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+{"doc_id": "2defbc421940244be7acba8cab14e532", "text": "CENTRAL BANK OF NIGERIA\nMONETARY \nMONETARY \nPOLICY REVIEW\nPOLICY REVIEW\nMONETARY \nPOLICY REVIEW\nAUGUST 2018\nAUGUST 2018\nAUGUST 2018\nCentral Bank of Nigeria\n33 Tafawa Balewa Way\nCentral Business District\nP.M.B. 0187, Garki, \nAbuja\nPhone: +234 (0)9 462 36011\nWebsite: www.cbn.gov.ng\nE-mail: info@cbn.gov.ng\nISSN: 2141-6281\n©2017 Central Bank of Nigeria\nMandate\n§Ensure monetary and price stability\n§Issue legal tender currency in Nigeria\n§Maintain external reserves to safeguard the international \nvalue of the legal tender currency\n§Promote a sound financial system in Nigeria\n§Act as banker and provide economic and financial \nadvice to the Federal Government\nVision\n“Be the model Central Bank delivering Price and \nFinancial System Stability and promoting \nSustainable Economic Development\"\nMission Statement\n“To be proactive in providing a stable framework for the economic \ndevelopment of Nigeria through effective, efficient and \ntransparent implementation of monetary and exchange \nrate policy and management of the financial sector\"\nCore Values\n \n· Meritocracy\n· Leadership\n· Learning \n· Customer - Focus\nCentral Bank of Nigeria\niii\nCBN Monetary Policy Review \nCBN Monetary Policy Review \nCBN Monetary Policy Review \nCONTENTS\nPage\niv\nCBN Monetary Policy Review \nCBN Monetary Policy Review \nCBN Monetary Policy Review \nTable of Contents\nStatement by the Governor \n.. \n.. \n.. \n.. \n.. \n.. \nvii\nChapter 1 \nOverview.. \n.. \n.. \n.. \n.. \n.. \n.. \n1\nChapter 2 \nOutput in the Domestic Economy \n.. \n.. \n.. \n7\nChapter 3 \nPrice Developments .. \n.. \n.. \n.. \n.. \n21\nChapter 4 \nMonetary Policy and Liquidity Management.. \n.. \n29\nChapter 5 \nDevelopments in the Financial Markets.. \n.. \n.. \n43\nChapter 6 \nEconomic Outlook.. \n.. \n.. \n.. \n.. \n.. \n63\n \n \nAppendices \n.. \n.. \n.. \n.. \n.. \n.. \n71\nList of Tables\nTable 3.1: \nInflation Rates, January – June 2017 .. \n.. \n.. \n22\nTable 3.2: \nMajor Components of Headline Inflation ((Y-on-Y), \n \n \nJanuary - June 2018.. \n.. \n.. \n.. \n.. \n23\nTable 3.3: \nMajor Components of Headline Inflation (M-on-M), \n \n \nJanuary - June 2018 \n.. \n.. \n.. \n.. \n.. \n23\nTable 3.4: \nMajor Components of Food Inflation (Y-on-Y), \n \n \nJanuary - June 2018.. \n.. \n.. \n.. \n.. \n24\nTable 3.5: \nMajor Components of Food Inflation (M-on-M), \n \n \nJanuary – June 2018.. \n.. \n.. \n.. \n.. \n25\nTable 3.6: \nMajor Components of Core Inflation (Y-on-Y) \n \n \nJanuary – June. 2018 .. \n.. \n.. \n.. \n.. \n25\nTable 3.7: \nMajor Components of Core Inflation (M-on-M) \n \n \nJanuary – June. 2018 .. \n.. \n.. \n.. \n.. \n26\nTable 3.8: \nActual and Seasonally Adjusted Headline Inflation \n \n \nJanuary – June 2018 .. \n.. \n.. \n.. \n.. \n26\nTable 4.1: \nOMO Bills Auction (January 2017 – June 2018) (N'billion).. \n34\nTable 4.2: \nCBN Standing Lending Facility (January 2017 – \n \n \nJune 2018) (N'billion) .. \n.. \n.. \n.. \n.. \n35\nTable 4.3: \nCBN Standing Deposit Facility (January 2017 – \n \n \nJune 2018) (N'billion) .. \n.. \n.. \n.. \n.. \n36\nTable 4.4: \nForeign Exchange Supply by the CBN (US$ Million) \n.. \n37\nTable 4.5: \nMonetary Aggregates Outcomes (Growth in % except \n \n \notherwise stated) \n.. \n.. \n.. \n.. \n.. \n41\nTable 5.1: \nWeighted Average Monthly Money Market Interest Rates \n \n \n(January – June 2017).. \n.. \n.. \n.. \n.. \n45\nTable 5.2: \nAverage Monthly Spot Exchange Rates (July 2017 – \n \n \nJune 2018) (N/US$) \n.. \n.. \n.. \n.. \n.. \n48\nTable 5.3: \nEnd-Month Exchange Rates (July 2017 – June 2018) \n \n \n(N/US$) \n.. \n.. \n.. \n.. \n.. \n.. \n48\nTable 5.4: \nNominal and Real Effective Exchange Rates Indices \n \n \n(Jan 2017 – Jun 2018) .. \n.. \n.. \n.. \n.. \n49\nTable 5.5: \nMonthly Foreign Exchange Flows through the CBN \n \n \n(July 2015 – June 2017) \n.. \n.. \n.. \n.. \n50\nv\nCBN Monetary Policy Review \nCBN Monetary Policy Review \nCBN Monetary Policy Review \nPage\nTable 5.6: \nMonthly Foreign Exchange Flows through the Economy\n \n \n(Jan. 2017 – June 2018) (US$ Mill \n.. \n.. \n.. \n51\nTable 5.7: \nNSE All-Share Index (ASI) and Market Capitalization (MC) \n \n \n(June 2017 – June 2018) \n.. \n.. \n.. \n.. \n52\nTable 5.8: \nPolicy Rates of Selected Countries January – June 2018 \n58\nTable 5.9: \nSelected International Stock Market Indices as at \n \n \nJune, 2018 \n.. \n.. \n.. \n.. \n.. \n.. \n59\nTable 5.10: \nExchange Rates of Selected Countries (value in currency \n \n \nunits to US$) \n.. \n.. \n.. \n.. \n.. \n.. \n61\nTable 6.1 \nGlobal Output and Inflation Outlook .. \n.. \n.. \n66\nList of Figures\nFigure 2.1: \nReal GDP Growth (%) 2016 Q1 – 2018 Q2. \n \n.. \n8\nFigure 2.2: \nNon-oil Sector Performance 2016Q1-2018Q1 .. \n.. \n9\nFigure 2.3: \nPerformance of the Oil Sector 2016Q1-2018Q2 \n.. \n9\nFigure 2.4: \nAgricultural Sector Contribution by Activity, 2016Q1-\n \n \n2018Q2 \n.. \n.. \n.. \n.. \n.. \n.. \n10\nFigure 2.5: \n Industrial Sector's Contribution by Activity, 2016Q1-2018Q2 12\nFigure 2.6: \nServices Sub-Sector Contribution, 2016Q1-2018Q2 \n.. \n14\nFigure 2.7: \nQuarter Oil Production (2016Q1-2018Q2).. \n.. \n.. \n15\nFigure 2.8: \nMonthly Bonny Light Price, January – June 2018 \n.. \n15\nFigure 3.1: \nHeadline, Core and Food Inflation Rates \n \n \n(January – June 2018) \n.. \n.. \n.. \n.. \n22\nFigure 3.2: \nMajor Components of Headline Inflation (Y-on-Y), \n \n \nJanuary – June 2018 .. \n.. \n.. \n.. \n.. \n23\nfigure 3.3: \nMajor Components of Headline Inflation (M-on-M), \n \n \nJanuary – June 2018 .. \n.. \n.. \n.. \n.. \n23\nFigure 3.4: \nMajor Components of Food Inflation (Y-on-Y), \n \n \nJanuary – June 2018 \n.. \n.. \n.. \n.. \n24\nFigure 3.5: \nMajor Components of Food Inflation (M-on-M), \n \n \nJanuary – June 2018 .. \n.. \n.. \n.. \n.. \n25\nFigure 3.6: \nMajor Components of Core Inflation (Y-on-Y) \n \n \nJanuary – June 2018 .. \n.. \n.. \n.. \n.. \n25\nFigure 3.7: \nMajor Components of Core Inflation (M-on-M) \n \n \nJanuary – June 2018 .. \n.. \n.. \n.. \n.. \n26\nFigure 3.8: \nActual and Seasonally Adjusted Headline Inflation \n \n \nJanuary – June 2018 .. \n.. \n.. \n.. \n.. \n26\nFigure 4.1: \nOMO Bills Auction (January – June 2018) \n.. \n.. \n35\nFigure 4.2: \nStanding Lending Facility (January 2017 – June 2018).. \n36\nFigure 4.3: \nStanding Deposit Facility (January 2017 – June 2018) .. \n36\nFigure 4.4: \nForeign Exchange Supply by the CBN \n \n \n(January – June 2018).. \n.. \n.. \n.. \n.. \n37\nFigure 4.5: \nMoney Supply (M1) and (M2) (January – June, 2018) .. \n38\nFigure 4.6: \nGrowth in Money Supply (M1) and (M2) \n \n \n(January - June, 2018) .. \n.. \n.. \n.. \n.. \n38\nPage\nvi\nCBN Monetary Policy Review \nCBN Monetary Policy Review \nCBN Monetary Policy Review \nFigure 4.7: \nNet Domestic Asset (NDA) (January - June 2018) \n.. \n39\nFigure 4.8: \nNDA, NDC and Other Assets (net) (January – June, 2018) \n39\nFigure 4.9: \nDomestic Credit to Private Sector (January – June, 2018) \n40\nFigure 5.1: \nWeighted Average Monthly Money Market Interest Rates \n \n \n(Jan.–Jun. 2018) \n.. \n.. \n.. \n.. \n.. \n45\nFigure 5.2: \nDaily Interbank Call Rate (January – June 2018) \n.. \n46\nFigure 5.3: \nDaily Open Buy Back Rate (January-June 2018) \n.. \n46\nFigure 5.4: \nDaily Naira/US Dollar Exchange Rate (January - June 2017) 47\nFigure 5.5: \nNominal and Real Effective Exchange Rates Indices \n \n \n(January 2017 – June 2018).. .. \n.. \n.. \n.. \n49\nFigure 5.6: \nMonthly Foreign Exchange Flows through the CBN \n \n \n(Jul 2016 – Jun 2018) .. \n.. \n.. \n.. \n.. \n50\nFigure 5.7 \nMonthly Foreign Exchange Flows through the Economy\n \n \n(Jul 2016 – Jun 2018) (US$ Million) \n.. \n.. \n.. \n52\nFigure 5.8: \nNSE ASI and MC (June 2017– June 2018) \n.. \n.. \n53\nFigure 5.9: \nNSE ASI and MC (December 2017 – June 2018) \n.. \n53\nFigure 5.10: \nPortfolio Inflows (May 2017 – May 2018) \n.. \n.. \n53\nFigure 5.11: \nNSE Market Capitalisation by Sector as at End-December \n \n \n 2017 \n.. \n.. \n.. \n.. \n.. \n.. \n.. \n54\nFigure 5.12: \nNSE Market Capitalisation by Sector as at End-June 2018 \n54\nFigure 5.13: \nWarren Buffett Valuation of Nigerian Equities Market .. \n54\nFigure 5.14: \n10-Year U.S. Dollar-denominated Bond Yield for Nigeria \n \n \n(June 30, 2017 – June 29, 2018) \n.. \n.. \n.. \n55\nFigure 5.15: \nFGN Bonds Yield Curves: end-June. 2017 vs. end-Dec. 2017 \n \n \nvs. end-June. 2018 \n.. \n.. \n.. \n.. \n.. \n55\nFigure 5.16: \nStructure of the Nigerian Capital Market (June, 2018).. \n56\nList of Boxes\nBox 2.1 \nTrade Tensions, Trade Wars and Implications for Monetary \n \n \nPolicy in Nigeria \n.. \n.. \n.. \n.. \n.. \n16\nBox 4.1 \nElectoral Cycles and Monetary Policy in Nigeria \n.. \n41\nCBN Monetary Policy Review \nCBN Monetary Policy Review \nCBN Monetary Policy Review \nSTATEMENT BY THE GOVERNOR\nM\nonetary policy in the first half of 2018 continued to be shaped by \ndevelopments in the global and domestic economic and financial \nenvironment. At the global level, the key influences were: increased \nmonetary policy divergence among the advanced economies; continued \nuncertainties surrounding the BREXIT negotiations and sustained monetary policy \nnormalization in the US as the Fed hiked interest rate and gave forward guidance of \nmore in the future. Others included the U.S withdrawal from the Iranian nuclear deal, \nthe emerging trade tensions between the US and other major world economies as \nwell as pockets of geo-political tensions. These, notwithstanding, the global \neconomy continued on the path to recovery, stemming from the strengthening of \ndomestic investment demand and relatively easier financing conditions in the \nadvanced economies, as well as sustained recovery in oil and other commodity \nprices, amid limited spillovers of trade tensions to the financial markets. As a result, \nglobal output growth was projected to rise to 3.9 per cent in 2018 from 3.7 per cent in \n2017.\nIn the domestic economy, the promising developments during the period were: \nimproved fiscal receipts and accretion to external reserves as a result of sustained \nrecovery in oil and other commodity prices, improved oil production, improvements \nin the 2017 capital budget implementation which was extended into the first half of \n2018, sustained development finance interventions in the real sector by the Central \nBank of Nigeria, and continued implementation of Economic Recovery and Growth \nPlan (ERGP). The outcome was reflected in improving but still fragile economic \nrecovery in the first half of the year. Consequently, Gross Domestic Product (GDP) \ngrowth moderated to 1.95, and 1.50 per cent (year-on-year) in the first and second \nquarters of 2018 from 2.11 per cent in the fourth quarter of 2017. \nOn price developments, the Bank could report that notwithstanding the continuing \nliquidity surfeit in the banking system, inflationary pressure moderated in the review \nperiod as headline inflation declined progressively from 15.13 per cent in January to \n11.23 per cent in June 2018. The development largely reflected the relative stability \nin the foreign exchange market, improvements in food supply, and stability in utility \nprices. \nMonetary policy in the review period, was informed by key considerations which \nincluded; the slow output recovery; high but moderating inflation rate which \nremained above the Bank's target range; continuing liquidity surfeit in the banking \nsystem; weak macro-prudential indicators; growing sovereign debt and low fiscal \nvii\nbuffers. These developments and the need to achieve the Bank's mandate of price \nand exchange rate stability provided the basis for the sustenance of the tight \nmonetary policy stance in the first half of the year. Consequently, the Bank kept the \nMonetary Policy Rate (MPR) at 14.0 per cent and retained its standing facility \ncorridor at +200/-500 basis points. The Cash Reserve Ratio (CRR) and Liquidity Ratio \n(LR) were also held constant throughout the review period at 22.5 and 30 per cent, \nrespectively. The Bank also continued its reliance on Open Market Operations as \nmain tool for liquidity management, complemented with regular foreign exchange \ninterventions. Although the Nigerian capital market opened on a bullish note in the \nreview period, the market witnessed a lull towards the end of the period, on account \nof a weak corporate environment and sustained capital reversals in response to on-\ngoing monetary policy normalization in the US. Consequently, the All Share Index \n(ASI) only recorded a marginal increase of 0.09 per cent from 38,243.19 at end-\nDecember 2017 to 38,278.55 at end-June 2018. \nThe broad outlook for the domestic economy in 2018 is promising. The economy is \nexpected to continue on the path of recovery, anchored on higher oil prices and \nproduction, and prospects for improved agricultural performance, electricity \nsupply and continuing reforms in the foreign exchange market. The price outlook \nindicates continuing moderation in the second half of the year towards the Bank's \nsingle digit inflation objective. The upside risks to inflation in the near-term would be \nthe implementation of the expansionary 2018 budget and spending towards the \n2019 general elections. In view of the near-term outlook, the Bank would continue to \nmanage liquidity conditions in the domestic economy, to ensure that risks to inflation \nand growth are minimized.\nGODWIN I. EMEFIELE\nGovernor, Central Bank of Nigeria\nAugust 2018 \nviii\nCBN Monetary Policy Review \nCBN Monetary Policy Review \nCBN Monetary Policy Review \nCBN Monetary Policy Review \n1 \nCHAPTER ONE \n \n1.0 \nOVERVIEW \n \nhe monetary policy environment in \nthe first half of 2018 was clouded \nby developments in the global and \ndomestic economies. On the global \nfront, the key developments were: \nincreased monetary policy divergence \namongst the advanced economies; \ncontinued \nuncertainties \nsurrounding \nthe \nBREXIT \nnegotiations; \nemerging \ntrade war between the US and other \nmajor \nworld \neconomies; \nsustained \nmonetary policy normalization in the US \nwith implications for capital reversals \nfrom \nthe \nemerging \nmarkets \nand \ndeveloping economies; pull-out of the \nUS from the Iranian nuclear deal; as \nwell as pockets of geopolitical tensions. \nThe \nmoderating \ndevelopments \nincluded the apparent return of peace \nto the Korean peninsula, following the \nmeeting between the US and North \nKorean \nleaders, \nand \nthe \ncommencement \nof \ntrade \ntalks \nbetween China and the US to avert the \nlooming trade war. \n \nOn the domestic scene, the major \nchallenges to monetary policy were: \nthe continuing liquidity surfeit in the \nbanking \nsystem; \nfragile \neconomic \nrecovery; \nhigh \nbut \nmoderating \ninflationary \npressure; \nas \nwell \nas \npressures in the foreign exchange \nmarket. Nevertheless, headline inflation \ndeclined progressively from 15.13 per \ncent in January to 11.23 per cent in \nJune 2018. Food inflation was the major \ndriver \nof \noverall \nmoderation \nin \nconsumer prices during the period, \nalthough, \ncore \ninflation \nalso \ncontributed. \n \nThe domestic economy continued on \nthe path of growth, which remained \nfragile. The development was due \nlargely to increased fiscal receipts and \naccretion to reserves as a result of \nsustained recovery in oil and other \ncommodity \nprices, \nimproved \noil \nproduction \nand \ncontinued \nimplementation \nof \nthe \nEconomic \nRecovery and Growth Plan (ERGP). \nOthers included: improvements in 2017 \ncapital budget implementation which \nextended into the first half, continued \ndevelopment finance interventions in \nthe real sector by the Central Bank of \nNigeria (CBN), and stability in the \nforeign exchange market. As a result, \ndata from the National Bureau of \nStatistics (NBS) showed that real GDP \ngrowth moderated to 1.95 per cent \n(year-on-year) in the first quarter of \n2018, from 2.11 per cent in the \npreceding quarter. This was in contrast \nto the contraction of 0.91 per cent in \nthe corresponding quarter of 2017. The \noil sector remained the main driver of \ngrowth as it grew by 14.77 per cent \ncompared with 11.20 per cent in the \npreceding quarter and a contraction \nof 15.60 per cent in the corresponding \nperiod of 2017. The sustained growth of \nthe oil sector was traceable to the \ncontinued peace in the Niger Delta \nregion, which had positive impact on \noil production. Similarly, the non-oil \nsector grew by 0.76 per cent in the first \nquarter of 2018 compared with the \ngrowth of 0.45 and 0.72 per cent in the \nT \nCBN Monetary Policy Review \n2 \npreceding and corresponding quarters \nof 2017, respectively. The growth in the \nnon-oil \nsector \nreflected \nthe \nperformance \nof \nIndustry \n(3.52%), \nAgriculture (3.0%) and Services (0.59%). \nHowever, the Construction and Trade \nsectors contracted by 1.54 and 2.57 \nper cent, respectively, in the first \nquarter of 2018. In the second quarter, \nreal GDP growth further declined to \n1.50 per cent (year-on-year) from 1.95 \nand 0.72 per cent in the preceding \nquarter and the corresponding period \nof 2017. The oil sector was the main \ndriver of the decline as it contracted by \n3.96 per cent from a growth of 14.77 \nper cent in the preceding quarter and \n3.53 per cent in the corresponding \nperiod of 2017. The non-oil real GDP, \nhowever, grew in the second quarter of \n2018 by 2.05 per cent up from 0.76 and \n0.45 per cent in the preceding quarter \nand the corresponding period of 2017. \nThe growth in non-oil real GDP largely \nreflected \nthe \nperformance \nof \nconstruction (7.66%), services (4.19%) \nand agriculture (1.19%), although trade \ncontracted by 2.14 per cent in the \nsecond quarter of 2018. \n \nDuring the first half of 2018, activities in \nthe Investors and Exporters foreign \nexchange \nwindow \nintensified \nand \nprovided \nstability \nin \nthe \nforeign \nexchange \nmarket. \nHowever, \nnew \nchallenges \nemerged \nfollowing \nthe \nsustained normalization of monetary \npolicy \nin \nsome \nmajor \nadvanced \neconomies, thereby intensifying capital \nreversals from the emerging market \neconomies, \nincluding \nNigeria. \nThe \ndevelopment led to renewed pressure \nin \nthe \nforeign \nexchange \nmarket. \nConsequently, the Bank had to intensify \nits heterodox approach to foreign \nexchange policy, by implementing \nadditional measures to stem these new \nsources of pressure in the market. These \nmeasures included: increased foreign \nexchange sales to BDCs from twice to \nthrice weekly as well as the conclusion \nand implementation of the bilateral \ncurrency swap between the Central \nBank of Nigeria and the People’s Bank \nof China. The currency swap was \nintended to facilitate the settlement of \ntransactions \nbetween \neconomic \nagents \nin \nboth \ncountries \nwithout \nrecourse to a third currency (notably \nthe \nUS \ndollar), \nthereby \nreducing \npressure on the exchange rate. The \nBank also sustained the implementation \nof \nexisting \nmeasures \nincluding: \nintensification \nof \nthe \npolicy \non \nrepatriation of export proceeds as well \nas return of unutilized foreign exchange \nsourced \nfrom \nCBN \nauctions; \nthe \nrestriction of access to 41 items; and \nthe use of Bank Verification Number \n(BVN) in BDC transactions, to rein-in \nspeculative practices and arbitrage \nopportunities in the market. \n \nThe Nigerian financial markets were \nmoderately \nstable, \nalthough \nperformance \ncontinued \nto \nreflect \ntrends in the global and domestic \neconomic and financial environments. \nIn the pursuit of its price and monetary \nstability mandate, the Bank continued \nto deploy various monetary policy \ninstruments in the first half of 2018. The \nfollowing instruments were deployed: \nthe Monetary Policy Rate (MPR), the \nCBN Monetary Policy Review \n3 \nCash Reserve Ratio (CRR), Liquidity \nRatio (LR), Open Market Operations \n(OMO) \nand \nDiscount \nWindow \nOperations. \nIn \naddition \nto \nthese \ninstruments, the Bank maintained its \nintervention in the foreign exchange \nmarket. \n \nThe Bank sustained its reliance on open \nmarket operations (OMO) as the main \ntool \nin \nmanaging \nbanking system \nliquidity in the first half of 2018. \nConsequently, actual OMO sales in the \nreview period increased to N9,743.76 \nbillion compared with N7,472.21 billion \nand N3,874.27 billion recorded in the \npreceding and corresponding periods \nof 2017, respectively. This represented \nan increase of 151.50 per cent and \n30.40 per cent, above the levels in the \nfirst \nand \nsecond \nhalves \nof \n2017, \nrespectively. The high level of OMO \nsales was attributed to the incidence of \nDeposit \nMoney \nBanks \n(DMBs) \ndiscounting OMO bills before maturity \nin \nthe \nsecondary \nmarket, \nthus \nexpanding the monetary base and \nleading to a rise in the growth rate of \nmoney supply. \n \nThe \nmonetary \naggregates, \nlargely, \nperformed \nbelow \ntheir \nindicative \ntargets in the review period. The \ndevelopment was as a result of the \ncontraction in Net Domestic Assets \n(NDA) which was, however, unable to \nsurpass the substantial growth in Net \nForeign Assets (NFA) of the banking \nsystem. The contraction of NDA was \ntraceable \nto \nthe \nsubstantial \ncontraction in credit to government, \ndue to increased government receipts \nfrom crude oil sales, which reduced \nrecourse \nto \nborrowing \nfrom \nthe \ndomestic financial markets. The huge \ngrowth in NFA, however, was due to \nthe rise in global crude oil prices which \nimproved \naccretion \nto \nexternal \nreserves. \n \nThe money market remained active, \nwith market rates reflecting liquidity \nconditions in the banking system. The \nrates fluctuated widely outside the \nStanding Facilities corridor with no clear \ndirection, indicating a high degree of \nuncertainty \nin \nthe \nmarket. \nThe \nuncertainties primarily were traceable \nto low fiscal activities as reflected in the \ndelayed Federal Government budget \nfor \n2018, \ngovernment’s \nrecent \npreference for borrowing from the \ninternational \nmarket, \ndelays \nin \nFederation \nAccount \nAllocation \nCommittee (FAAC) disbursements and \nimplementation of additional measures \nto manage demand pressure in the \nforeign exchange market. Rates at the \nuncollateralized segment of the market \nwere \nhigher \ncompared \nwith \nthe \ncollateralized OBB rates reflecting the \nheightened risks and uncertainties in \nthe market. \n \nIn the first half of 2018, the Nigerian \ncapital market opened on a bullish \nnote \nreflecting \nimproved \ngrowth \nsentiments \nas \nthe \neconomy \nwas \nrecovering from recession as well as \nincreased activities at the Investors and \nExporters window. However, towards \nthe end of the period, the market \nwitnessed \nsome \nlull \nin \nactivities, \nfollowing sustained spate of capital \nCBN Monetary Policy Review \n4 \nreversals arising from the continued \nmonetary policy normalization in some \nadvanced \neconomies, \nlow \nfiscal \nactivities \nfollowing \nthe \ndelayed \npassage of the 2018 FGN budget and \nfragile \neconomic \nrecovery, \nall \nculminating \nin \na \nweak \ncorporate \nenvironment. Consequently, the All-\nShare Index (ASI) increased by 0.09 per \ncent to 38,278.55 as at end-June 2018 \nfrom 38,243.19 at end- December 2017. \nSimilarly it also increased by 15.58 per \ncent compared with 33,117.48 at end-\nJune 2017. \n \nIn the first half of 2018, activities in the \nbonds market were dominated by \ntransactions in debt instruments of the \nFederal Government of Nigeria (FGN). \nThere was also some activity in the Sub-\nnational government and corporate \nbonds \nsegments, \nwith \nthe \nlatter \nrecording the least share by market \nvolume. At 5.90 per cent, the 10-year \ndollar-denominated \nbond \nyield \nfor \nNigeria increased by 143 basis points at \nend-June 2018, from 4.47 per cent at \nend-December 2017. When compared \nwith end-June 2017 yield of 4.80 per \ncent, it increased by 33 basis points \nwith, the developments traceable to \nthe perception of rising sovereign risk \nby investors. \n \nOn the outlook for inflation available \nestimates suggest that consumer prices \nwill continue their downward trajectory \nin the near –to-medium term. Headline \ninflation \nrate \n(year-on-year) \ndecelerated to 11.23 per cent in June \n2018, compared with 15.13 per cent \nrecorded in January, 2018. Staff \nprojections show that the year-on-year \nheadline inflation would moderate to \n10.94, 10.66, 10.41, 10.26 and 10.01 per \ncent \nin \nJuly, \nAugust, \nSeptember, \nOctober \nand \nNovember \n2018, \nrespectively. Inflation is, however, \nforecast to inch up slightly to 10.36 per \ncent in December 2018. The upside risks \nto \ninflation \nwould \ninclude \nthe \nimplementation of the 2018 budget \nand \nspending \ntowards \nthe \n2019 \ngeneral elections. Others are: poor \npower \nsupply; \nincreased \ncost \nof \ntransportation; and persistent clashes \nbetween \nherdsmen \nand \nfarmers; \nleading to disruptions in the food supply \nand distribution chain. As the Bank \ncontinues \nto \nmanage \nliquidity \nconditions in the domestic economy, \ninflationary \ndevelopments \nwould \ncontinue to be monitored to ensure \nthat the downside risks of inflation to \ngrowth are minimized. \n \nThe domestic economy is expected to \ncontinue on the path of recovery. Real \nGDP grew at 1.95 per cent (year-on-\nyear) in Q1 2018, representing a \nstronger growth of 2.87 percentage \npoints compared with -0.91 per cent in \nQ1 2017. However, the outcome \nrepresented \na \ndecline \nof \n0.16 \npercentage point compared with 2.11 \nper cent recorded in Q4 2017. Similarly, \nreal GDP grew by 1.50 per cent in Q2 \n2018 representing an expansion of 0.78 \npercentage point when compared \nwith the growth of 0.72 per cent in the \ncorresponding period of 2017. The \noutcome was, however, a decline \nwhen compared with the growth of \n1.95 per cent in Q1 2018. The outlook \nCBN Monetary Policy Review \n5 \nfor 2018 and beyond is positive, as the \neconomy is projected to grow by 2.1 \nper cent in 2018 and 1.9 per cent in \n2019 (IMF, 2018). Similarly, the World \nBank projects a growth of 2.5 per cent \nin 2018 and 2.8 per cent in 2019. The \noutlook is anchored on higher crude oil \nprices \nand \nproduction, \nimproved \nelectricity \nsupply, \nprospects \nof \nimproved \nagricultural \nperformance \nand continuing reforms in the foreign \nexchange \nmarket, \namong \nothers. \nNevertheless, the unemployment rate \nremained high at 18.8 per cent, \nrequiring targeted fiscal spending to \nfurther strengthen output and create \njobs. The downside risks to the outlook \nare: ongoing security challenges; loss of \nmarket share for Nigeria’s crude oil \nexport; increased political uncertainty \ndue to electioneering activities, which \nmay trigger capital outflows; and weak \nprivate \nsector \ncredit \ngrowth. \nThe \nconduct of monetary policy by the \nBank will, therefore, continue to be \nanchored \non \nthe \nMedium-Term \nFramework, \nwith \nthe \nobjective \nof \nminimizing the upside risks to inflation \nand downside risks to growth. \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \nCBN Monetary Policy Review \n6 \nCBN Monetary Policy Review \n7 \nCHAPTER TWO \n \n2.0 \nOUTPUT \nIN \nTHE \nDOMESTIC \nECONOMY \n \nn the first half of 2018, the domestic \neconomy continued on the path of \ngrowth, which however, remained \nfragile. The development was due \nlargely to increased fiscal receipts and \naccretion to reserves as a result of \nsustained recovery in oil and other \ncommodity \nprices, \nimproved \noil \nproduction \nand \ncontinued \nimplementation \nof \nthe \nEconomic \nRecovery and Growth Plan (ERGP). \n \nAvailable \ndata \nfrom \nthe \nNational \nBureau of Statistics (NBS) showed that \nreal Gross Domestic Product (GDP) \ngrowth moderated to 1.95 per cent \n(year-on-year) in the first quarter of \n2018, from 2.11 per cent in the \npreceding quarter. The growth was in \ncontrast to the contraction of 0.91 per \ncent in the corresponding quarter of \n2017. The oil sector remained the main \ndriver of growth as it grew by 14.77 per \ncent, compared with 11.20 per cent in \nthe \npreceding \nquarter \nand \na \ncontraction of 15.60 per cent in the \ncorresponding period of 2017. The \nsustained growth of the oil sector was \ntraceable to the continued peace in \nthe Niger Delta region, which had \npositive impact on oil production. \nSimilarly, the non-oil sector grew by 0.76 \nper cent in the first quarter of 2018 \ncompared with the growth of 0.45 and \n0.72 per cent in the preceding and \ncorresponding \nquarters \nof \n2017, \nrespectively. The growth in the non-oil \nsector reflected the performance of \nIndustry (3.52%), Agriculture (3.0%) and \nServices (0.59%). The Construction and \nTrade sectors, however, contracted by \n1.54 and 2.57 per cent, respectively, in \nthe first quarter of 2018. \n \nIn the second quarter of 2018, real GDP \ngrew by 1.50 per cent (year-on-year) \nwhich was lower by 0.45 percentage \npoint when compared with 1.95 per \ncent in the preceding quarter. It was, \nhowever, \nan \nincrease \nof \n0.78 \npercentage point compared with the \ngrowth \nof \n0.72 \nper \ncent \nin \nthe \ncorresponding period of 2017. The oil \nsector was the main driver of the \ndecline as it contracted by 3.96 per \ncent in Q2 2018 compared with the \ngrowth of 14.11 and 3.53 per cent in \nthe \npreceding \nquarter \nand \nthe \ncorresponding period of 2017. The non-\noil sector, however, grew by 2.05 per \ncent compared with the growth of 0.76 \nand 0.45 per cent in the preceding \nquarter and the corresponding period \nof 2017, respectively. Growth in the \nnon-oil \nsector \nreflected \nthe \nperformance of construction (7.66%), \nservices (4.19%) and agriculture (1.19%), \nalthough the trade sector contracted \nby 2.14 per cent in the second quarter \nof 2018. \n \n \n \n \n \n \n \n \n \n \n \nI \nCBN Monetary Policy Review \n8 \nFigure 2.1 \nReal GDP Growth (%) 2016 Q1 – 2018 Q2 \n \nSource: NBS \n \n2.1 DOMESTIC ECONOMIC ACTIVITIES \nDuring the first half of 2018, real GDP \ngrowth was driven by activities in both \nthe oil and non-oil sectors. In the first \nquarter of 2018, the oil sector was the \nmain driver of growth, as it grew by \n14.77 per cent. This represents an \nincrease of 30.37 and 3.57 percentage \npoints relative to -15.60 and 11.20 per \ncent \nin \nthe \ncorresponding \nand \npreceding \nquarters \nof \n2017, \nrespectively. Average daily crude oil \nproduction rose to 2.0 million barrels per \nday (mbpd) in the first quarter of 2018, \nwhich was 0.05 and 0.25 mbpd higher \nwhen compared with the average \ndaily production of 1.95 and 1.75 mbpd \nin \nthe \npreceding \nand \nthe \ncorresponding \nquarters \nof \n2017, \nrespectively. \n \nGrowth \nof \nthe \nnon-oil \nsector \nmoderated to 0.76 per cent in the first \nquarter of 2018 from 1.45 per cent in \nthe \npreceding \nquarter \nof \n2017. \nHowever, compared with 0.72 per cent \nin \nthe \ncorresponding \nperiod, \nit \nincreased by 0.04 percentage point. \nActivities in the non-oil sector were \ndriven \nby \ntransportation \n(14.45%), \nfinancial \ninstitutions \nand \ninsurance \n(13.30%), utilities (8.01%), fishing (4.25%), \ncrop \nproduction \n(3.45%), \nmanufacturing \n(3.39%), \nand \nInformation & Communication (1.58%). \nThese compare with the growth rates of \n10.55, 0.67, 2.35, 5.49, 3.50, 1.36 and \n2.73 per cent, respectively, in the \ncorresponding quarter of 2017. \n \nIn the second quarter of 2018, the non-\noil sector was the major driver of \ngrowth. It expanded by 2.05 per cent \nup from 0.76 per cent in the preceding \nquarter and 0.45 in the corresponding \nperiod in 2017. Activities in the non-oil \nsector were driven by transportation \n(21.76%), \nInformation \n& \nCommunication \n(11.81%), \nutilities \n(8.91%), \nforestry \n(3.96%), \narts \n& \nentertainment (3.48%), solid minerals \n(2.86%), \naccommodation \n& \nfood \nservices \n(2.43%), \nadministrative \n& \nsupport services (2.07%), and crop \nproduction (1.49%). This compares with \ntheir respective growth rates of -6.11, -\n1.15, 23.98, 3.89, -0.62, 2.28, -4.05, -1.72 \nand 3.21 per cent in the corresponding \nquarter of 2017. \nThe decline in real GDP growth in Q2 \n2018 was largely due to the contraction \nin the oil sector by 3.95 per cent \ncompared with the growth of 14.11 \nand 3.53 per cent in the preceding \nquarter and the corresponding period \nof 2017, respectively. Average daily \ncrude oil production declined to 1.84 \nmillion barrels per day (mbpd) in the \nsecond quarter, which was 0.16 and \n0.03 mbpd lower when compared with \nCBN Monetary Policy Review \n9 \nthe daily average production of 2.0 \nand 1.87 mbpd in the preceding \nquarter and corresponding period of \n2017, respectively. \n \nFigure 2.2: \nNon-oil Sector Performance 2016Q1-2018Q1 \n \nSource: NBS \n \nFigure 2.3 \nPerformance of the Oil Sector 2016Q1-2018Q2 \n \nSource: NBS \n \n2.2 \nSectoral Analysis \nThis section reviews the economy’s \nsectoral \nperformance, \ntaking \ninto \naccount key institutional factors that \ncontributed to output growth in the \nreview period. \n \n2.2.1 Agriculture \n \nReal GDP growth in the agricultural \nsector in the first quarter of 2018 stood \nat 3.00 per cent, representing a decline \nof 1.23 and 0.39 percentage points \nwhen compared with 4.23 and 3.39 per \ncent \nin \nthe \npreceding \nand \ncorresponding \nquarters \nof \n2017, \nrespectively. The decline in the sector \nwas driven by crop production which \nfell to 3.45 per cent from 4.58 and 3.50 \nper \ncent \nin \nthe \npreceding \nand \ncorresponding quarters, respectively. In \naddition, \nthe \nlivestock \nsubsector \ncontracted by 1.85 per cent compared \nwith expansion of 0.19 and 1.72 per \ncent \nin \nthe \npreceding \nand \ncorresponding \nquarters \nof \n2017, \nrespectively. \nThe \ndecline \nin \nthe \nagricultural \nsector \nwas, \nhowever, \nmoderated by the growth of 4.25 and \n2.94 per cent in fishing and forestry, \ncompared with 4.05 and 2.83 per cent, \nrespectively, in the preceding quarter \nof 2017. The overall contribution of the \nsector to real GDP in the first quarter of \n2018 stood at 21.65 per cent, which \nwas lower than 26.13 per cent in the \npreceding quarter but slightly higher \nthan \n21.43 \nper \ncent \nin \nthe \ncorresponding quarter of 2017. \n \nIn the second quarter, real GDP \nagricultural output growth was 1.19 per \ncent, a decline of 1.91 and 1.92 \npercentage points when compared \nwith 3.00 and 3.01 per cent in the \npreceding \nquarter \nand \nthe \ncorresponding \nperiod \nof \n2017, \nrespectively. The decline in the sector \nwas driven by crop production which \nCBN Monetary Policy Review \n10 \nsignificantly \nfell \nto \n1.49 \nper \ncent \ncompared with 3.45 in the preceding \nquarter and 3.21 per cent in the \ncorresponding \nperiod \nof \n2017. \nIn \naddition, \nlivestock \nand \nfishing \ncontracted by 1.95 and 1.35 per cent, \nrespectively, \ncompared \nwith \nthe \ncontraction \nof \n1.85 \nper \ncent \nfor \nlivestock and expansion of 4.25 per \ncent for fishing in the preceding \nquarter. The decline in the agricultural \nsector was, however, moderated by \nthe growth of 3.96 per cent in forestry, \ncompared with 2.94 and .3.89 per cent \nin the preceding quarter and the \ncorresponding \nperiod \nin \n2017, \nrespectively. Overall, the contribution \nof the sector to real GDP in the second \nquarter of 2018 stood at 22.86 per cent \nper cent, which was higher than 21.65 \nper cent in the preceding quarter but \nslightly lower than 22.93 per cent in the \ncorresponding quarter of 2017. \n \nFigure 2.4 \nAgricultural Sector Contribution by Activity, \n2016Q1-2018Q2 \n \nSource: NBS \n \n \n \n2.2.1.2 Agricultural \nPolicies \nand \nInstitutional Support \nThe agricultural sector continued to \nbenefit from a number of