio (CAR) \nstood at 11.2% as of end-June 2023, which was above the regulatory minimum \nof 10%. The Non-Performing Loans (NPLs) ratio was 4.1%, which was below the \nregulatory maximum of 5%. Furthermore, Liquidity Ratio stood at 48.4%, above \nthe regulatory minimum of 30%. Data also shows that the banking industry’s Total \nAssets and Gross Credit to the economy have maintained their upward trends in \nJune 2023. Total industry assets grew year-on-year by N30.92 trillion or 47.21% to \nN96.4 trillion between end-June 2022 and end-June 2023. The upward trend in \ntotal credit to the economy stands at N37.81 trillion as of June 2023 and has \nincreased by N10.75 trillion or 39.73% between the end of June 2022 and the \nend of June 2023. The credit growth has continued since 2019 following the \nBank’s Loan-to-Deposit Ratio (LDR) policy. \n \nThe Basis for My Policy Choice \nI am concerned that new and legacy forces would substantially influence the \nevolution of prices in the medium term and, given the already high level of \ninflation, hurt output growth. The new exchange rate policy that led to the \ndepreciation of the naira, for instance, would directly feed into prices in the \nshort-to-medium term. Along with the expected subsidy savings, the \nmonetization of oil proceeds under the current exchange rate regime would \nmean a substantial increase in government revenues. While this brings the \nmuch-needed improvement in the fiscal space, it also could mean increased \nliquidity injections, especially in the context of a weak legal framework for saving \nwindfalls. This expected liquidity, unless fully sterilised, could raise the existing \ninflationary pressures and eventually depress output. In my opinion, therefore, \nthere is a need for effective coordination between monetary and fiscal policy \nto sustainably achieve low inflation and high output growth. In deciding \n \n61 \n \nClassified as Confidential \nbetween loosening, holding, or raising the MPR, I choose to raise the policy rate \nbecause loosening would compound the inflationary pressure, negate the \npresent efforts at taming inflation and accelerate capital outflows. Holding, at \nthe moment, could erode the gains made from the previous policy rate hikes. I, \ntherefore, voted for a further tightening, albeit by a lower rate in consideration \nof the potential impact of the new policy reforms on the financial system \nstability. Consequently, I voted to: \n1. Raise the MPR by 25 basis points to 18.75% per cent; \n2. Retain the CRR at 32.5 per cent; \n3. Adjust the asymmetric corridor to +100/–300 basis points around the MPR; \nand \n4. Retain the liquidity ratio at 30.0 per cent. \n \n \n \n \n \n \n \n \n \n \n \n62 \n \nClassified as Confidential \n11. SHONUBI, FOLASHODUN A. \nFaced with a high chance of prolonged Russia-Ukraine crisis, as well as the \ndampening effect of high global inflation and tight financial conditions, the \nprospect for global economic growth remains weak. Many economies are thus \nstruggling with how to sustain the fight against inflation, without hurting financial \nsystem stability, while also working to preserve the fragile growth. Domestically, \nwe are determined to sustain efforts in achieving an enduring policy regime that \nwill not only protect the domestic economy from global shocks and assure near-\nterm stability, but also put the economy on the path of sustainable long-term \ngrowth and development. \n \n \nGlobal and Domestic Economic Developments \nDisruptions recovery of the global economy continued during the review \nperiod, with slowing momentum, growing uncertainties, and fragile outlook. \nWidespread tight monetary policy to curb inflation constrained aggregate \ndemand and dampened growth prospects, while also constituting threat to \nfinancial system stability. Although global inflation has started declining in some \nkey economies, elevated cost pressures in labour markets and lingering supply-\ndisruptions have kept inflation above long run targets. Consequently, IMF \nexpects global growth to weaken from 3.5 per cent in 2022 to 3.0 per cent in \n2023 and 2024. \n \nDomestic Conditions Review \nUpwardly trending inflation in a period of weak and fragile output growth \nindicate a delicately stable short-term prospect for the Nigerian economy. \nUnintended and transitory effects of recent supply-correcting reforms \n(stoppage of petroleum subsidy and foreign exchange market liberalisation) in \nthe domestic economy are combining with global headwinds to aggravate \ninflation, weaken household demand and dampen economic activities. \n \n63 \n \nClassified as Confidential \nHence, developments in the domestic macro-economic environment in the \nreview period reflected the sentiments and dynamics in the various sectors of \nthe economy, as triggered by the policy induced shocks. \n \nDomestic GDP growth, at 2.31 per cent in 2023Q1, was below the 3.52 per cent \nin the preceding quarter, indicating largely robust performance of the non-oil \nsector. The services and industry sub-sectors were the major drivers of non-oil \nsector growth. The fragile outcome in 2023Q1 reflected mainly the effects of \ntemporary unintended policy induced weakening of effective demand and \ndisruptions to economic activities in the review period. \n \nAt 22.79 per cent in June 2023, from 22.41 per cent in May, domestic headline \ninflation rate remained broadly elevated on account of increase in both core \nand food inflation. On a month-on-month basis, inflation rose by 2.13 per cent, \ncompared with 1.94 per cent in May. Rising inflation showed the impact of both \nsupply-side (infrastructure, insecurity, energy prices, transportation, exchange \nrate) and demand-side (mainly liquidity overhang) factors driving inflation. \n \nSignificant growth of key monetary aggregates in the review period highlighted \nthe challenge of excess liquidity in the economy. Annualised growth in broad \nmoney supply, at 48.71 per cent vis-à-vis the programmed target of 28.21 per \ncent, was driven by expansion in both net