policies, \nreforms and institutional support in the \nfirst half of 2018, which are highlighted \nin this section. \n \nThe Agricultural Credit and Guarantee \nScheme (ACGS) \nIn the first half of 2018, a total of 10,420 \nloans valued at ₦1.75 billion were \nguaranteed \nunder \nthe \nscheme \ncompared with 20,268 loans valued at \n₦2.82 billion in the second half of 2017, \nindicating decreases of 48.6 and 37.9 \nper cent, respectively, in the number \nand value of loans guaranteed. In the \nreview period, 17,977 loans valued at \n₦3.05 billion were repaid, compared \nwith 22,475 loans valued at ₦3.01billion \nrepaid in the second half of 2017. The \nperformance reflected an increase of \n1.33 per cent in the number but a \ndecrease of 20.01 per cent in the value \nof loans repaid. \n \nN200 Billion Commercial Agriculture \nCredit Scheme (CACS) \nUnder the scheme, the sum of ₦39.34 \nbillion was disbursed to 8 banks for 16 \nprojects in the first half of 2018 \ncompared with ₦50.59 billion disbursed \nto 11 banks for 34 projects in the \nsecond half 2017. A total of ₦17.01 \nbillion from 14 banks for 51 projects was \nrepaid in the review period, compared \nwith ₦28.825 billion from 18 banks for \n191 projects repaid in the second half \nof 2017. \nCBN Monetary Policy Review \n11 \n \nN220 Billion Micro, Small and Medium \nEnterprises \nDevelopment \nFund \n(MSMEDF) \nIn the first half of 2018, the sum of ₦4.77 \nbillion \nwas \ndisbursed \nto \n14,492 \nbeneficiaries through the Participating \nFinancial Institutions (PFIs) and State \nGovernments compared with N1.59 \nbillion disbursed in the corresponding \nperiod in 2017. Repayments during the \nperiod \namounted \nto \n₦3.48 \nbillion \ncompared with N15.52 billion repaid in \nthe corresponding period of 2017. \n \nAnchor Borrowers’ Programme (ABP) \nIn the first half of 2018, the sum of \n₦36.37 billion was disbursed to 155,732 \nfarmers in 34 States for the cultivation of \ncassava, cotton, groundnut, maize, \nrice, soya beans, wheat and the \nproduction of fish and poultry. This \nrepresented an increase of 189.34 per \ncent when compared with N12.57 \nbillion disbursed in the corresponding \nperiod of 2017. \n \nPaddy Aggregation Scheme (PAS) \nThe Paddy Aggregation Scheme is a \nshort term bridging facility introduced \nin 2017 to enable rice millers mop up \npaddy during the harvesting period. \nThe sum of ₦4.25 billion was released to \n3 banks for 3 projects in the first half of \n2018, compared with ₦30.37 billion \nreleased to 4 banks for 8 projects in the \nsecond half of 2017. This brings the total \ndisbursement under the scheme to \n₦34.62 billion as at end-June, 2018. The \nsum of ₦13.37 billion was repaid in the \nfirst half of 2018. \n \nNational Food Security Programme \n(NFSP) \nThe programme provides financing for \nlarge-scale agricultural enterprises to \nsupport government’s Strategic Grains \nReserves by mopping up excess grains \nto promote investments in modern \nagriculture. The sum of ₦4.04 billion was \ndisbursed to 2 banks for 3 projects in \nthe \nfirst \nhalf \nof \n2018, \nbringing \ncumulative \ndisbursements \nsince \ninception in 2017 to ₦43.99 billion for 11 \nprojects. In the review period, the sum \nof ₦2.19 billion was repaid, raising the \ncumulative \nrepayments \nunder \nthe \nscheme to ₦2.38 billion since inception. \nNon-oil \nExport \nStimulation \nFacility \n(NESF) \nThe NESF is aimed at improving access \nof exporters to finance for expansion \nand diversification of non-oil exports. \nThe Facility commenced in 2018. In the \nfirst half of 2018, six (6) projects were \nfinanced with ₦19.04 billion, while \nrepayments amounted to ₦5.04 billion. \n \nFederal Government of Nigeria (FGN) \nSpecial Presidential Fertilizer Initiative \n(PFI) \nThe FGN Special Presidential Fertilizer \nInitiative was introduced to increase \nthe production of fertilizer by local \nblending plants with a view to making \nthe commodity more affordable to \nNigerian farmers. In the review period, \nthe sum of N20.0 billion was released, \nbringing \nthe \ncumulative \namount \nreleased since its inception in 2017, to \nN25.0 billion. \n \nCBN Monetary Policy Review \n12 \n2.2.2 Industry \n \n \n2.2.2.1 Industrial Production \nIn the first quarter of 2018, industrial \nsector output grew by 8.75 per cent, up \nfrom 4.72 and -7.24 per cent in the \npreceding and corresponding quarters \nof 2017. The main drivers of growth in \nthe sector were: Solid minerals (26.29%), \ncrude \npetroleum \n& \nnatural \ngas \n(14.77%), and manufacturing (3.39%). \nThese were higher than their respective \ngrowth rates of -9.18, 11.20 and 0.14 \nper cent in the preceding quarter of \n2017. Also, they compare favourably \nwith their respective rates of 31.47, -\n15.60 \nand \n1.36 \nper \ncent \nin \nthe \ncorresponding \nquarter \nof \n2017. \nConsequently, the share of Industry in \noverall GDP improved to 19.58 per cent \nin the first quarter of 2018 from 16.35 per \ncent in the preceding quarter. \n \nIn the second quarter of 2018, output of \nthe industrial sector contracted by 1.56 \nper cent in contrast to the growth of \n8.75 and 2.04 per cent in the preceding \nquarter and the corresponding period \nof 2017, respectively. The main driver of \nthe contraction was crude petroleum (-\n3.95%), compared with growth of 14.77 \nand 3.53 per cent in the preceding \nquarter and the corresponding period \nof 2017, respectively. The contraction in \nthe industrial sector was, however, \nmoderated by respective growth of \n2.86 and 0.68 per cent in the solid \nminerals \nand \nmanufacturing \nsub-\nsectors, compared with 26.29 and 3.39 \nper cent in the preceding quarter of \n2018 and 2.28 and 0.64 per cent in the \ncorresponding \nperiod \nin \n2017. \nConsequently, \nthe \nshare \nof \nthe \nindustrial sector in overall GDP declined \nto 17.99 per cent from 19.58 and 18.55 \nper cent in the preceding quarter and \nthe corresponding period of 2017, \nrespectively. \n \nFigure 2.5 \n Industrial Sector’s Contribution by Activity, \n2016Q1-2018Q2 \n \nSource: NBS \n \n2.2.2.2 Industrial Policy and Institutional \nSupport \nIn the first half of 2018, a number of \nnew \nand \nexisting \nreforms \nand \nincentives were sustained to support \nthe performance of the sector. These \nare highlighted in this section. \nN300 \nBillion \nPower \nand \nAirline \nIntervention Fund (PAIF) \nDuring the review period, ₦18.74 billion \nwas disbursed to the following projects: \nKano Power Project (₦3.01 billion), \nAshaka Cement Limited Power Plant \n(₦6.75 billion), Azura Power Project \n(₦4.94 billion) and Paras Energy and \nNatural Resources Development Ltd. \n(₦4.05 billion). The sum of ₦12.35 billion \nwas repaid in the first half of 2018, \nCBN Monetary Policy Review \n13 \nbringing the cumulative repayment \nsince inception to ₦132.18 billion. \nNigerian \nElectricity \nMarket \nStabilization Facility (N213 billion) \nIn the first half of 2018, ₦38.53 billion \nwas disbursed to one (1) distribution \ncompany \n(DisCo), \nseventeen \n(17) \ngenerating companies (GenCos), six \n(6) gas companies (GasCos) and five \n(5) service providers. Also, ₦4.99 billion \nwas repaid in the review period, \nbringing the cumulative repayments to \n₦20.56 billion. \nReal Sector Support Facility (RSSF) \nIn the first half of 2018, ₦23.91 billion \nwas released to five (5) projects. Also, \n₦960.16 million was repaid in the review \nperiod, \nbringing \ncumulative \nrepayments to ₦1.76 billion. \nTextile Sector Intervention Facility \nDuring the review period, ₦19.1 billion \nwas disbursed to two (2) projects \nunder the scheme. There were no \nrepayments in the period, leaving the \ncumulative \nrepayments \nsince \ninception at ₦1.01 billion. \n \nNigeria Bulk Electricity Trading Payment \nAssurance Facility (NBET-PAF) \nDuring the review period, ₦248.40 \nbillion was disbursed to NBET Plc. \nCumulatively, the amount disbursed \nunder the programme stood at ₦358.09 \nat end-June, 2018. \n \nSmall \nand \nMedium \nEnterprises \nRestructuring and Refinancing Facility \n(SMERRF) \nDisbursement under the scheme was \ndiscontinued \nfollowing \nits \nreplacement with the Real Sector \nSupport Facility in December 2014. \nHowever, \nrepayments \nduring \nthe \nreview period amounted to ₦12.60 \nbillion, \nbringing \nthe \ncumulative \nrepayments to ₦113.261 billion. \n \n2.2.3 Construction and Trade \n \n2.2.3 1 Construction \nIn the first quarter of 2018, the \nconstruction sector contracted by 1.54 \nper cent in contrast to the growth of \n4.14 and 0.15 per cent in the preceding \nand corresponding quarters of 2017, \nrespectively. The share of Construction \nin total GDP, however, improved to \n4.04 per cent from 3.49 per cent in the \nfourth quarter of 2017. \nIn the second quarter of 2018, the \nconstruction sector grew significantly \nby 7.66 per cent up from -1.54 and 0.13 \nper cent in the preceding quarter and \nthe corresponding period of 2017, \nrespectively. Consequently, the share \nof construction in overall GDP in the \nsecond quarter of 2018 improved to \n4.51 per cent from 4.04 in the first \nquarter. \n \n2.2.3.2 Trade \nTrade sector real GDP contracted by \n2.57 per cent in the first quarter of 2018 \ncompared with the growth of 2.07 per \ncent in the preceding quarter and a \ncontraction of 3.08 per cent in the \ncorresponding period of 2017. The \nshare of Trade in total GDP, however, \nrose from 16.72 per cent in the fourth \nquarter of 2017 to 17.06 per cent in the \nCBN Monetary Policy Review \n14 \nfirst quarter of 2018. In the second \nquarter, the trade sector contracted by \n2.14 per cent, thus continuing the \ncontractions of 2.57 and 1.62 per cent \nwitnessed in the preceding quarter and \nthe corresponding period of 2017, \nrespectively. Consequently, the share \nof trade in total GDP declined from \n17.06 in the first quarter to 16.45 per \ncent in the second of 2018. \n \n2.2.4 Services Sector \nThe Service sector returned to growth \nfollowing three successive quarters of \ncontraction. The sector grew by 0.59 \nper cent in the first quarter of 2018, \ncompared with a contraction of 0.44 \nper cent in the preceding quarter. The \nsector grew by 0.98 per cent in the \ncorresponding quarter of 2017. Growth \nin the sector was driven by transport \n(14.45%), Finance & Insurance (13.30%), \nutilities (8.01%), other services (2.24%), \nInformation & Communication (1.58%), \nEducation \n(0.45%), \nand \nArts, \nEntertainment & Recreation (0.30%). \nHowever, \nthe \nsub-sectors \nthat \ncontracted during the period were: \nReal \nEstate \n(9.40%), \nProfessional, \nScientific & Technical Services (2.35%), \nAdministrative \n& \nSupport \nServices \n(0.52%), Public Admin (1.72%) and \nHealth & Social Services (0.37%). \nIn the second quarter of 2018, growth in \nthe services sector improved further to \n4.19 per cent, compared with 0.59 and \n-0.15 per cent in the preceding quarter \nand the corresponding period of 2017, \nrespectively. Growth in the sector was \ndriven \nby \nTransport \n(21.76%), \nInformation \n& \nCommunication \n(11.81%), \nUtilities \n(8.91%), \nArts, \nEntertainment & Recreation (3.48%), \nAccommodation and Food Services \n(2.43%), \nProfessional, \nScientific \n& \nTechnical \nServices \n(2.07%), \nand \nFinance & Insurance (1.28%). Some sub-\nsectors, \nhowever, \ncontracted \nincluding; Public Administration (5.21%), \nReal Estate (3.88%), Administrative & \nSupport \nServices \n(3.41%), \nand \nEducation (0.67). The share of the \nservices sector in overall GDP increased \nfrom 37.67 per cent in the first quarter \nto 38.19 per cent in the second quarter \nof 2018. \n \nFigure 2.6 \nServices Sub-Sector Contribution, 2016Q1-2018Q2 \n \nSource: NBS \n \n \n2.2.5 Oil Sector \n \nDuring the review period, the oil sector \nsustained \nits \nimprovement \nwhich \nbegan in mid-2017. This was driven by \ncontinued \nprice \nrecovery \nin \nthe \ninternational crude oil market as well as \nincreased \nproduction \nlargely \nattributable to sustained peace in the \nCBN Monetary Policy Review \n15 \nNiger \nDelta \nregion. \nConsequently, \naverage daily crude oil production rose \nto 2.0 million barrels per day (mbpd) in \nthe first quarter of 2018, which was 0.05 \nmbpd and 0.25mbpd higher than the \ndaily average production recorded in \nthe \npreceding \nand \ncorresponding \nquarters of 2017, respectively. In the \nsecond quarter of 2018, however, \naverage daily crude oil production \ndeclined to 1.84 million barrels per day \n(mbpd), which was 0.16 and 0.03 \nmbpd lower when compared with the \ndaily average production of 2.0 and \n1.87 mbpd in the preceding quarter \nand the corresponding period of 2017, \nrespectively. \n \nIn the review period, crude oil price \nfluctuated upwards mainly due to the \npulling out of the US from the Iranian \nnuclear \ndeal \nand \nthe \ncontinued \nimplementation of the agreement by \nthe Organization of the Petroleum \nExporting Countries (OPEC) and Non-\nOPEC producers to freeze oil output. As \na result, the price of Nigeria’s reference \ncrude, the Bonny Light 370API which \nwas at US$69.68 per barrel (PB) in \nJanuary 2018, fell to US$66.94pb in \nMarch and peaked at US77.64pb in \nMay. It, however, fell to US$75.38pb in \nJune, 2018. Overall, the average price \nof Bonny Light of US$71.45pb in the first \nhalf of 2018 was US$20.45pb above the \nFederal Government of Nigeria’s 2018 \nbudget benchmark of US$51.0pb. \n \n \n \n \n \nFigure 2.7 \nQuarter Oil Production (2016Q1-2018Q2) \n \nSource: Bloomberg \n \nFigure 2.8 \nMonthly Bonny Light Price, January – June 2018 \n60\n62\n64\n66\n68\n70\n72\n74\n76\n78\n80\nJan-18\nFeb-18\nMar-18\nApr-18\nMay-18\nJun-18\nUS$\n Source: Bloomberg \n \n \n \n \n \n \n \n \n \n \n \n \n \n \nCBN Monetary Policy Review \n16 \nTrade Tensions and Trade Wars \nInternational trade refers the exchange of goods and services across national \nboundaries. It is the most traditional form of business activity across national borders \nand has played a major role in shaping world history and development. \nInternational trade allows producers and distributors to seek out markets, products \nand services available or produce in foreign countries. Be it products, services or \ncomponents, industries and households acquire them because of cost advantage \nor in order to learn, in the case of firms, about advanced technical methods used \nin other production climes. The advantage lies in the transfer of technology to help \nreduce production cost, lower prices and in turn, induce more consumption, thus \nincreasing income, profitability and employment. Trade also enables the \nacquisition of resources that are not available in the home country. \n \nGrowth and external trade are associated with increase in jobs as external markets \nenable firms to invest in plant capacity that is beyond the domestic demand. \nSeveral studies find strong positive correlations between export intensity and wages \nas well as imports and improved consumption and standard of living. Thus, trade as \nthe traditional theory posits, generates mutual benefits of providing to consumers a \nvariety of goods and services, advanced technical methods of production for \nfirms, reduces cost of production and lower prices, increases profits and higher \nemployment. Given all these benefits, why then do countries sometimes resort to \nimposing restrictions on trade, thus generating trade tensions which sometimes \ndegenerate into trade wars?. Trade between and among nations is shaped by a \nnumber of factors which according to Seyoun (2009) include: the trade regime \n(import tariffs and quotas), exchange rate regime, efficiency enhancing \ngovernment policy, presence of entrepreneurial class and secured access to \ntransport and marketing services, among others. Principal among these factors is \nthe trade regime, which when changed has the likelihood of eliciting retaliatory \nresponse from trading partners because of its instant and disruptive effects. \n \nCountry participation in international trade is guided by its respective trade policy. \nTrade policies exist to protect national or group interest in international trade. A \nnation’s trade policy is often viewed as a component of its fiscal policy. In \ndesigning trade policy, account is taken of the bilateral and multilateral trade \nagreements that the country has entered into, and the policy is subject to revisions \nto accommodate developments in the domestic and international economy. \nWhere a party assesses its position as disadvantageous in the trade relationship \nbecause current outcomes are not mutually or fairly beneficial to the parties, \nchanges are bound to be introduced and most often in the trade regime. \nPoliticians often rationalize tariffs and other trade interventions by claiming that \nthey will help boost exports and reduce trade deficit. Their argument is that since \nnet exports are a core component of GDP, any policy that reduces the trade \nCBN Monetary Policy Review \n17 \ndeficit should, other things equal, serve to boost economic growth. This is, however, \nnot always the case with an increase in tariffs. For a central bank that targets or \nhave an eye on inflation, the inevitable rise in domestic prices sparked off by tariff \nincrease would trigger the Bank to raise interest rates in order to contract money \nsupply, sending aggregate demand downward. Thus, a key challenge is in how \nchanges in the trade regime are introduced: would it be arbitrary, negotiated, \ngradual or instant? Where the actions are taken arbitrarily or non-negotiated, they \nare bound to generate tension and counter responses and, when not properly \nhandled, could result in a trade war. \n \nTrade Tensions and Wars \nA trade war is usually an outcome of protectionism which occurs when one \ncountry raises tariffs on another country’s imports thus prompting a retaliation from \nthe second country by way of raising tariffs on the imports of the first country. It \nusually starts when country 1 adjudges the trade practices of country 2 as unfair \nand in order to correct the anomaly raise tariffs or introduce quotas. The counter \nresponse and the continuing tit-for-tat degenerates into a trade war. A trade war \nthat begins in one sector can spread to other sector because countries produce \nand trade goods and services they have comparative advantage. Similarly in a \nglobalized world, a trade war that begins between two countries can affect other \ncountries that were not initially involved in the dispute. \n \nA more connected world implies a higher incidence of trade disputes and a \nbroadening of international economic tensions to include matters of national \nsecurity and intellectual property (IP). Until recently, incidences of high tariffs were \nrare and transient following the framework of negotiation provided under the GATT \nand later WTO. This was because of numerous forces that push against substantial \nincrease in tariff. These forces included: the welfare costs of protectionism, vertical \nintegration of global supply-chain, threat of reciprocity and development of \ninternational trade institutions as umpires and custodians of commitments to trade \nagreements. Following the global financial crisis of 2008/2009, there have, been \ngrowing anti-globalization sentiments. Recent developments indicate that trade \nissues will continue to generate attention given trade’s economic importance and \nthe increasing concerns expressed against the unevenness of the benefits of \nglobalization as well as the resultant shift in voter attitudes towards a more \nnationalistic or protectionist agenda., especially in the advanced economies. \n \nThe Recent US-China Trade Tension \nTensions between the United States and China regarding bilateral trade intensified \nin recent times. The United States announced in early March 2018 that it would \nimpose tariffs on import of steel and aluminum products. The tariffs were not \ntargeted exclusively at any particular country, but given China’s volume of exports \nCBN Monetary Policy Review \n18 \nof steel and aluminum to the United States, it was obvious that the country will \nsignificantly be affected by the measures. In response, China announced its own \ntariffs on about $3 billion worth of American goods. On April 3, the United States \nannounced that it would impose tariffs on the exports of about 1,300 Chinese \ngoods, worth about $50 billion, in “response to China’s unfair trade practices \nrelated to the forced transfer of U.S. technology and intellectual property.” \nFollowing this, China again promptly responded with tariffs on 106 American \nproducts—mostly agricultural products, automobiles, aircraft and chemicals—\nwhose export value to China total about $50 billion. \n \nAll these developments remain at the level of trade tension because the proposed \ntariffs from both sides have not yet gone into effect. The tariffs could completely be \nrescinded if negotiations by both sides reach agreement on ways to settle the \ntrade tensions between them. \n \nEconomic consequences and Implications for Monetary policy \nHigher tariffs hurt the economy most directly and quickly through higher prices of \nimported goods. Tariffs act much like a tax increase, weakening the purchasing \npower of consumers; if households need to spend more on imported goods, then \nthey have less income to spend on other things. Exports also suffer as the tit-for-tat \ntariffs imposed by trading partners cause consumers and businesses to purchase \nwhat they need domestically or from competing nations that can now provide the \ngoods more cheaply. Where the political authority has strong control over the \neconomy, they can recommend to the citizens not to buy goods from the \ncompeting country. Higher tariffs always weigh on the profitability of multinationals \nand their stock prices. These occurs via weaker overseas sales. It also creates a risk-\noff environment in global financial markets. In the longer run, the reduction in trade \naffects productivity growth, as the benefits of comparative advantage are \ndiminished. \n \nThe tit-for-tat in tariffs between or among countries breeds uncertainty, with fallout \non business and investor confidence, which would surely be substantial as they \ncontemplate the broader geo-political implications of the trade war. Businesses are \nless likely to make significant investment decisions. In other words, such situations \nhold down investment growth with deleterious effect on output growth, \nemployment and citizens’ welfare. \n \nIn today’s world where the manufacture of many goods involves multiple cross-\nborder movements of components from different economic climes with the final \ngood only a product of assembly of these components, higher tariffs on final \nproducts may only lead to a shift in the global supply chain. This is because since \nthe multinational companies have no idea on how long the tariffs will remain in \nCBN Monetary Policy Review \n19 \nplace, and since there are many other places in the world not subject to higher \ntariffs, production may shift to where it is cheaper to make most of these goods. \nThis, however, depends on how conducive is the business environment. Sentiment is \nvery fickle; it is fine, until it is not. There is no telling when sentiment will swing \nsignificantly, but when it does, the economic pains intensify quickly. \n \nAlthough Nigeria may not be directly involved in the trade dispute/war between \nthe U.S. and the E.U, China and member countries of NAFTA, the enforcement of \ntariffs and counter tariffs by the parties may have spillover effects on other \neconomies, especially those with strong trading ties with these countries. In \naddition, the U.S. being the leading economy in the world and the US dollar as the \nworld’s dominant trading currency, increase in tariff by the US would certainly lead \nto higher US domestic prices. For this reason, the Fed would raise rates sharply to \nhead off inflationary pressures. The rise in interest rates would have two major \neffects. First is the reversal of capital flow as returns to capital will now be higher in \nthe U.S, which is also considered a safer haven relative to the emerging markets \nand developing economies. Second is the increase in foreign currency liabilities \narising from the re-pricing of foreign loans as interest rates rise. \n \nIn addition, while the effects of any tariffs on output and inflation may take time to \nmaterialize, the falls in equity prices in response to the US announcement to impose \na tariff on steel and aluminum, and prevailing uncertainty on the scope of \nretaliatory measures, have already contributed to tighter financial conditions. And \nby fuelling uncertainty among market participants, fears of a “trade war” have \nadded to the volatility already witnessed earlier this year in equity markets. None of \nthis supports growth and employment. Therefore, given the dependence of \ncommodity exporting economies on improvements in commodity prices which is \ndirectly related to global growth, any negative growth and employment effects of \nhigher tariffs would mean lower demand for commodities, lower prices and \nresultant decline in foreign exchange earnings for such economies, increase in \nexchange rate pressure, currency depreciation and the pass-through to domestic \ninflation. \n \nIn conclusion, high tariffs may look politically expedient, especially when a country \nis confronted with a high fiscal or trade deficits. However, the tendency of such \nactions eliciting retaliatory measures from trading partners makes the policy of \nunilateral increase in tariffs no-win game in the long-run. Moderate and negotiated \nsolutions remain the way out given the political economy of trade’s distributional \neffects, supply-chain issues and the unanticipated spillover of retaliatory measures. \n \n \nCBN Monetary Policy Review \n20 \nCBN Monetary Policy Review \n21 \nCHAPTER THREE \n \n3.0 \nPRICE DEVELOPMENTS \nuring \nthe \nreview \nperiod, \ninflationary pressure receded, \nlargely on account of the \nBank’s sustained tight monetary policy \nstance. \nAll \nmeasures \nof \ninflation \nnamely, headline, core and food, \nmaintained a downward trajectory, \nalthough, headline inflation continued \nto trend above the upper limit of the \nBank’s target range of 6 - 9 per cent. \nDomestic \nprice \ndevelopments \ngenerally reflected the interplay of \nboth supply and demand-side forces. \nOn the supply side, the pressure in the \nforeign exchange market abated, with \nfavourable impact on the domestic \nprice level in the review period. The \nnaira strengthened in all segments of \nthe market, reflecting the impact of \nrecent reforms and interventions by the \nBank, including the intensification of \nmeasures to encourage capital inflow \nand improve liquidity in the foreign \nexchange market. \n \nPrimarily, the significant improvement in \naccretion to external reserves on the \nback of the price recovery in the \nglobal crude oil market, helped to \nsupport the appreciation of the naira. \nIn addition, the Bank sustained the \nimplementation of existing measures, \nincluding the Investors’ & Exporters’ \nwindow, restriction of access to foreign \nexchange for some 41 items, the use of \nBank Verification Number (BVN) in BDC \ntransactions, and the sale of foreign \nexchange to BDCs by the Bank and \nInternational Money Transfer Operators \n(IMTOs). The Bank also intensified its \nexisting policy on repatriation of export \nproceeds as well as the return to the \nBank of unutilized foreign exchange \nsourced from CBN auctions. \n \nOn \nthe \ndemand-side, \nprice \ndevelopments were also influenced by \nactivities in the money market, where \nrates fluctuated widely outside the \nStanding Facilities corridor with no clear \ndirection, indicating a high degree of \nuncertainty \nin \nthe \nmarket. \nThe \nuncertainties primarily were as a result \nof low fiscal activities as reflected in the \ndelayed Federal Government budget \nfor \n2018, \ngovernment’s \nrecent \npreference for borrowing from the \ninternational \nmarket, \ndelays \nin \nFederation \nAccount \nAllocation \nCommittee (FAAC) disbursements and \nimplementation of additional measures \nto manage demand pressure in the \nforeign exchange market. The major \nsources of liquidity during the period \nincluded: continued implementation of \nthe 2017 capital budget, Joint Venture \nCash (JVC) call payments, CBN real \nsector interventions and maturing CBN \nbills and government securities. These \ndevelopments made the Monetary \nPolicy Committee (MPC) to sustain its \nmonetary \npolicy \ntightening \nstance \nduring the period, in order to moderate \ninflationary pressures. \n \n3.1 \n Trends in Inflation \nHeadline, core and food inflation \ntrended downwards in the period \nD \nCBN Monetary Policy Review \n22 \nunder review. These three measures of \nthe consumer price index (CPI) stood \nat 248.4, 235.4 and 263.3 in January \n2018 compared with 260.5, 246.1 and \n278.3, \nrespectively, \nin \nJune \n2018. \nAccordingly, food inflation (year-on-\nyear) decreased by 5.94 percentage \npoints from 18.92 per cent in January to \n12.98 per cent in June 2018. Also, core \ninflation fell by 1.70 percentage points \nfrom 12.09 per cent in January to 10.39 \nper cent in June 2018. Consequently, \nheadline inflation declined by 3.90 \npercentage points from 15.13 per cent \nin January to 11.23 per cent in June \n2018 (Figure 3.1 and Table 3.1). The \nmajor driver of the overall moderation \nin consumer prices during the period \nwas food inflation, even though the \ncore measure also moderated (Table \n3.4). \n \nTable 3.1: \nInflation Rates, January – June 2018 \nCPI\nY-on-Y 12MMA\nCPI\nY-on-Y\n12MMA\nCPI\nY-on-Y\n12MMA\nJan 2108 248.35 15.13 16.22 235.42 12.09\n13.01 263.29 18.92\n19.62\nFeb 2108 250.32 14.33 15.93 237.20 11.71\n12.67 265.52 17.59\n19.52\nMar 2108 252.41 13.34 15.60 239.19 11.18\n12.33 267.91 16.08\n19.29\nApr 2108 254.52 12.48 15.20 241.26 10.92\n12.02 270.35 14.80\n18.89\nMay 2108 257.29 11.61 14.79 243.61 10.71\n11.83 273.94 13.45\n18.36\nJun 2108 260.47 11.23 14.37 246.12 10.39\n11.65 278.25 12.98\n17.75\nHeadline Inflation\nCore Inflation\nFood Inflation\n \nSource: NBS \n \n \n \n \n \n \n \n \n \nFigure 3.1: \nHeadline, Core and Food Inflation Rates (January \n– June 2018) \n \nSource: NBS \n \n3.1.1 Headline Inflation \nThe major components of headline \ninflation continued to decrease during \nthe first half of the year, as a result of \nthe \ndownward \ntrend \nin \ndomestic \nprices. The key components that drove \nthe decline were Food and Non-\nAlcoholic Beverages, which decreased \nfrom 9.99 per cent in January to 7.02 \nper cent in June, 2018. This was \nfollowed by housing, water, electricity, \ngas and other fuels, decreasing from \n1.52 to 1.25 per cent during the period \n(Table 3.2 and Figure 3.4). \n \nThe moderation in inflation was still \ndriven by the base effect which was \ngradually wearing-off, coupled with \nsustained \nstability \nin \nthe \nforeign \nexchange market following intensified \nimplementation \nof \nmeasures \nto \nmanage the foreign exchange market \nincluding the Investors’ and Exporters’ \nwindow. Other contributory factors \nwere the sustained tight monetary \npolicy stance of the Bank and weak \nCBN Monetary Policy Review \n23 \naggregate demand as reflected in low \nfiscal activity during the period. \n \nTable 3.2 \nMajor Components of Headline Inflation ((Y-on-\nY), January - June 2018 \nHeadline\nFood & \nNon-\nAlcoholic \nBev.\nAlcoholi\nc Bev. \nTobacco \n& Kola\nClothing \n& \nfootwear\nHousing, \nWater, \nElect.Gas & \nOther Fuel\nFurnishing\ns, \nHousehold \nEquip &HH \nMaint. \nHealth Transport Education\nJan 2018\n15.13\n9.99\n0.08\n1.10\n1.52\n0.61\n0.30\n0.78\n0.39\nFeb 2018\n14.33\n9.34\n0.08\n1.07\n1.44\n0.60\n0.30\n0.77\n0.38\nMar 2018\n13.34\n8.58\n0.08\n1.01\n1.35\n0.57\n0.29\n0.74\n0.37\nApr 2018\n12.48\n7.93\n0.08\n0.94\n1.30\n0.54\n0.28\n0.72\n0.36\nMay 2018\n11.61\n7.26\n0.08\n0.87\n1.25\n0.52\n0.27\n0.69\n0.35\nJun 2018\n11.23\n7.02\n0.08\n0.82\n1.25\n0.49\n0.26\n0.67\n0.34\nChange btw \nJan & Jun. \n2018\n-3.90\n-2.97\n0.00\n-0.29\n-0.28\n-0.12\n-0.04\n-0.11\n-0.05\n \nSource: NBS \n \nFigure 3.2 \nMajor Components of Headline Inflation (Y-on-Y), \nJanuary – June 2018 \n \nSource: NBS \n \nOn a month-on-month basis, headline \ninflation increased from 0.80 per cent in \nJanuary to 1.24 per cent in June, 2018. \nThe major components that drove the \nmonth-on-month \nheadline \ninflation \nwere the prices of food and non-\nalcoholic beverages, which rose from \n0.48 per cent in January to 0.86 per \ncent in June; and Housing, Water, \nElect. Gas & Other Fuel, from 0.10 per \ncent in January to 0.13 per cent in \nJune, 2018 (Table 3.3 and Figure 3.5). \nThe phenomenon of moderating year-\non-year \nheadline \ninflation \nbeing \nexperienced alongside rising month-on-\nmonth inflation rate suggests that the \nbase effect driving the moderation was \ngradually wearing-off. Consequently, \npolicies to address the likely threat of \ninflation \nresurgence \nneed to start \nkicking in. \n \nTable 3.3 \nMajor Components of Headline Inflation (M-on-\nM), January - June 2018 \nHeadline\nFood & \nNon-\nAlcoholic \nBev.\nAlcoholi\nc Bev. \nTobacco \n& Kola\nClothing \n& \nfootwear\nHousing, \nWater, \nElect.Gas & \nOther Fuel\nFurnishing\ns, \nHousehold \nEquip &HH \nMaint. \nHealth Transport Education\nJan 2018\n0.80\n0.48\n0.01\n0.05\n0.10\n0.03\n0.02\n0.06\n0.03\nFeb 2018\n0.79\n0.46\n0.01\n0.06\n0.11\n0.03\n0.02\n0.05\n0.03\nMar 2018\n0.84\n0.49\n0.01\n0.06\n0.12\n0.03\n0.02\n0.05\n0.03\nApr 2018\n0.83\n0.50\n0.01\n0.06\n0.11\n0.03\n0.02\n0.05\n0.03\nMay 2018\n1.09\n0.72\n0.01\n0.06\n0.12\n0.04\n0.02\n0.06\n0.03\nJun 2018\n1.24\n0.86\n0.01\n0.07\n0.13\n0.04\n0.02\n0.06\n0.03\nChange btw \nJan & Jun. \n2018\n0.44\n0.38\n0.00\n0.01\n0.03\n0.00\n0.01\n0.00\n0.01\n \nSource: NBS \n \nFigure 3.3 \nMajor Components of Headline Inflation (M-on-\nM), January – June 2018 \n \nSource: NBS \n \n3.1.2 Food Inflation \nFood inflation (year-on-year) fell from \n18.92 per cent in January to 12.98 per \ncent in June 2018, a decrease of 5.94 \npercentage \npoints. \nThe \nkey \ncomponents that drove the decrease \nwere \nprocessed \nfood \nand \nfarm \nproduce. The price of processed food \nCBN Monetary Policy Review \n24 \nfell by 3.06 percentage points from 9.46 \nto 6.40 per cent and that of farm \nproduce by 2.89 percentage points \nfrom 9.46 per cent in January to 6.57 \nper cent in June 2018. The decrease in \nthe price of processed food was \naccounted for by the fall in the prices \nof meat, fish & sea food, and oil & fat \nby 0.62, 0.56 and 0.38 percentage \npoint, respectively. Also, the decrease \nin the price of farm produce was \ntraceable to the fall in the prices of \nyam, \npotatoes \n& \nother \ntubers, \nvegetables and fruits by 0.76, 0.38 and \n0.11 percentage point, respectively. \nThe policy drivers of this moderation are \ntraceable to the base effect, the \nfavourable \nimpact \nof \nCBN’s \ninterventions on food production and \nimproved access to foreign exchange \nwhich help counteract the effect of \nfarmer-herdsmen \nconflicts. \nOther \ncomplimentary \nfactors \nwere \nthe \nimproved accretion to foreign reserves, \nand sustained tight monetary policy \nstance of the Bank. \n \nTable 3.4 \nMajor Components of Food Inflation (Y-on-Y), \nJanuary - June 2018 \nFOOD Processed \nFood\nMeat\nFish \n& \nSea \nFood\nMilk, \nCheese \n& Eggs\nOil & \nFats\nSugar, \nJam, \nHoney, \netc.