domestic and net foreign assets. \nOverall, increased systemic liquidity in June 2023, on account of higher FAAC \nallocation, temporary effect of CRR normalisation and sustained increase in \nbanking system credit, were major contributors to liquidity surfeit and expansion \nof monetary aggregates. Accordingly, money market interest rates eased as \nthe weighted average OBB and the interbank call rates, fell to 9.12 and 11.61 \nper cent, respectively, in June 2023, from 12.60 and 12.31 per cent in May 2023. \n \n \n \n64 \n \nClassified as Confidential \nThe banking sector continued to be in safe, sound, and healthy state as \nfinancial soundness indicators remained largely within the prudential limits. \nSimilarly, developments in the capital market were positive as market \ncapitalisation and all-share index both improved on the back of improved \ninvestor confidence and trust in the new macroeconomic and policy \nenvironment. \nExchange \nrate \nconvergence \ndue \nto \nthe \nrecent \nliberalisation \nwas \naccompanied by marginal accretion to external reserves. As the market was \nliberalised, rates converged, thereby narrowing arbitrage premium. Though \ndemand pressures slackened slightly, residual rigidities and imperfections, as \nwell as short-term stickiness remained major challenges. \n \nMy Considerations and Decision \nApparent uncertainty in global macroeconomic conditions, on account of the \nwidespread tightness due to restrictive monetary policy actions to curb high \ninflation and persisting disruptions to global supply chain portends downside risk \nto global growth. I note that weak global demand, elevated global inflation, \nand rising interest rate could potentially impact the domestic economy; a \nthreat which we must adequately mitigate with effective countervailing \nmeasures. \n \nDomestic output is projected to remain subdued as the economy adjusts \ngradually to the recent reforms, just as the current elevated inflation constitutes \na significant threat to macroeconomic stability. In-house estimates forecast a \nmoderate growth of 2.66 per cent in 2023, while the IMF projects domestic \ngrowth at 3.2 per cent in 2023 on account of potential consolidation of \neconomic activities. However, I am positive about moderate improvement in \nthe short to medium term, as expected improvement in operations of the oil \nsector begin to contribute rather than being a drag on the economy. \n \n65 \n \nClassified as Confidential \n \nAt 22.79 per cent, inflation has not only remained high but maintained an \nupward trend, thereby impairing household wealth and domestic consumption. \nThe recent subsidy removal and exchange rate liberalisation are forecast to \nkeep inflation sticky downward in the near-term, although an adequately tight \nmonetary policy can engender inflation deceleration. Today, in my view, rising \ninflation is a far greater concern to us than growth deceleration. Various in-\nhouse analyses of the outlook highlight the need to resolutely curb inflation in \nthe short-term, to ensure long-run macroeconomic stability. \n \nI emphasise that current inflation trend, fuelled by expected impacts of petrol \nsubsidy removal and exchange rate pass-through, is inimical to growth and \nneeds to be tackled. Aside the structural drivers of inflation, month-on-month \nsurge in banking system liquidity, as highlighted by the expansion in monetary \naggregates, contributed significantly to inflation dynamics. To complement the \npolicy rate, it is imperative that we unreservedly adopt an array of other \ninstruments at the Bank’s disposal to tighten systemic liquidity. Nonetheless, I \nnote that the series of policy rate hikes have been effective enough, in \nmoderating the pace of inflation uptick in the face of global shocks and \ndomestic rigidities. \nI note further that the recent liberalisation of the exchange rate, which was \naccompanied by significant depreciation of the naira, is expected to have \nsome effect on inflation. But I envisage a low inflation pass-through, as much of \nthe price adjustment was already priced in. Eventual stability of the foreign \nexchange market, over the medium-term, will further help to achieve price \nstability. Besides, the recent removal of subsidy could have a favourable effect \non price stability as increased crude oil receipts by the government will bolster \nreserves, engender exchange rate stability, and help to moderate inflation. \n \n66 \n \nClassified as Confidential \n \nOverall, the transmission of monetary policy must be strengthened to ensure \nthat market indices respond optimally to the Bank’s rate adjustments and in line \nwith liquidity profile of the economy. I reiterate that excess liquidity doesn’t just \naffect inflation but also the exchange rate and as such the Bank must deploy \nall tools in its kit to constrain excessive liquidity expansion. \n \nOverall Considerations and Decision \nToday, I support further tightening to tackle inflation and ensure price stability. \nWhile this could constrain growth, inordinate inflation, with implications for \nfuture expectations, constitutes greater danger to overall domestic stability. \nInflation needs to be combated resolutely as we creatively establish measures \nto cushion its impact on output. I believe that an adequately tight liquidity \ncondition and measured rate hikes will deliver the goal of price stability that will \nsupport long-run growth. \nTherefore, I vote to: \n1. Raise the MPR by 50 basis points to 19.00 per cent; \n2. Adjust the asymmetric corridor to +100/-300 basis points from +100/–700 \nbasis points around the MPR; \n3. Retain the CRR at 32.50 per cent; and \n4. Retain liquidity ratio at 30.00 per cent. \n \nFOLASHODUN A. SHONUBI, OFR \nAg. Governor \nJuly 2023", "source": "CBN", "stratum": "cb_requests", "fetch_date": "2026-05-11", "url": "file:///CBN/MPC_Communiques/Central Bank of Nigeria Communique No. 149 of the 292nd Meeting of Monetary Policy Committee held on Monday 24th and 25th Tuesday July, 2023 and Personal Statements of Members.pdf"}