\nFarm \nProduce Fruits Vegatables\nYam, \nPotatoes \n& other \ntubers\nJan 2018\n18.92\n9.46\n1.51\n1.88\n0.43\n1.14\n0.35\n9.46\n0.55\n1.66\n2.31\nFeb 2018\n17.59\n8.72\n1.36\n1.78\n0.41\n1.07\n0.33\n8.87\n0.52\n1.59\n2.10\nMar 2018\n16.08\n7.67\n1.20\n1.64\n0.37\n1.00\n0.30\n8.41\n0.50\n1.50\n1.89\nApr 2018\n14.80\n7.15\n1.08\n1.52\n0.34\n0.92\n0.27\n7.64\n0.48\n1.44\n1.71\nMay 2018 13.45\n6.55\n0.96\n1.39\n0.29\n0.82\n0.25\n6.90\n0.43\n1.35\n1.59\nJun 2018\n12.98\n6.40\n0.89\n1.33\n0.26\n0.75\n0.24\n6.57\n0.44\n1.29\n1.55\nChange \nbtw Jan & \nJun. 2018\n-5.94\n-3.06\n-0.62 -0.56\n-0.18\n-0.38\n-0.12\n-2.89\n-0.11\n-0.38\n-0.76\n \nSource: NBS \n \n \n \n \n \n \nFigure 3.4 \nMajor Components of Food Inflation \n(Y-on-Y), January – June 2018 \n \n \nContrary to the decreasing year-on-\nyear trend, food inflation on a month-\non-month \nbasis \nrose \nby \n0.74 \npercentage point from 0.83 per cent in \nJanuary to 1.57 per cent in June 2018. \nThe price of processed food rose by \n0.61 percentage point from 0.32 per \ncent in January 2018 to 0.93 per cent in \nJune 2018. Similarly, the price of farm \nproduce rose by 0.13 percentage point \nfrom 0.51 to 0.64 per cent in the same \nperiod. Thus, the 0.74 percentage point \nincrease in food inflation was largely \ndue to the increase in the price of \nprocessed food. The key driver of the \nincrease \nin \nthe \nprocessed \nfood \ncategory was fish and sea food which \nrose by 0.06 percentage point. \n \n \n \n \n \n \n \n \n \n \n \n \n \nCBN Monetary Policy Review \n25 \nTable 3.5 \nMajor Components of Food Inflation (M-on-M), \nJanuary – June 2018 \nFOOD Processed \nFood\nMeat\nFish \n& \nSea \nFood\nMilk, \nCheese \n& Eggs\nOil & \nFats\nSugar, \nJam, \nHoney, \netc.\nFarm \nProduce Fruits Vegatables\nYam, \nPotatoes \n& other \ntubers\nJan 2018\n0.83\n0.32\n0.06\n0.09\n0.02\n0.05\n0.01\n0.51\n0.03\n0.10\n0.02\nFeb 2018\n0.78\n0.44\n0.07\n0.08\n0.02\n0.05\n0.02\n0.34\n0.03\n0.09\n0.03\nMar 2018\n0.82\n0.32\n0.08\n0.09\n0.02\n0.06\n0.02\n0.50\n0.04\n0.10\n0.02\nApr 2018\n0.91\n0.58\n0.08\n0.10\n0.02\n0.06\n0.02\n0.34\n0.03\n0.10\n0.11\nMay 2018\n1.33\n0.81\n0.11\n0.13\n0.02\n0.07\n0.02\n0.52\n0.05\n0.14\n0.20\nJun 2018\n1.57\n0.93\n0.12\n0.15\n0.02\n0.07\n0.03\n0.64\n0.05\n0.15\n0.21\nChange \nbtw Jan & \nJun. 2018\n0.74\n0.61\n0.06\n0.06\n0.00\n0.02\n0.01\n0.13\n0.02\n0.05\n0.19\n \nSource: NBS \n \nFigure 3.5 \nMajor Components of Food Inflation (M-on-M), \nJanuary – June 2018 \n \nSource: NBS \n \n3.1.3 Core Inflation \nCore inflation (year-on-year) fell from \n12.09 per cent in January 2018 to 10.39 \nper cent in June 2018, a decrease of \n1.70 \npercentage \npoints. \nThe \nperformance was driven by processed \nfood (1.67 percentage points), Clothing \n& Footwear (0.42 percentage point), \nTransportation (0.18 percentage point), \nand \nEducation \n(0.11 \npercentage \npoint). All other components of core \ninflation increased in the reviewed \nperiod (Table 3.6 and Figure 3.8). The \ndecline \nin \nProcessed \nFood \nand \nClothing & Footwear prices was due to \nthe sustained stability in utility prices, \nthe base effect as well as the impact of \nstability of the exchange rate on \naccount \nof \nthe \nBank’s \nforeign \nexchange \nmanagement \nmeasures, \nparticularly the establishment of the I&E \nwindow and improved funding of \nBDCs. In addition, the weakening of \naggregate demand reflected in the \naccumulation of salary arrears and \ncontractor debts in some states also \ncontributed to lower prices. \n \nTable 3.6 \nMajor Components of Core Inflation \n(Y-on-Y) January – June. 2018 \nCore\nProcess\ned Food\nNon-\nAlcoholic \nBeverages\nAlcoholic \nBev. \nTobacco & \nKola \nClothing \n& \nfootwear\nHousing,Wate\nr, Elect.Gas & \nOther Fuel\nFurnishings, \nHousehold \nEquip &HH \nMaint.\nHealth\nTransport\nCommunication Recreation \n& culture Education\nRestaur\nant & \nHotels\nMisc \nGoods & \nServices\nJan 2018 12.09 5.59\n0.21\n0.11\n1.63\n0.66\n0.94\n0.50\n1.17\n0.02\n0.08\n0.63\n0.23\n0.33\nFeb 2018 11.71 5.34\n0.20\n0.11\n1.60\n0.59\n0.93\n0.50\n1.16\n0.03\n0.07\n0.62\n0.23\n0.33\nMar 2018 11.18 5.04\n0.19\n0.11\n1.52\n0.52\n0.90\n0.49\n1.14\n0.03\n0.07\n0.61\n0.24\n0.33\nApr 2018 10.92 4.85\n0.18\n0.11\n1.45\n0.52\n0.88\n0.50\n1.13\n0.03\n0.06\n0.62\n0.25\n0.33\nMay 2018 10.71 4.67\n0.17\n0.11\n1.38\n0.53\n0.88\n0.52\n1.12\n0.03\n0.06\n0.63\n0.27\n0.35\nJun 2018 10.39 3.92\n0.15\n0.11\n1.21\n1.82\n0.74\n0.41\n0.99\n0.03\n0.06\n0.52\n0.17\n0.25\nChange \nbtw Jan & \nJun. 2018\n-1.70 -1.67 -0.06\n0.00\n-0.42\n1.17\n-0.20\n-0.09 -0.18\n0.01\n-0.02\n-0.11 -0.06 -0.08\n \nSource: NBS \n \nFigure 3.6 \nMajor Components of Core Inflation \n(Y-on-Y) January – June 2018 \n0.00\n2.00\n4.00\n6.00\n8.00\n10.00\n12.00\n14.00\nJan\n2018\nFeb\n2018\nMar\n2018\nApr\n2018\nMay\n2018\nJun\n2018\nCore\nProcessed Food\nNon-Alcoholic Beverages\nAlcoholic Bev. Tobacco &\nKola\nClothing & footwear\nHousing,Water, Elect.Gas\n& Other Fuel\nFurnishings, Household\nEquip &HH Maint.\nHealth\nTransport\nCommunication\nRecreation & culture\nEducation\nRestaurant & Hotels\nMisc Goods & Services\n \nOn a month-on-month basis, core \ninflation, however, increased by 0.35 \npercentage point from 0.68 per cent in \nJanuary to 1.03 per cent in June 2018. \nHousing, Water, Elect. Gas & Other Fuel \ncomponent remained the major driver \nof the rise in core inflation, increasing \nfrom -1.17 per cent in January to 0.17 \nCBN Monetary Policy Review \n26 \nper cent in June 2018. This was followed \nby \nFurnishing \nand \nHousehold \nEquipment \n& \nmaintenance \n(0.14 \npercentage point) (Table 3.7 and \nFigure 3.9). \n \nTable 3.7 \nMajor Components of Core Inflation \n(M-on-M) January – June. 2018 \nCore\nProcessed \nFood\nNon-\nAlcoholic \nBeverages\nAlcoholic \nBev. \nTobacco \n& Kola \nClothing \n& \nfootwear\nHousing,\nWater, \nElect.Gas \n& Other \nFuel\nFurnishings, \nHousehold \nEquip &HH \nMaint.\nHealth Transport Communic\nation\nRecreation \n& culture\nEducation Restaurant \n& Hotels\nMisc \nGoods & \nServices\nJan 2018 0.68\n0.84\n0.01\n0.01\n0.17\n-1.17\n0.15\n0.12\n0.18\n0.00\n0.00\n0.14\n0.11\n0.11\nFeb 2018 0.75\n0.86\n0.01\n0.01\n0.18\n-1.12\n0.15\n0.12\n0.18\n0.00\n0.00\n0.13\n0.11\n0.11\nMar 2018 0.84\n0.08\n0.02\n0.02\n0.13\n0.33\n0.06\n0.02\n0.12\n0.01\n0.01\n0.04\n-0.01\n0.00\nApr 2018 0.87\n0.31\n0.01\n0.01\n0.09\n0.19\n0.05\n0.03\n0.08\n0.00\n0.01\n0.04\n0.01\n0.02\nMay 2018 0.98\n0.40\n0.01\n0.01\n0.09\n0.20\n0.05\n0.04\n0.08\n0.00\n0.01\n0.05\n0.01\n0.02\nJun 2018 1.03\n0.33\n0.01\n0.01\n0.08\n0.17\n0.28\n0.02\n0.07\n0.00\n0.01\n0.04\n0.00\n0.01\nChange \nbtw Jan & \nJun. 2018\n0.35\n-0.51\n0.00\n0.00\n-0.09\n1.34\n0.14\n-0.10\n-0.12\n0.00\n0.00\n-0.10\n-0.11\n-0.11\n \nSource: NBS \n \nFigure 3.7 \nMajor Components of Core Inflation (M-on-M) \nJanuary – June 2018 \n-1.50\n-1.00\n-0.50\n0.00\n0.50\n1.00\n1.50\nJan\n2018\nFeb\n2018\nMar\n2018\nApr\n2018\nMay\n2018\nJun\n2018\nCore\nProcessed Food\nNon-Alcoholic Beverages\nAlcoholic Bev. Tobacco &\nKola\nClothing & footwear\nHousing,Water, Elect.Gas\n& Other Fuel\nFurnishings, Household\nEquip &HH Maint.\nHealth\nTransport\nCommunication\nRecreation & culture\nEducation\nRestaurant & Hotels\n \n3.1.4 Seasonally-Adjusted Inflation \nThe actual and seasonally-adjusted \nmeasures of headline inflation both \ntrended downwards in the review \nperiod, continuing the trend of decline \nwitnessed towards the end of the \nsecond half of 2017 (Table 3.8 and \nFigure 3.10). Actual headline inflation \ncontinued to reflect the declining \ngeneral price level in the economy, \ntrending below the seasonally-adjusted \nmeasure throughout the first half of \n2018. The overall downward trend in \nboth measures could be attributed to \nthe weakening of aggregate demand \nreflected in the accumulation of salary \narrears and non-payment of contractor \ndebt in some states. The incidence of \nweakening \naggregate \ndemand \nengendered \na \nweak \nelasticity \nof \ninflation to seasonal factors such as the \nusual \nincrease \nin \nexpenditure \nassociated with festive periods. \n \nTable 3.8 \nActual and Seasonally Adjusted Headline \nInflation January – June 2018 \nDate\nInflation\nSA Inflation\nJan-18\n15.13\n16.22\nFeb-18\n14.33\n15.93\nMar-18\n13.34\n15.60\nApr-18\n12.48\n15.20\nMay-18\n11.61\n14.79\nJun-18\n11.23\n14.37\n \nSource: NBS \n \nFigure 3.8 \nActual and Seasonally Adjusted Headline \nInflation January – June 2018 \n0.00\n5.00\n10.00\n15.00\n20.00\nInflation\nSA Inflation\n \nSource: NBS \n \n3.2 \nKey \nFactors \nthat \nInfluenced \nDomestic Prices \nInflation \ndevelopments \nduring \nthe \nreview period were primarily influenced \nCBN Monetary Policy Review \n27 \nby \ncost-push, \ndemand-pull \nand \nmoderating factors. The key highlights \nof these factors include: exchange rate \nstability, the sustained tight monetary \npolicy stance of the Bank, continued \nintervention \nby \nthe \nBank \nin \nthe \nagricultural sector, and relative stability \nin energy prices. Others included: the \nliquidity effects of the monetisation of \nimproved \nexport \nearnings, \nthe \npayment \nof \nsome \noutstanding \nobiligations by the Government; and \nherdsmen-farmer crisis in some parts of \nthe country as well as production and \ndistribution challenges associated with \ninsurgency in the north east region of \nthe country. \n \n3.2.1 Demand-side Factors \nThe downward trajectory in headline \ninflation was driven amongst others by \nthe tight monetary policy stance of the \nBank, coupled with a number of \nreforms adopted in managing the \nforeign exchange market. These factors \nhelped \ncurb \nexchange \nrate \ndepreciation and rein-in inflationary \npressures. Also, stable energy prices \ncontributed to reducing inflationary \npressures. During the review period, \nagregate demand remained weak \nowing to oustanding contractor debt, \nworkers’ \nsalaries \nand \npension \nabligations, particularly at the sub-\nnational levels of government. Overall, \nthe net effect of these factors was the \nsignificant and steady reduction in \ninflationary pressures. \n \n \n \n3.2.2. Supply-Side Factors \nThere were basically three groups of \nfactors that led to the observed \nmoderation in inflation during the \nperiod. These were factors related to: \n(i) \nimproved \nsupply \nof \nforeign \nexchange; (ii) improved productivity in \nthe economy; and (iii) stability in \nadministered or utilities prices. The \nfactors related to the improved supply \nof foreign exchange included: the \nsignificant improvement in accretion to \nexternal reserves due to the recovery in \ncrude oil prices; activities at the \nInvestors’ & Exporters’ window; and \nsustained \nrestriction \nof \naccess \nto \nforeign exchange for 41 items, amongst \nothers. The production related factors \nincluded: the continued intervention by \nthe CBN in the real sector; the Federal \nGovernment of Nigeria (FGN) Special \nPresidential \nFertilizer \nInitiative; \nand \nactivities of the National Food Security \nCouncil. On administered prices, the \nfactors included: improved availability \nof petroleum products and stable \nenergy prices. All these supply side \nforces helped to moderate inflationary \npressure during the first half of 2018. \n \n3.2.3 Moderating Factors \nThe moderating factors were those \nthat \nstoked \ninflationary \npressures, \nthereby slowing the downward trend \nexperienced during the review period. \nThese included: continued herdsmen-\nfarmer crisis, the waning base effect, \nand \nincreased \nFAAC \ndistribution \nfollowing improvements in oil receipts. \n \nCBN Monetary Policy Review \n28 \n \n \n \n \n \n \n \nCBN Monetary Policy Review \n29 \nCHAPTER FOUR \n \n4.0 \nMONETARY \nPOLICY \nAND \nLIQUIDITY MANAGEMENT \n \nhe monetary policy environment in \nthe first half of 2018 was clouded \nby developments in the global and \ndomestic economies. On the global \nfront, the key developments were: \nincreased monetary policy divergence \namongst the advanced economies; \ncontinued \nuncertainties \nsurrounding \nthe \nBREXIT \nnegotiations; \nemerging \ntrade war between the US and other \nmajor \nworld \neconomies; \nsustained \nmonetary policy normalization in the US \nwith implications for capital reversals \nfrom \nthe \nemerging \nmarkets \nand \ndeveloping economies; pull-out of the \nUS from the Iranian nuclear deal; as \nwell as pockets of geopolitical tensions. \nThe moderating developments include \nthe apparent return of peace on the \nKorean peninsula following the meeting \nbetween the US and North Korean \nleaders, and the commencement of \ntrade talks between China and the US \nto avert the looming trade war. On the \ndomestic scene, the major challenges \nto \nmonetary \npolicy \nwere: \nthe \ncontinuing \nliquidity \nsurfeit \nin \nthe \nbanking \nsystem; \nfragile \neconomic \nrecovery; \nhigh \nbut \nmoderating \ninflationary \npressures; \nas \nwell \nas \npressures in the foreign exchange \nmarket. \nIn \nthe \nface \nof \nthese \nchallenges, the need to achieve price \nstability \nconducive \nto \neconomic \ngrowth was the key consideration that \nshaped monetary policy decisions in \nthe review period. \n4.1 \nDECISIONS OF THE MONETARY \nPOLICY COMMITTEE (MPC) \n \nIn the first half of 2018, decisions of the \nMonetary Policy Committee (MPC) \nwere shaped by a variety of global \nand domestic economic and financial \ndevelopments. Principal amongst these \nwere: the continued adjustments in the \nglobal \nfinancial \nmarkets \nfollowing \nmonetary policy normalization in the \nUS, growing trade tensions between \nmajor economies and continued geo-\npolitical tensions. \n \nThe key developments in the domestic \neconomy were: slow output recovery; \nhigh but moderating inflation rate \nwhich remained above the Bank’s \ntarget range; continuing liquidity surfeit \nin the banking system; weak macro-\nprudential \nindicators; \ngrowing \nsovereign debt and low fiscal buffers. \nThese issues and the need to achieve \nthe Bank’s mandate of price and \nexchange rate stability provided the \nbackground \nfor \nmonetary \npolicy \ndecisions in the review period. \n \n4.1.1 July 2017 MPC Meeting \nThe 3rd and 4th April, 2018 Monetary \nPolicy \nCommittee \n(MPC) \nmeeting \nassessed developments in the global \nand domestic economic environments \nduring the first quarter of 2018, as well \nas the risks to price stability, financial \nstability, and output growth in the short \nto medium term. \n \nAt the global scene, output growth was \nprojected at 3.9 per cent for 2018 up \nT \nCBN Monetary Policy Review \n30 \nfrom 3.7 per cent in 2017 on the heels \nof \nrebound \nin \ninvestments. \nThe \ndevelopment was underpinned by \nimprovements in investor confidence, \nstrengthening commodity prices, rising \naggregate \ndemand \nand \naccommodative monetary policy in \nsome \nadvanced \neconomies. \nThe \nCommittee, \nhowever, \nnoted \nthe \ndownside risks to the global output \ngrowth to include: new U.S. trade \npolicy; \ncontinuing \nnormalization \nof \nmonetary policy in some advanced \neconomies; uncertainties associated \nwith the BREXIT negotiations; and rising \ngeo-political tensions in the Middle-East \nand the Korean Peninsula. \n \nOn the domestic front, the Committee \nobserved \nthat \nthe \neconomy \nwas \ngradually \nreturning to \na \npath \nof \nsustainable \ngrowth \nas \nreal \nGross \nDomestic Product (GDP) grew by 1.92 \nper cent in the fourth quarter of 2017 \nup from 1.40 and 0.72 per cent in the \nthird and second quarters, respectively. \nOverall, the economy grew by 0.83 per \ncent in 2017. The main drivers of real \nGDP growth were agriculture (1.08%), \nindustry (0.56%) and trade (0.35%). Non-\noil real GDP grew by 1.45 per cent in \nthe fourth quarter of 2017 compared \nwith a contraction of 0.76 per cent in \nthe third quarter. The Committee also \ntook cognizance of the continued \npositive growth outlook indicated by \nthe twelfth and eleventh consecutive \nmonths of expansions of 56.7 and 57.2 \nindex points in the Manufacturing and \nNon-manufacturing \nPurchasing \nManagers’ \nindices, \nrespectively, \nin \nMarch 2018. \nIn \naddition, \nthe \nMPC \nexamined \navailable \nforecasts \nof \nkey \nmacroeconomic \nindicators \nwhich \npointed to a positive outlook for the \neconomy in 2018. The Committee, thus \ncalled for the quick passage and \neffective implementation of the 2018 \nbudget and improvement of security \nsituation \nin \nthe \ncountry \nto \nhelp \nactualize the growth projections. It also \ncalled for sustained implementation of \nthe Economic Recovery and Growth \nPlan (ERGP) in order to support the \nfragile recovery. The downside risks to \nthe outlook, according to the MPC, \nincluded: \nthe \nliquidity \nimpact \nof \nspending towards the 2019 general \nelections; continuing herdsmen related \nviolence; \nand rising yields in the \nadvanced economies, which could \ntrigger capital outflows and renew \npressure on the exchange rate. \n \nThe MPC also noted the continued \ndeceleration in inflation, with headline \ninflation (year-on-year) falling for the \nthirteenth consecutive month to 14.33 \nper cent in February 2018 from 18.72 \nper \ncent \nin \nJanuary \n2017. \nThe \nCommittee \nattributed \nthe \ndevelopment to the relative stability in \nthe foreign exchange market. \n \nThe \nCommittee \nobserved \nthe \nimprovements in the equities segment \nof the capital market being buoyed by \nincrease in the level of reserves. As a \nresult, the All-Share Index (ASI) rose by \n8.5 \nper \ncent \nfrom \n38,243.19 \non \nDecember 29, 2017, to 41,504.51 on \nMarch 29, 2018. Market Capitalization \n(MC) also improved by 10.2 per cent \nCBN Monetary Policy Review \n31 \nfrom N13.61 trillion to N14.99 trillion \nduring the same period, owing to \ngrowing investor confidence. \n \nIn its considerations, the MPC noted the \nfragile output recovery, moderation in \nprice development and the relative \nstability of the banking system. The \nCommittee \nnoted \nthat \neconomic \nrecovery, even though still weak, was \nstrengthening, in view of the return to \ngrowth of the Services Sector. It called \nfor a quick passage of the 2018 \nAppropriation \nBill \nby \nthe \nNational \nAssembly, to keep fiscal policy on track \nand deliver the urgently needed reliefs \nin terms of employment and growth. \nThe \nMPC \nwas \nsatisfied \nwith \nthe \ncontinued moderation in all measures \nof inflation as well as sustained stability \nin \nthe \nnaira \nexchange \nrate. \nThe \nCommittee applauded the relatively \nstrong balance sheets and stable \noutlook of deposit money banks in spite \nof the concentration of non-performing \nloans in a few sectors, which it \nobserved \nwas \nsatisfactorily \nbeing \naddressed by adequate mechanisms \nestablished by the Bank. \n \nIn reaching its decision, the MPC \nappraised potential policy options with \na consideration for the balance of risks. \nThe Committee also took note of the \ngains made so far as a result of its \nearlier decisions, including the stability \nof the foreign exchange market, the \nmoderation in price developments as \nwell as the restoration of output growth, \nand lauded the launch of the Food \nSecurity \nCouncil \nby \nthe \nFederal \nGovernment to ensure food security. \nThe Committee was of the view that \nfurther tightening would strengthen the \nimpact of monetary policy on inflation \nwith complementary positive effects on \ncapital \nflows \nand \nexchange \nrate \nstability. \nNevertheless, \nit \ncould \npotentially \ndampen \nthe \npositive \noutlook for output growth and financial \nstability. On the other hand, the \nCommittee was of the view that \nloosening may strengthen the outlook \nfor growth by stimulating domestic \naggregate demand through reduced \ncost of borrowing. This, the MPC noted, \nmay lead to a rise in consumer price \nlevels, \ngenerating \nexchange \nrate \npressures in the process. It could also \nworsen the current account balance \nthrough \nincreased \nimportation \nof \nconsumer \ngoods \nand \noutflow \nof \ncapital. On the argument to hold, the \nCommittee was of the view that key \nmacroeconomic \nvariables \nhave \ncontinued to evolve in a positive \ndirection \nand \nshould \nbe \nallowed \nadequate time to fully manifest. \n \nIn consideration of the foregoing, the \nCommittee decided unanimously to \nretain the Monetary Policy Rate (MPR) \nat 14.0 per cent; CRR at 22.5 per cent; \nLiquidity Ratio at 30.0 per cent; and the \nasymmetric corridor of +200 and -500 \nbasis points around the MPR. \n \n4.1.2 September 2017 MPC Meeting \nAt the 21st and 22nd May, 2018 MPC \nmeeting, the Committee noted the \nsustained \nmomentum \nof \nglobal \neconomic activities, driven by: easing \ngeo-political tensions on the Korean \nCBN Monetary Policy Review \n32 \nPeninsula; \nreduced \ntrade \ntensions \nbetween China and the United States; \nand easy financing conditions in the \nEuro \nArea, \nthe \nUK \nand \nJapan. \nAccordingly, \nglobal \noutput \nwas \nprojected to grow at 3.9 per cent in \n2018, up from 3.8 per cent in 2017. The \nCommittee noted that in spite of these \noptimistic developments, the downside \nrisks \nto \nglobal \ngrowth \nremained: \nlingering geo-political tensions in the \nMiddle-East; continued uncertainties \naround \nthe \nBREXIT \nnegotiations; \nwithdrawal of the United States from \nthe 2015 Iranian Nuclear Deal; and \ngrowing \ntrend \ntowards \ntrade \nprotectionism. \n \nOn \nthe \ndomestic \nscene, \nthe \nCommittee noted improvements in the \neconomy, attributable to the steady \ndecline in inflation, rebound in oil prices \nand increase in production level, as \nwell as the continued stability in the \nforeign exchange market. Accordingly, \ndata from the National Bureau of \nStatistics (NBS) showed that real Gross \nDomestic Product (GDP) for Q4 2017 \nwas revised upwards from 1.92 to 2.11 \nper cent, while a growth of 1.95 per \ncent was recorded in the first quarter of \n2018, up from a contraction of 0.91 per \ncent in the corresponding period of \n2017. The Committee also noted the \nsustained positive outlook based on the \nManufacturing, \nand \nNon-\nmanufacturing Purchasing Managers’ \nIndices (PMI), which rose for the \nthirteenth \nand \ntwelfth \nconsecutive \nmonths to 56.9 and 57.5 index points, \nrespectively, in April 2018. While the \nCommittee \nwelcomed \nthis \ndevelopment, it remained of the view \nthat growth was still largely fragile and \ncould benefit from further reforms and \nstimulus. In this regard, it urged the \nvarious \nlevels \nof \ngovernment \nto \naccelerate \nthe \nsettlement \nof \ncontractor debt and salary arrears as \nwell \nas \nfacilitate \nthe \nquick \nimplementation of the 2018 Federal \nGovernment budget. \n \nThe MPC also noted that inflationary \npressures continued to moderate, with \nheadline \ninflation \n(year-on-year) \ndeclining for the fifteenth consecutive \nmonth to 12.48 per cent in April 2018 \nfrom 13.34 per cent in March 2018, \ndriven by a decline in food prices and \ncontinued stability in the exchange \nrate. \n \nOn developments in the financial \nmarkets, the Committee observed with \nconcern, the declining performance in \nthe equities market, as the All-Share \nIndex (ASI) decreased by 6.6 per cent \nfrom 43,330.54 on February 28, 2018 to \n40,472.45 on May 18, 2018. Similarly, \nMarket Capitalization (MC) fell by 5.7 \nper cent from N15.55 trillion on February \n28, 2018 to N14.66 trillion on May 18, \n2018. The decline was due largely to \nprofit taking activities by investors, as \nwell \nas \ncapital \nflow \nreversals \nin \nresponse \nto \nmonetary \npolicy \nnormalization in the United States. The \nMPC thus, noted the need to maintain \nremunerative domestic rates to stem \nthe \ntrend \ntowards \nhuge \ncapital \noutflows. \n \nCBN Monetary Policy Review \n33 \nIn its considerations, the Committee \nexpressed satisfaction on the positive \noutlook in the domestic economy as \nreal \nGDP \ngrew \nfor \nthe \nfourth \nconsecutive quarter by the first quarter \nof 2018. The Committee also welcomed \nthe continued deceleration in headline \ninflation as well as stability in the foreign \nexchange \nmarket \nand \ntherefore, \ncalled on the Bank to sustain the \nmomentum in order to further subdue \ninflation and ensure continued growth. \nThe MPC, however, noted the potential \neffects \nof \nthe \nexpansionary \n2018 \nbudget, the buildup in election-related \nspending towards the 2019 general \nelections and the liquidity impact of \nrising FAAC distributions following the \nincrease \nin \ncrude \noil \nprices. \nThe \nCommittee took note of the improved \nperformance of deposit money banks \nand observed that the relatively high \nlevel of non-performing loans in the \nindustry was moderating and urged the \nFederal Government to promptly settle \noutstanding contractor arrears to help \nimprove aggregate demand. \n \nThe MPC critically assessed the impact \nof developments in the international \nand domestic environments on key \nmacroeconomic \nvariables \nsuch \nas \noutput growth, inflation, the exchange \nrate and accretion to external reserves \nand evaluated the policy options. In its \nevaluation, the Committee considered \nthe forecast of high liquidity injection in \nthe second half of 2018 and its likely \nupward pressure on prices. Tightening, \nit argued would ensure the mop-up of \nexcess liquidity, noting that inflation still \nremained in double digits and above \nthe ceiling of the Bank’s inflation \ncorridor \nin \nspite \nof \nits \ncontinued \nmoderation. Raising the policy rate, \nhowever, may depress investment and \nconsumer spending and impact the \nfragile recovery adversely. Loosening, \nthe Committee considered, would help \nstimulate aggregate demand through \nlower cost of credit. Nevertheless, it \ndeliberated on the effectiveness of the \nchoice at a time when high liquidity \ninjections had been forecast in the \nsecond half of the year as likely to \nexacerbate \ninflationary \npressures, \nincrease capital outflow and pressure \non the exchange rate. It further noted \nthat \nloosening \nwould \nworsen \nthe \ncurrent \naccount \nbalance \nthrough \nincreased \nimportation \nof \ncheaper \nforeign \ngoods, \nmargin \nlending, \nlowering of risk evaluation in accessing \nloans which may result in increased \nNPLs \nwith \npotential \nnegative \nconsequences on the stability of the \nbanking industry. In the Committee’s \nopinion, the prevailing downside risk to \ngrowth and upside risk to inflation \nappeared \nrelatively \nbalanced \nas \ngrowth continued to strengthen even \nthough moderately, while the pace of \nprice development continued to taper. \nMaintaining the current policy stance, it \nargued, \nwould \nsustain \ngradual \nimprovements in both indices. \n \nIn \nsummary, \nthe \npredominant \nargument for a hold at this time was to \nawait \nthe \npassage \nand \nimplementation of the 2018 budget \nand to monitor its impact on price \ndevelopment and output growth. In \nconsideration of the foregoing, the \nCBN Monetary Policy Review \n34 \nCommittee decided by a vote of 8 \nmembers to retain the Monetary Policy \nRate (MPR) at 14.0 per cent alongside \nall other policy parameters. One (1) \nmember, however, voted to increase \nthe MPR by 50 basis points. Thus, the \nMPC voted to retain the: MPR at 14.0 \nper cent; CRR at 22.5 per cent; Liquidity \nRatio at 30.0 per cent; and the \nasymmetric corridor of +200 and -500 \nbasis points around the MPR. \n \n4.2 \nInstruments \nof \nLiquidity \nManagement \nIn \npursuance \nof \nits \nprice \nand \nmacroeconomic stability mandate, the \nBank continued to deploy various \nmonetary policy instruments in the first \nhalf of 2018. The following instruments \nwere deployed: the Monetary Policy \nRate (MPR), the Cash Reserve Ratio \n(CRR), Liquidity Ratio (LR), Open Market \nOperations \n(OMO) \nand \nDiscount \nWindow Operations. In addition to the \nuse of these instruments, the Bank \nmaintained active intervention in the \nforeign exchange market. \n \n4.2.1 Monetary Policy Rate (MPR) \nThe MPR remained the key instrument \nfor \nmonetary \npolicy \nmanagement \nduring the review period, remaining \nunchanged \nat \n14.0 \nper \ncent \nthroughout the period as conditions in \nthe economy did not necessitate an \nadjustment. The asymmetric corridor \naround \nthe \nMPR \nwas \nalso \nleft \nunchanged at +200 and -500 basis \npoints. The retention of MPR and the \nasymmetric \ncorridor, \nshowed \nthe \nBank’s commitment to a tight policy \nstance. \n \n4.2.2 Open Market Operations (OMO) \nLiquidity management in the first half \nof \n2018 \nwas \nconducted \nprimarily \nthrough \nOpen \nMarket \nOperations \n(OMO). \nOMO \nsales \nincreased \nto \nN9,743.76 billion in the review period \nfrom N7,472.21 billion and N3,874.27 \nbillion, representing an increase of \n30.40 per cent and 151.50 per cent \nabove the levels in the preceding and \ncorresponding \nperiods \nof \n2017, \nrespectively (Table 4.1). The high level \nof operations was attributed to the \nincidence of Deposit Money Banks \n(DMBs) discounting OMO bills before \nmaturity in the secondary market, thus \nexpanding the monetary base and \nleading to a rise in the growth rate of \nmoney supply. \n \nTable 4.1 \nOMO Bills Auction (January 2017 – June 2018) \n(N’billion) \nDate\n2017\n2018\n% \nChange \n Jan \n700.52\n2,132.61\n204.43\n Feb\n619.14\n845.28\n36.52\nMar\n391.16\n1,561.38\n299.17\nApr\n316.09\n2,084.46\n559.45\nMay\n580.08\n2,033.42\n250.54\nJun\n1,267.28\n1,086.61\n-14.26\n 1st Half\n3,874.27\n9,743.76 151.50%\nJul\n1,517.53\nAug\n1,104.57\nSep\n741.85\nOct\n1,179.20\nNov\n1,461.13\nDec\n1,467.93\n2nd Half\n7,472.21\n30.40% \nSource: Financial Market Department, CBN \n \nCBN Monetary Policy Review \n35 \nFigure 4.1 \nOMO Bills Auction (January – June 2018) \n -\n 500.00\n 1,000.00\n 1,500.00\n 2,000.00\n 2,500.00\nJan-18\nFeb-18\nMar-18\nApr-18\nMay-18\nJun-18\nN'Billions\n \nSource: CBN \n \n4.2.3 Reserve Requirements \nThe Cash Reserve Ratio (CRR) was \nused to complement the MPR and \nOMO \nas \ninstruments \nof \nliquidity \nmanagement in the first half of 2018. \nThe Monetary Policy Committee (MPC) \nmaintained the CRR at 22.5 per cent \nduring the review period, the same \nlevel as it was at end-December 2017, \nas liquidity in the banking system \nremained relatively high. The liquidity \nratio also remained unchanged at 30.0 \nper cent during the review period. \n \n4.2.4 Standing Facilities \nThe Standing Facilities windows were \nactive during the review period to \nenable Deposit Money Banks (DMBs) \nand the Discount House (DH) meet their \ndaily liquidity requirements. The Bank \nmaintained \nthe \nstanding \nfacilities \ncorridor \nof \n+200/-500 \nbasis \npoints \naround the MPR. \n \nThe \nrequest \nfor \nStanding \nLending \nFacility (SLF), decreased significantly by \n72.62 per cent from N25,664.35 billion in \nthe second half of 2017 to N7,027.46 \nbillion in the first half of 2018. The \nvolume also declined by 74.41 per cent \nwhen compared with N27,466.58 billion \nin the corresponding period of 2017 \n(Table 4.2). \n \nIn contrast, total deposits at the \nStanding Deposit Facility (SDF) window \nincreased significantly by 149.93 per \ncent to N10,684.38 billion in the first half \nof 2018 from N4,275.00 billion in the \nsecond half of 2017. This represented \nan increase of 93.88 per cent relative \nto N5,510.75 billion recorded in the \ncorresponding period of 2017 (Table \n4.3). Transactions at the two windows \nresulted in a net deposit of N3,656.92 \nbillion in the first half of 2018. The \nincreased level of deposits was due to \nsustained monetary policy tightening \nstance which helped to rein-in excess \nliquidity from the money market. \n \nTable 4.2 \nCBN Standing Lending Facility (January 2017 – \nJune 2018) (N’billion) \nDate\n2017\n2018\n% \nChange \nJan \n3,380.57\n833.09\n-75.36\nFeb\n4,478.50\n1,020.15\n-77.22\nMar\n5,052.56\n952.23\n-81.15\nApr\n5,746.68\n1,145.52\n-80.07\nMay\n4,596.99\n1,847.69\n-59.81\nJun\n4,211.28\n1,228.78\n-70.82\n1st Half\n27,466.58\n7,027.46\n-74.41%\nJul\n3,855.13\nAug\n5,585.51\nSep\n4,377.89\nOct\n5,605.30\nNov\n3,909.09\nDec\n2,331.43\n2nd Half\n25,664.35\n-72.62%\nTotal\n53,130.93\n371.07 \n \nSource: CBN \nCBN Monetary Policy Review \n36 \nFigure 4.2 \nStanding Lending Facility (January 2017 – June \n2018) \n -\n 200.00\n 400.00\n 600.00\n 800.00\n 1,000.00\n 1,200.00\n 1,400.00\n 1,600.00\n 1,800.00\n 2,000.00\nJan\nFeb\nMar\nApr\nMay\nJun\nN'Billions\n \nSource: CBN \n \nTable 4.3 \nCBN Standing Deposit Facility (January 2017 – \nJune 2018) (N’billion) \nDate\n2017\n2018\n% Change \nJan \n1,855.98\n1,919.78\n3.44\nFeb\n804.07\n1,144.10\n42.29\nMar\n889.35\n1,508.75\n69.65\nApr\n593.79\n2,952.20\n397.18\nMay\n665.28\n1,527.04\n129.53\nJun\n702.28\n1,632.51\n132.46\n1st Half\n5,510.75\n10,684.38\n93.88%\nJul\n825.1\nAug\n315.24\nSep\n411.43\nOct\n405.21\nNov\n691.97\nDec\n1,626.05\n2nd Half\n4,275.00\n149.93%\nTotal\n9,785.75\n \n \nSource: CBN \n \n \n \n \n \n \n \n \n \n \n \nFigure 4.3 \nStanding Deposit Facility (January 2017 – June \n2018) \n -\n 500.00\n 1,000.00\n 1,500.00\n 2,000.00\n 2,500.00\n 3,000.00\n 3,500.00\nJan\nFeb\nMar\nApr\nMay\nJun\nN'Billion\n \nSource: CBN \n \n \n4.2.5 \n Foreign Exchange Intervention \nDuring the first half of 2018, activities in \nthe Investors and Exporters foreign \nexchange \nwindow \nintensified \nand \nprovided \nstability \nin \nthe \nforeign \nexchange \nmarket. \nHowever, \nnew \nchallenges \nemerged \nfollowing \nthe \nsustained normalization of monetary \npolicy \nin \nsome \nmajor \nadvanced \neconomies, thereby intensifying capital \nreversals \nfrom \nemerging \nmarket \neconomies, \nincluding \nNigeria. \nThe \ndevelopment renewed pressure in the \nforeign \nexchange \nmarket. \nConsequently, the Bank had to intensify \nits heterodox approach to foreign \nexchange policy, by implementing \nadditional measures to stem these new \nsources of pressure in the market. These \nmeasures included: increased foreign \nexchange sales to BDCs from twice to \nthrice weekly as well as the conclusion \nand implementation of the bilateral \ncurrency swap between the Central \nBank of Nigeria and the People’s Bank \nof China. The currency swap was \nintended to facilitate the settlement of \ntransactions \nbetween \neconomic \nCBN Monetary Policy Review \n37 \nagents \nin \nboth \ncountries \nwithout \nrecourse to a third currency (notably \nthe \nUS \ndollar), \nthereby \nreducing \npressure on the exchange rate. \n \nThe \nBank \nalso \nsustained \nthe \nimplementation \nof \nthe \nexisting \nmeasures including: intensification of \nthe policy on repatriation of export \nproceeds as well as return of unutilized \nforeign exchange sourced from CBN \nauctions; the restriction of foreign \nexchange access of some 41 items; the \nuse of Bank Verification Number (BVN) \nin BDC transactions; resumption of sale \nof foreign exchange by the Bank and \nInternational Money Transfer Operators \n(IMTOs) to BDCs; as well as special \nforeign exchange auctions to targeted \nsectors and foreign exchange sales for \nsmall scale importers. As a result, the \ntotal \nsupply \nof \nforeign \nexchange \nincreased \nby \n23.21 \nper \ncent \nto \nUS$9,499.92 million in the first half of \n2018, from US$7,710.49 million in the \nsecond half of 2017. It also increased \nby 17.21 per cent when compared with \nUS$8,104.95 million in the corresponding \nperiod \nof \n2017 \n(Table \n4.4). \nThe \nincreased supply of foreign exchange \nwas largely due to improved accretion \nto foreign reserves from higher oil prices \nas well as modest capital inflow from \nthe sustained tight monetary policy \nstance of the Bank. \n \n \n \n \n \n \n \n \n \nTable 4.4 \nForeign Exchange Supply by the CBN (US$ \nMillion) \nDate\n2017\n2018\n% \nChange \nTotal FX \nSupply \n(including \nForward \nSales)\nTotal FX \nSupply \n(including \nForward \nSales)\nJan \n768.76\n1,343.12\n74.71\nFeb\n876.48\n1,237.26\n41.16\nMar\n1,309.44\n1,300.93\n-0.65\nApr\n1,919.30\n1,422.35\n-25.89\nMay\n2,109.93\n2,039.51\n-3.34\nJun\n1,121.04\n2,156.75\n92.39\n1st Half\n8,104.95\n9,499.92\n17.21%\nJul\n1,207.00\nAug\n1,449.49\nSep\n1,220.33\nOct\n1,315.99\nNov\n1,210.99\nDec\n1,306.69\n2nd Half\n7,710.49\n \n \nSource: CBN \n \nFigure 4.4 \nForeign Exchange Supply by the CBN (January – \nJune 2018) \n -\n 500.00\n 1,000.00\n 1,500.00\n 2,000.00\n 2,500.00\nJan\nFeb\nMar\nApr\nMay\nJun\nUS$'Million\n \nSource: CBN \n \n4.3. \nDevelopments in the Monetary \nAggregates \nIn the first half of 2018, most of the \nmonetary \naggregates \nperformed \nbelow their indicative targets. The \ndevelopment was as a result of the \nCBN Monetary Policy Review \n38 \ncontraction in Net Domestic Asset \n(NDA) which was, however, unable to \noverwhelm the substantial growth in \nNet Foreign Assets (NFA) of the banking \nsystem. The contraction of NDA was \ntraceable \nto \nthe \nsubstantial \ncontraction in credit to government, \ndue to increased government receipts \nfrom crude oil sales, which reduced \nrecourse \nto \nborrowing \nfrom \nthe \ndomestic financial market. The huge \ngrowth in NFA, however, was due to \nthe sustained rise in global crude oil \nprices, which improved accretion to \nexternal reserves. \n \n4.3.1 \nBroad Money (M2) \nBroad Money (M2) grew by 2.79 per \ncent to N24,814.00 billion at end-June \n2018, from N24,140.63 billion at end-\nDecember 2017. Compared with the \nend-June 2017 level of N21,980.58 \nbillion, M2 increased by 12.89 per cent. \nThe year-on-year growth in M2 of 12.89 \nper cent was above the 2018 indicative \ngrowth target of 10.48 per cent. \n \nFigure 4.5 \nMoney Supply (M1) and (M2) (January – June, \n2018) \n \nSource: CBN \n \nFigure 4.6 \nGrowth in Money Supply (M1) and (M2) (January \n- June, 2018) \n-6.00%\n-4.00%\n-2.00%\n0.00%\n2.00%\n4.00%\n6.00%\n8.00%\nJan-18\nFeb-18\nMar-18\nApr-18\nMay-18\nJun-18\nM2 Growth\nM1 Growth\n \nSource: CBN \n \n4.3.2 \nNarrow Money (M1) \nNarrow Money (M1) contracted by \n4.25 per cent to N10,701.11 billion at \nend-June 2018 from N11,175.11 billion \nat \nend-December \n2017. \nHowever, \ncompared with end-June 2017 figure of \nN10,190.19 billion, M1 grew by 5.01 per \ncent which was, however, below the \nindicative growth target of 8.04 per \ncent \nindicating \nthat \nM1 \nunder-\nperformed during the review period \n(Figures 4.4 and 4.5). \n \n4.3.3 Net Foreign Assets (NFA) \nNet Foreign Assets (NFA) increased by \n18.15 per cent to N 18,337.53 billion at \nend-June 2018 from N15,520.76 billion \nat end-December 2017. Compared \nwith the end - June 2017 figure of \nN8,468.08 billion, NFA grew by 116.55 \nper cent which was well above the \nindicative growth target of 18.15 per \ncent. The substantial growth in NFA was \ndue to the continued rise in global \ncrude \noil \nprices, \nwhich \nimproved \naccretion to external reserves. Average \ncrude oil prices (Bonny Ligth) rose to \nCBN Monetary Policy Review \n39 \nUS$71.45 in the first half of 2018 from \nUS$54.09 in the second half of 2017. \n \n4.3.4 \nNet Domestic Assets (NDA) \nNet \nDomestic \nAssets \n(NDA) \ncontracted \nby \n3.51 \nper \ncent \nto \nN15,088.68 billion at end-June 2018 \nfrom \nN15,636.80 \nat \nend-December \n2017. Compared with the end-June \n2017 figure of N19,851.20 billion, NDA \nalso contracted by 31.56 per cent, \nwhich was significantly below the \nindicative growth target of 1.97 per \ncent, largely on account of huge \ncontraction \nin \ncredit \nto \nthe \ngovernment. \n \nFigure 4.7 \nNet Domestic Asset (NDA) (January - June 2018) \nJan-18\nFeb-18\nMar-18\nApr-18\nMay-18\nJun-18\nNet Domestic Asset\n15,887.39\n17,429.77\n16,830.28\n17,321.58\n15,475.47\n15,088.68\n 13,500.00\n 14,000.00\n 14,500.00\n 15,000.00\n 15,500.00\n 16,000.00\n 16,500.00\n 17,000.00\n 17,500.00\n 18,000.00\nN'Billion\n \nSource: CBN \n \nFigure 4.8 \nNDA, NDC and Other Assets (net) (January – \nJune, 2018) \nJan-18\nFeb-18\nMar-18\nApr-18\nMay-18\nJun-18\nNet Domestic Assets 15,887.39 17,429.77 16,830.28 17,321.58 15,475.47 15,088.68\nNet Domestic Credit 28,033.38 26,821.45 26,985.31 27,174.81 26,349.07 25,863.28\nOther Assets (Net)\n(14,582.0 (14,702.9 (15,081.8 (17,071.2 (17,335.5 (16,675.1\n (18,000.00)\n (17,500.00)\n (17,000.00)\n (16,500.00)\n (16,000.00)\n (15,500.00)\n (15,000.00)\n (14,500.00)\n (14,000.00)\n (13,500.00)\n (13,000.00)\n -\n 5,000.00\n 10,000.00\n 15,000.00\n 20,000.00\n 25,000.00\n 30,000.00\nN'Billion\n \nSource: CBN \n4.3.5 \nCredit to the Government (Cg) \nCredit to Government (Cg) in the first \nhalf of 2018 contracted by 9.74 per \ncent to N3,286.34 billion at end-June \n2018 from N3,640.93 billion at end-\nDecember 2017. When compared with \nthe end-June 2017 figure of N5,250.49 \nbillion, it also contracted by 37.41 per \ncent, in contrast to the indicative \ngrowth benchmark of 54.25 per cent. \nThe development was attributed to \nincreased government receipts from \ncrude \noil \nsales \nwhich \nreduced \nGovernment’s recourse to borrowing \nfrom the domestic financial market. \n \n4.3.6 \n Credit to the Private Sector (Cp) \nCredit to the private sector (Cp) \ndeclined marginally by 0.04 per cent to \nN22,281.87 billion at end-June 2018 \nfrom \nN22,290.66 \nbillion \nat \nend-\nDecember 2017. Compared with the \nend-June 2017 figure of N21,985.95 \nbillion, Cp, however, grew by 1.35 per \ncent, which was still below the 2018 \nindicative growth target of 5.75 per \ncent. The decline in credit to the \nprivate sector in the review period can \nbe attributed to the continued risk \naversion by banks in lending to the real \nsector. \n \n \n \n \n \n \n \n \n \n \n \n \nCBN Monetary Policy Review \n40 \nFigure 4.9 \nDomestic Credit to Private Sector (January – \nJune, 2018) \nJan-18\nFeb-18\nMar-18\nApr-18\nMay-18\nJun-18\nCredit to Private Sector\n21,993.43 22,500.91 22,363.23 22,276.49 22,206.74 22,281.87\n21,700.00\n21,800.00\n21,900.00\n22,000.00\n22,100.00\n22,200.00\n22,300.00\n22,400.00\n22,500.00\n22,600.00\nN'Billion\n \nSource: CBN \n \n4.3.7 \n Reserve Money (RM) \nReserve \nMoney \n(RM) \ncontracted \nmarginally \nby \n1.91 \nper \ncent \nto \nN6,360.47 billion at end-June 2018 \ncompared with N6,484.30 billion at \nend-December \n2017. \nIt, \nhowever, \nincreased by 16.06 per cent when \ncompared with its end-June 2017 level \nof N5,480.21 billion, but was below the \n2018 indicative growth benchmark of \n21.50 per cent. \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \nCBN Monetary Policy Review \n41 \nTable 4.5 \nMonetary Aggregates Outcomes (Growth in % except otherwise stated) \nActual \nActual \nActual \nBenchmark\nJune \nDecember \nJune \n2018\n2017\n2017\n2018\nM2 (N'b)\n21,980.58\n24,140.63\n24,814.00\n27,791.26\n-2,977.26\n2,833.42\nM2 (%)\n5.9\n9.83%\n2.79%\n10.48%\n-0.11\n12.89%\nM1 (N'b)\n10,190.19\n11,175.57\n10,701.11\n11,951.18\n-1,250.07\n510.92\nM1 (%)\n24.14\n9.67%\n-4.25%\n8.04%\n-0.10\n5.01%\nRM (N'b)\n5,480.21\n6,484.30\n6,360.47\n6,710.96\n-350.49\n880.26\nRM (%)\n-1.99\n18.32%\n-1.91%\n21.50%\n-0.05\n16.06%\nNDC (N'b)\n27,236.43\n25,931.58\n25,568.21\n28,340.64\n-2,772.43\n-1,668.22\nNDC (%)\n12.13\n-4.79%\n-1.40%\n12.45%\n-0.10\n-6.12%\nCg (N'b)\n5,250.49\n3,640.93\n3,286.34\n3,123.22\n163.12\n-1,964.15\nCg (%)\n151.56\n-30.66%\n-9.74%\n54.25%\n0.05\n-37.41%\nCp (N'b)\n21,985.95 22,290.66\n22,281.87\n25,217.41\n-2,935.54\n295.92\nCp (%)\n3.29\n1.39%\n-0.04%\n5.75%\n-0.12\n1.35%\nNFA (N'b)\n8,468.08\n15,520.76\n18,337.53\n15,604.16\n2,733.37\n9,869.45\nNFA (%)\n-18.12\n83.29%\n18.15%\n18.15%\n0.18\n116.55%\nChange in H1 \n2018 over H1, \n2017\nVariables\nDeviation \n(N'b)\n Source: CBN \n \n \nElectoral Cycles and Monetary Policy in Nigeria \nDemocracy has become the dominant form of government around the world. \nIndeed the wave of democratization became so forceful during the turn of the 20th \ncentury, when the proportion of democratic states grew from 27.0 to 61.0 per cent. \nDemocratic governance in modern states is underpinned by periodic elections, the \nprocess by which representatives are selected to conduct the affairs of \ngovernment on behalf of the citizenry. \n \nAn empirical regularity had been severally established between the growth rate of \nM1 and the periods leading up to and during major election cycles in both \nadvanced and developing democracies. Prior literature had linked electoral \ncycles to monetary policy through two main hypotheses. The first, which has \nbecome popularly known as the political business cycles hypothesis is consistent \nwith the thinking that the monetary authorities, who are to some degree \nsubservient to the government, are somewhat compelled to deliberately \nmanipulate instruments in the monetary policy toolkit to expand money supply, \nCBN Monetary Policy Review \n42 \nthus reducing interest rates in periods leading up to elections. The aim is to signal \ngood performance by the political authorities, with the motive being to curry the \nfavour of electorates and secure the re-election of the incumbent or the ruling \npolitical ideology. \n \nThe alternative explanation for monetary growth during electoral cycles lies in the \ngovernment deliberately “cultivating” the electorate during election years in order \nto influence voting behavior and sentiments. This deliberate show of concern for \nthe electorate is manifested in several ways including increased budgetary \nspending in election years, election-related spending, and systematic vote buying - \nthe processes through which election outcomes are swayed in a given direction by \nmeans of gifts or cash inducements. Vote buying requires high level of liquidity \nwhich may entail converting illiquid assets into cash, thus substituting broad money \nfor cash or bank deposits. Also because vote buying is an illicit activity, the \nfinancing most often comes from the underground economy. Funds from such \nshadow economy eventually find their way into formal bank deposits, thereby \nincreasing the money stock. \n \nPrior empirical tests of the money-election cycle theory have produced rather \nweak and inconclusive evidence, particularly for democracies with weak \ninstitutions in developing countries. Thus the alternative of increased budgetary \nprovisions and vote buying perspective seems to come handy in explaining the \nmoney-election nexus. Preliminary observations on the evolution of narrow money \nstock (M1) during Nigeria’s election years of 1999, 2003, 2007, 2011, and 2015 \nindicate a pattern of increase in MI during the election periods. The data showed a \nclear increase in money stock (M1) as from the months of February and March, \nwhen political and electoral activities were at their peak in the respective election \nyears; with money stock peaking in periods around and immediately after \ninauguration in May. Subsequently, money stock returned to trend. These \nobservations were, however, not empirically tested. \n \nThese issues are particularly relevant as the preparation towards Nigeria’s \nupcoming elections in early 2019 portend liquidity management challenges. The \ncommon believe is that due to the late passage of the 2018 budget, the year \nwould experience liquidity flows arising from the implementation of the 2018 and \n2017 FGN budgets, as well as other spending associated with increased political \nand electoral activities. With the country’s fledgling democracy since 1999, the \nincreasing monetization of the electoral process raises the concern of stakeholders \nparticularly the Central Bank which rely on achieving targets for the growth rates of \nmonetary aggregates to support its price stability mandate. \n \nCBN Monetary Policy Review \n43 \nCHAPTER FIVE \n \n5.0 \nDEVELOPMENTS \nIN \nTHE \nFINANCIAL MARKETS \nn the review period, the Nigerian \nfinancial markets were moderately \nstable, \nalthough \nperformance \ncontinued to reflect developments in \nthe global and domestic economic \nand financial environments. The key \nforces on the global front were: rising \ntrade tensions between the US and its \nmajor trading partners; the withdrawal \nof the US from the Iranian nuclear deal; \nand \nthe \ncontinued \nuncertainties \naround the BREXIT negotiations. Other \nfactors included: sustained monetary \npolicy divergence in the advanced \neconomies; \nand \nheightened \ngeo-\npolitical tensions in the Middle East and \nKorean Peninsula. On balance, the \neffect \nof \nthese \nfactors \nwere \nconsiderably \nmuted \nby \nthe \ncommencement of peace talks on the \nKorean \nPeninsula \nand \nsustained \nrecovery in oil and other commodity \nprices, \nleading \nto \na \nrebound \nin \ninvestment and manufacturing output. \nAccordingly, \nglobal \neconomic \nrecovery \nstrengthened, \nwith \nmore \ncentral banks in advanced economies \ngearing up to join the US and the UK in \nnormalizing monetary policy. The US \nFed raised its rate twice in 2018, with \nmarkets largely anticipating one more \nbefore year end. The Bank of England \n(BOE) indicated that a gradual hike in \nthe policy rate would be required in \norder to address inflation concerns and \nmanage \ninvestment \noutflow \nfrom \nuncertainties surrounding BREXIT. The \nEuropean Central Bank (ECB) provided \nguidance that it would review its asset \npurchase \nprogramme \nin \n2018. \nNonetheless, \nthe \nmonetary \nenvironment during the review period \nremained \nbroadly \naccommodative \nrelative to historical trends. \n \nAt the domestic scene, the money \nmarket remained active in the review \nperiod, with market rates reflecting \nliquidity conditions in the banking \nsystem. The rates fluctuated widely \noutside the Standing Facilities window, \nindicating a high degree of uncertainty \nin the market. The stability in the foreign \nexchange market was threatened by \nintensified capital reversals, following \nsustained normalization of US monetary \npolicy. In response, the Bank sustained \nimplementation of existing and new \nmeasures including: increased foreign \nexchange sales to BDCs as well as the \nconclusion and implementation of the \nbilateral currency swap between the \nCentral Bank of Nigeria and the \nPeople’s Bank of China, which helped \nrein-in \nspeculative \npractices \nand \narbitrage opportunities in the market. \nThe Nigerian stock market witnessed a \nlull in activity as the All-Share Index (ASI) \nremained almost flat at 0.09 per cent \nyear-to-June 2018, on the back of \nfragile \neconomic \nrecovery, \nweak \ncorporate environment and low fiscal \nactivities which fuelled adverse investor \nsentiments. \n \n5.1 \nThe Money Market \nDuring the review period, the money \nmarket remained active, with market \nrates reflecting liquidity conditions in \nthe \nbanking \nsystem. \nThe \nrates \nI \nCBN Monetary Policy Review \n44 \nfluctuated widely outside the Standing \nFacilities \ncorridor \nwith \nno \nclear \ndirection, indicating a high degree of \nuncertainty \nin \nthe \nmarket. \nThe \nuncertainties primarily were traceable \nto low fiscal activities as reflected in the \ndelayed Federal Government budget \nfor \n2018, \ngovernment’s \nrecent \npreference for borrowing from the \ninternational \nmarket, \ndelays \nin \nFederation \nAccount \nAllocation \nCommittee (FAAC) disbursements and \nimplementation of additional measures \nto manage demand pressure in the \nforeign exchange market. Accordingly, \nthe Bank increased its OMO auctions \nand \ninterventions \nin \nthe \nforeign \nexchange market in response to the \nobserved volatility in the market. The \nmajor sources of liquidity during the \nperiod \nincluded: \ncontinued \nimplementation of the 2017 capital \nbudget, Joint Venture Cash (JVC) call \npayments, \nCBN \nreal \nsector \ninterventions, and maturing CBN bills \nand government securities. Rates at \nthe uncollateralized segment of the \nmarket (interbank call rates) were \nhigher \ncompared \nwith \nthe \ncollateralized OBB rates reflecting the \nheightened risks and uncertainties in \nthe market. \n \nThese \ndevelopments \nmade \nthe \nMonetary Policy Committee (MPC) to \nsustain its monetary policy tightening \nstance \nduring \nthe \nperiod \nby \nmaintaining the Monetary Policy Rate \n(MPR) at 14.0 per cent and the \nasymmetric corridor of +200/-500 basis \npoints as well as the Cash Reserve Ratio \n(CRR) and Liquidity Ratio (LR) of 22.5 \nand 30.0 per cent, respectively. \n \n5.1.1 \nShort-term \nInterest \nRate \nDevelopments \nMarket interest rates largely reflected \nliquidity levels in the banking system. \nLiquidity in the money market was \nmainly influenced by statutory FAAC \ndisbursements, \nOMO \nand \nNTB \ntransactions, \nmaturing \ngovernment \nsecurities and CBN bills, Joint Venture \n(JVC) \ncash \ncall \npayments \nand \ncontinued implementation of the 2017 \nFGN budget. CBN’s foreign exchange \ninterventions \nto \nmoderate \nFOREX \ndemand \npressures \nalso \naffected \nliquidity in the money market. During \nthe review period, both segments of \nthe money market remained active \nand \nexperienced \nperiods \nof \nhigh \nvolatility. The interbank call rate ranged \nbetween 3.34 per cent and 26.19 per \ncent, averaging 15.12 per cent in the \nentire period, while the OBB rate had a \nnarrower range of between 2.96 per \ncent and 19.99 per cent, averaging \nlower at 12.58 per cent in the period. \nThe average interbank call rate was \ngenerally higher than the OBB rates \nmirroring heightened risks in the market. \n \n \nCBN Monetary Policy Review \n45 \nTable 5.1 \nWeighted Average Monthly Money Market \nInterest Rates (January – June 2017) \nMONTHS Interbank\nOBB\nSDF\nMPR\nSLF\nNIBOR - \n30DAYS\nJan-18\n15.58\n10.62\n9.00\n14.00\n16.00\n15.09\nFeb-18\n26.19\n19.99\n9.00\n14.00\n16.00\n15.10\nMar-18\n15.16\n12.69\n9.00\n14.00\n16.00\n15.38\nApr-18\n3.34\n2.96\n9.00\n14.00\n16.00\n12.91\nMay-18\n25.43\n18.37\n9.00\n14.00\n16.00\n13.15\nJun-18\n5.00\n10.84\n9.00\n14.00\n16.00\n13.88\nAverage\n15.12\n12.58\n9.00\n14.00\n16.00\n14.25\n \nSource: (Statistics, CBN) \n \nFigure 5.1 \nWeighted Average Monthly Money Market \nInterest Rates (Jan.–Jun. 2018) \n0\n5\n10\n15\n20\n25\n30\nJan-18\nFeb-18\nMar-18\nApr-18\nMay-18\nJun-18\nPer cent\nInterbank\nOBB\nSDF\nMPR\nSLF\nNIBOR - 30DAYS\n \n(i) \nThe Interbank Call Rate \nDuring \nthe \nreview \nperiod, \nthe \ninterbank call segment experienced a \nlull in activities, as evidenced by several \nnon-trading days. The high frequency \nof \nnon-trading \ndays \nin \nthe \nuncollateralized segment was due to \nheightened \nrisk \naversion \namongst \ndeposit \nmoney \nbanks \n(DMBs). \nConsequently, \ninterbank \ncall \nrates \nincreased from 15.19 per cent in \nJanuary to 26.19 per cent in February, \nbefore declining significantly to 3.34 \nper cent in April, 2018. The rate further \nspiked to 25.43 per cent in May before \nclosing lower at 5.00 per cent in June, \n2018. The flat rate of 5.00 per cent \nrecorded in June was based on only \none transaction for the entire month. \nThe peak in the review period affirms \nthe sustained tight monetary policy \nstance of the Bank, which led to \noccasional \nliquidity \ncrunch \nin \nthe \nmoney market. The interbank call rate \nranged between 3.34 per cent and \n26.19 per cent, averaging 15.12 per \ncent in the review period, compared \nwith 19.78 per cent in the preceding \nhalf year. Analysis of the daily rates \nshowed that the call rate ranged from \n1.00 to 140.00 per cent between \nJanuary and June 2018. The rate spike \nof 140.00 per cent recorded in May, \n2018 was due to the withdrawal of \nliquidity \nfrom \nthe \nbanking \nsystem \nthrough OMO auctions, Naira deposit \nmade by commercial banks for the \npurchase of foreign currency and \nrevenue \nremittances \nby \nNigerian \nNational \nPetroleum \nCorporation \n(NNPC), Nigeria Customs Service (NCS) \nand Federal Inland Revenue Service \n(FIRS) and other government agencies \nduring the period of FAAC distributions. \nThe rate however, declined to 5.00 per \ncent \nin \nJune \nfollowing \nimproved \nliquidity conditions. \n \n \n \n \n \n \n \n \n \nCBN Monetary Policy Review \n46 \nFigure 5.2 \nDaily Interbank Call Rate (January – June 2018) \n \n \n(ii) \nThe Open Buy Back Rate \nDuring the review period, non-trading \ndays were not observed in the OBB \nsegment, which remained active in \ncomparison \nwith \nactivities \nat \nthe \ninterbank call segment. The improved \nactivities at the OBB segment were \nlargely traceable to the security of \ntransactions of the segment. The OBB \nrate rose from 10.62 per cent in January \nto 19.99 per cent in February, before \ndeclining significantly to 2.96 per cent \nin April, 2018. The rate, however, spiked \nto 18.37 per cent in May before closing \nlower at 10.84 per cent in June, 2018. \nAs in the interbank call segment, the \nspikes in the OBB rate in February and \nMay were largely as a result of low \nlevels of liquidity in the banking system, \narising from the sale of NTBs and CBN \nBills. The OBB rate had a narrower \nrange of between 2.96 per cent and \n19.99 per cent, averaging lower at \n12.58 per cent in the period compared \nwith 22.57 per cent in the preceding \nhalf year. Analysis of the daily rates \nshowed that the OBB rate ranged from \n1.85 to 131.04 per cent between \nJanuary and June 2018. The rate spike \nof 131.04 per cent recorded in May, \n2018 was as a result of withdrawal of \nliquidity \nfrom \nthe \nbanking \nsystem \nthrough OMO auctions, Naira deposit \nmade by commercial banks for the \npurchase of foreign currency and \nrevenue remittances by NNPC, NCS \nand \nFIRS \nand \nother \ngovernment \nagencies during the period of FAAC \ndistributions. The rate however, closed \nat 13.30 per cent in June following \nimproved liquidity conditions. \n \n Figure 5.3 \nDaily Open Buy Back Rate (January-June 2018) \n \n \n(iii) \nThe Nigeria Interbank Offered \nRate (NIBOR) \nThe reference rate in the Nigerian \nmoney \nmarket, \nthe \nNIBOR, \nwas \nrelatively stable across all tenors in the \nreview \nperiod. \nThe \nrate \ngenerally \nfluctuated downwards as opposed to \nmovements in the interbank call and \nOBB rates that did not show a clear \ndirection. The weighted average 30-\nday NIBOR, rose from 15.09 per cent in \nJanuary to 15.38 per cent in March \n2015. It, however, moderated to 13.15 \nper cent in May, and subsequently \nclosed at 13.88 per cent in June 2018. \nCBN Monetary Policy Review \n47 \nThe average NIBOR rate for the review \nperiod was 14.25 per cent, down from \n27.83 per cent in the preceding half \nyear, indicating that liquidity conditions \nwere easing (Table 5.1). \n \n5.2 \nForeign Exchange Market \nDuring the first half of 2018, the key \nchallenge to foreign exchange stability \nwas the sustained normalization of \nmonetary policy in the US, which led to \nintensified \ncapital \nreversal \nfrom \nemerging market economies, including \nNigeria. The development was in spite \nof increased activities at the Investors \nand Exporters window, targeted at \nproviding \nstability \nto \nthe \nmarket. \nConsequently, the Bank sustained the \nimplementation of existing measures \nincluding: the continuation of the \npolicy \non \nrepatriation \nof \nexport \nproceeds as well as return of unutilized \nforeign exchange sourced from CBN \nauctions; the restriction of access to \nforeign exchange for some 41 items; \nthe use of Bank Verification Number \n(BVN) in BDC transactions; resumption \nof sale of foreign exchange by the \nBank and International Money Transfer \nOperators (IMTOs) to BDCs; as well as \nspecial foreign exchange auctions to \ntargeted sectors and foreign exchange \nsales for small scale importers. In \naddition to these policies, the Bank \nintroduced \nnew \nmeasures \nwhich \nincluded: increased foreign exchange \nsales to BDCs from twice to thrice \nweekly, as well as the conclusion and \nimplementation \nof \nthe \nbilateral \ncurrency swap between the Central \nBank of Nigeria and the People’s Bank \nof China. These measures were able to \nrein-in \nspeculative \npractices \nand \narbitrage opportunities in the market. \nFigure 5.4 \nDaily Naira/US Dollar Exchange Rate (January - \nJune 2017) \n \n \n5.2.1 \nAverage Exchange Rates \nThe \nforeign \nexchange \nrate \nappreciated by 0.03 per cent to an \naverage of N305.79/US$ in the first half \nof 2018 from N305.88/US$ in the second \nhalf of 2017. During the same period, \nthe BDC rate also appreciated by 0.48 \nper \ncent, \nfrom \nan \naverage \nof \nN363.99/US$ to N362.25/US$ (Table 5.2). \nCBN Monetary Policy Review \n48 \nTable 5.2 \nAverage Monthly Spot Exchange Rates (July 2017 \n– June 2018) (N/US$) \nMonth / Year\nInterbank Rate\nBDC Rate\n2017: Jul\n305.86\n365.38\nAug\n305.67\n365.57\nSep\n305.89\n365.55\nOct\n305.62\n362.21\nNov\n305.9\n362.41\nDec\n306.31\n362.83\nAverage\n305.88\n363.99\n2018: Jan\n305.78\n363.2\nFeb\n305.9\n362.48\nMar\n305.74\n362.07\nApr\n305.61\n362.25\nMay\n305.83\n362.86\nJun\n305.87\n360.66\nAverage\n305.79\n362.25\n \nSource: CBN \n \n5.2.2 \nEnd-Period (Month) Exchange \nRates \nThe \nnaira \nappreciated \nat \nthe \ninterbank and the BDC segments of the \nforeign exchange market at the end of \nthe first half of 2018. At the interbank \nforeign exchange market, the naira \nappreciated by 0.02 per cent to \nN305.78/US$ at end-June, 2018 from \nN305.85/US$ at end-December 2017. At \nthe BDC segment, it, also, appreciated \nby 0.30 per cent to N362.00/US$ at end-\nJune, 2018 from N363.08/US$ at end-\nDecember, 2017. The development \nindicated \na \ntrend \ntowards \nconvergence of the rates in the market \nin \nresponse \nto \nthe \nBank’s \npolicy \nmeasures (Figure 5.5 and Table 5.3). \n \n \n \n \nTable 5.3 \nEnd-Month Exchange Rates (July 2017 – June \n2018) (N/US$) \nMonth / Year\nInterbank Rate\nBDC 'B' Rate\n2017: Jul\n305.70\n362.00\nAug\n305.85\n364.00\nSep\n305.75\n364.50\nOct\n305.80\n362.00\nNov\n306.00\n363.00\nDec\n306.00\n363.00\nAverage\n305.85\n363.08\n2018: Jan\n305.70\n363.00\nFeb\n305.90\n362.00\nMar\n305.65\n362.00\nApr\n305.70\n362.00\nMay\n305.95\n362.50\nJun\n305.75\n360.50\nAverage\n305.78\n362.00\n \nSource: CBN \n \n \n5.2.3 \nNominal \nand \nReal \nEffective \nExchange Rates \nThe Nominal Effective Exchange Rate \n(NEER) depreciated by 1.27 per cent to \nan average of 162.87 in the first half of \n2018 from an average of 160.83 in the \nsecond half of 2017. It also depreciated \nsignificantly by 4.87 per cent when \ncompared \nwith \n155.31 \nin \nthe \ncorresponding \nperiod \nof \n2017. \nIn \ncontrast, the Real Effective Exchange \nRate (REER) appreciated by 2.02 per \ncent from an average of 84.44 in the \nsecond half of 2017 to an average of \n82.77 in the first half of 2018. When \ncompared \nwith \n86.80 \nin \nthe \ncorresponding period of 2017, the \naverage REER appreciated by 4.87 per \ncent \n(Table \n5.4). \nThus, \nthe \nnaira \nappreciated in real terms relative to \nthe \ncurrencies \nof \nNigeria’s \nmajor \nCBN Monetary Policy Review \n49 \ntrading partners in the review period, \nindicating the effectiveness of efforts \nby the Bank to manage inflation which \nsustained its downward trend in the \nreview period (Table 5.4 and figure 5.6). \n \nTable 5.4 \nNominal and Real Effective Exchange Rates \nIndices (Jan 2017 – Jun 2018) \nDATE\nNEER\nREER\n2017: Jan\n153.29\n88.75\nFeb\n153.33\n87.71\nMar\n154.54\n87.03\nApr\n155.84\n86.62\nMay\n156.95\n85.71\nJun\n157.92\n84.95\n2017:H1 Average\n155.31\n86.8\n2017: Jul\n160.61\n85.56\nAug\n161.37\n85.42\nSep\n160.32\n84.33\nOct\n159.05\n83.23\nNov\n160.9\n83.73\nDec\n162.74\n84.39\n2017:H2 Average\n160.83\n84.44\n2018: Jan\n167.13\n86.12\nFeb\n165.02\n85.31\nMar\n165.35\n84.12\nApr\n162.03\n81.93\nMay\n158.85\n79.56\nJun\n158.86\n79.56\n2018:H1 Average\n162.87\n82.77\n \nSource: CBN \n \nFigure: 5.5 \nNominal and Real Effective Exchange Rates \nIndices (January 2017 – June 2018) \n \nSource: CBN \n \n5.2.4 Foreign Exchange Flows through \nthe CBN \nForeign exchange inflows through the \nCBN increased by 13.23 per cent to \nUS$30,414.98 million in the first half of \n2018, from US$26,861.61 million in the \npreceding period. It also increased by \n90.89 \nper \ncent \ncompared \nwith \nUS$15,933.36 \nmillion \nin \nthe \ncorresponding period of 2017. Foreign \nexchange outflows also rose by 29.44 \nper cent to US$22,942.33 million in the \nfirst half from US$17,724.26 million in the \npreceding period. On a year-on-year \nbasis, \nforeign \nexchange \noutflows \nrepresented an increase of 79.86 per \ncent \ncompared \nwith \nUS$12,755.62 \nmillion in the corresponding period of \n2017. The development resulted in a \nlower net inflow of US$7,472.65 million in \nthe first half of 2018 compared with \nUS$9,137.35 million in the preceding \nhalf year. The inflow was, however, \nhigher \nwhen \ncompared \nwith \nUS$3,177.74 million in the corresponding \nhalf of 2017 (Table 5.5 and Figure 5.7). \nThe modest inflows were traceable to \nhigher \noil \nreceipts \nand \nthe \neffectiveness of the Bank’s measures in \nmanaging capital outflows. \n \nCBN Monetary Policy Review \n50 \nTable 5.5 \nMonthly Foreign Exchange Flows through the CBN \n(July 2015 – June 2017) \nDates\nInflow (CBN)\nTotal Outflow \n(CBN)\nNet Flow (CBN)\nJan-17\n2,605.50\n1,055.84\n1,549.66\nFeb-17\n2,374.48\n978.56\n1,395.92\nMar-18\n1,693.40\n1,672.59\n20.81\nApr-18\n2,874.86\n2,164.40\n710.46\nMay-18\n2,712.38\n3,676.12\n-963.74\nJun-18\n3,672.74\n3,208.11\n464.63\n2017 H1 Total\n15,933.36\n12,755.62\n3,177.74\nJul-17\n3,867.04\n3,358.32\n508.72\nAug-17\n3,943.45\n3,594.32\n349.13\nSep-17\n4,425.53\n2,390.41\n2,035.12\nOct-17\n4,132.80\n2,839.15\n1,293.65\nNov-17\n6,811.96\n2,957.60\n3,854.36\nDec-17\n3,680.83\n2,584.46\n1,096.37\n2017 H2 Total\n26,861.61\n17,724.26\n9,137.35\nJan-18\n4,212.56\n2,734.38\n1,478.18\nFeb-18\n7,303.15\n3,163.29\n4,139.86\nMar-18\n5,076.48\n3,754.12\n1,322.36\nApr-18\n4,238.05\n3,437.72\n800.33\nMay-18\n4,373.01\n4,821.91\n-448.90\nJun-18\n5,211.73\n5,030.91\n180.82\n2018 H1 Total\n30,414.98\n22,942.33\n7,472.65\n \n \nFigure 5.6 \nMonthly Foreign Exchange Flows through the CBN \n(Jul 2016 – Jun 2018) \n \n \n \n \n5.2.5 Foreign Exchange Flow through \nthe Economy \nIn the review period, gross foreign \nexchange inflow to the economy \nincreased \nby \n18.16 \nper \ncent \nto \nUS$66,931.28 million, from US$56,646.51 \nmillion in the second half of 2017. It \nsignificantly increased by 100.64 per \ncent \nwhen \ncompared \nwith \nUS$33,358.96 \nmillion \nin \nthe \ncorresponding period of 2017. Similarly, \ngross \nforeign \nexchange \noutflow \nincreased \nby \n26.24 \nper \ncent \nto \nUS$24,928.57 million in the first half of \n2018, from US$19,746.94 million in the \nsecond half of 2017. When compared \nwith \nUS$13,859.55 \nmillion \nin \nthe \ncorresponding period of 2017, it surged \nby 79.87 per cent. \n \n \n \n \n \n \n \n \nCBN Monetary Policy Review \n51 \n \nTable 5.6 \nMonthly Foreign Exchange Flows through the Economy\n(Jan. 2017 – June 2018) (Million) \nPERIOD\nInflow \n(CBN)\nInflow \n(Autonomous)\nTotal \nInflows\nOutflows \n(CBN)\nOutflows \n(Autonomous)\nTotal \nOutflow\nNet \nFlow\nNet Flow \n(CBN)\nNet Flow \n(Autonomous)\nJan-17\n2,605.50\n1,880.08\n4,485.58\n1,055.84\n179.12\n1,234.96\n3,250.62\n1,549.66\n1,700.96\nFeb-17\n2,374.48\n2,769.45\n5,143.93\n978.56\n224.32\n1,202.88\n3,941.05\n1,395.92\n2,545.13\nMar-18\n1,693.40\n2,997.32\n4,690.72\n1,672.59\n255.20\n1,927.79\n2,762.93\n20.81\n2,742.12\nApr-18\n2,874.86\n3,312.95\n6,187.81\n2,164.40\n129.90\n2,294.30\n3,893.51\n710.46\n3,183.05\nMay-18\n2,712.38\n3,474.35\n6,186.73\n3,676.12\n162.59\n3,838.71\n2,348.02\n-963.74\n3,311.76\nJun-18\n3,672.74\n2,991.45\n6,664.19\n3,208.11\n152.80\n3,360.91\n3,303.28\n464.63\n2,838.65\n2017 H1 Total 15,933.36\n17,425.60\n33,358.96 12,755.62\n1,103.93\n13,859.55 19,499.41\n3,177.74\n16,321.67\nJul-17\n3,867.04\n4,622.05\n8,489.09\n3,358.32\n250.35\n3,608.67\n4,880.42\n508.72\n4,371.70\nAug-17\n3,943.45\n4,802.68\n8,746.13\n3,594.32\n196.61\n3,790.93\n4,955.20\n349.13\n4,606.07\nSep-17\n4,425.53\n5,423.72\n9,849.25\n2,390.41\n379.23\n2,769.64\n7,079.61\n2,035.12\n5,044.49\nOct-17\n4,132.80\n5,016.26\n9,149.06\n2,839.15\n229.12\n3,068.27\n6,080.79\n1,293.65\n4,787.14\nNov-17\n6,811.96\n4,833.41\n11,645.37\n2,957.60\n546.82\n3,504.42\n8,140.95\n3,854.36\n4,286.59\nDec-17\n3,680.83\n5,086.79\n8,767.62\n2,584.46\n420.55\n3,005.01\n5,762.60\n1,096.37\n4,666.23\n2017 H2 Total 26,861.61\n29,784.90\n56,646.51 17,724.26\n2,022.68\n19,746.94 36,899.57\n9,137.35\n27,762.22\nJan-18\n4,212.56\n6,288.40\n10,500.96\n2,734.38\n297.61\n3,031.99\n7,468.97\n1,478.18\n5,990.79\nFeb-18\n7,303.15\n3,561.35\n10,864.50\n3,163.29\n447.64\n3,610.93\n7,253.58\n4,139.86\n3,113.72\nMar-18\n5,076.48\n6,147.23\n11,223.71\n3,754.12\n331.74\n4,085.86\n7,137.85\n1,322.36\n5,815.49\nApr-18\n4,238.05\n8,721.00\n12,959.05\n3,437.72\n222.55\n3,660.27\n9,298.78\n800.33\n8,498.45\nMay-18\n4,373.01\n5,865.39\n10,238.40\n4,821.91\n321.53\n5,143.44\n5,094.96\n-448.90\n5,543.86\nJun-18\n5,211.73\n5,932.93\n11,144.66\n5,030.91\n365.18\n5,396.09\n5,748.58\n180.82\n5,567.76\n2018 H1 Total 30,414.98\n36,516.30\n66,931.28 22,942.33\n1,986.24\n24,928.57 42,002.71\n7,472.65\n34,530.06\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \nCBN Monetary Policy Review \n52 \nFigure 5.7 \nMonthly Foreign Exchange Flows through the \nEconomy(Jul 2016 – Jun 2018) (US$ Million) \n \n \n5.3 \nCapital Market \nIn the first half of 2018, the Nigerian \ncapital market opened on a bullish \nnote \nreflecting \nimproved \ngrowth \nsentiments \nas \nthe \neconomy \nwas \nrecovering from recession, and also \npartly due to increased activities at the \nInvestors \nand \nExporters \nwindow. \nTowards \nthe \nend \nof \nthe \nperiod, \nhowever, the market witnessed some \nlull in activities, following sustained \nspate of capital reversals arising from \nthe \ncontinued \nmonetary \npolicy \nnormalization \nin \nsome \nadvanced \neconomies, \nlow \nfiscal \nactivities \nfollowing \nthe \ndelayed \n2018 \nFGN \nbudget \nand \nfragile \neconomic \nrecovery, all culminating in a weak \ncorporate \nenvironment. \nMany \ncorporate entities were unable to \ndeclare dividends, while some had to \ncapitalize their earnings due to weak \nprofitability. Nonetheless, the Nigerian \ncapital market remained substantially \nunder-valued \nand \nstill \npresents \npromising investment opportunities for \nboth local and foreign investors. \n \n5.3.1 \nEquities Market \nThe All-Share Index (ASI) increased by \n0.09 per cent to 38,278.55 at end-June \n2018 from 38,243.19 at end- December \n2017. It also increased by 15.58 per \ncent compared with 33,117.48 at end-\nJune 2017. In the same vein, Market \nCapitalization (MC) increased by 1.91 \nper cent to N13.87 trillion at end-June \n2018, from N13.61 trillion at end-\nDecember \n2017. \nThe \nMC \nwhen \ncompared with N11.45 trillion at end-\nJune 2017, increased by 21.14 per \ncent. Although, ASI experienced a \nyear-on-year increase of 15.58 per \ncent, the lull in the market during the \nreview period was traceable to the \ndecline in some key sectors including \nBanking, Breweries, Building Materials \nand Oil & Gas which decreased to \n14.66, 11.35, 29.85 and 2.28 per cent \nfrom their respective shares of 19.10, \n13.52, 32.36 and 5.14 per cent in the \npreceding half year. \n \nTable 5.7 \nNSE All-Share Index (ASI) and Market \nCapitalization (MC) (June 2017 – June 2018) \nJun-17\n33,117.48\n11.45\nJul-17\n35,847.75\n12.35\nAug-18\n35,504.62\n12.24\nSep-18\n35,429.31\n12.21\nOct-18\n36,680.29\n12.69\nNov-18\n37,944.60\n13.21\nDec-18\n38,243.19\n13.61\nJan-18\n44,343.65\n15.9\nFeb-18\n43,330.54\n15.55\nMar-18\n41,504.51\n14.99\nApr-18\n41,268.01\n14.95\nMay-18\n38,104.54\n13.8\nJun-18\n38,278.55\n13.87\nDate\nASI\nMC(Equities) \nN’Trillion)\n \nSource: NSE \n \n \nCBN Monetary Policy Review \n53 \nFigure 5.8 \nNSE ASI and MC (June 2017– June 2018) \n0.00\n2.00\n4.00\n6.00\n8.00\n10.00\n12.00\n14.00\n16.00\n18.00\n20.00\n20,000\n24,000\n28,000\n32,000\n36,000\n40,000\n44,000\n48,000\nJun-17\nJul-17\nAug-17\nSep-17\nOct-17\nNov-17\nDec-17\nJan-18\nFeb-18\nMar-18\nApr-18\nMay-18\nJun-18\n(N' Trillion)\nAll-Share Index\nEquities Market Capitalisation (N' Trillion)\n \nSource: NSE \n \nFigure 5.9 \nNSE ASI and MC (December 2017 – June 2018) \n12.00\n12.50\n13.00\n13.50\n14.00\n14.50\n15.00\n15.50\n16.00\n16.50\n34,000\n35,000\n36,000\n37,000\n38,000\n39,000\n40,000\n41,000\n42,000\n43,000\n44,000\n45,000\nDec-17\nJan-18\nFeb-18\nMar-18\nApr-18\nMay-18\nJun-18\n(N' Trillion)\nAll-Share Index\nEquities Market Capitalisation (N' Trillion)\n \nSource: NSE \n \n5.3.2 Market Turnover \nAggregate stock market turnover in \nthe first half of 2018 increased by 13.52 \nper cent to 67.42 billion shares, valued \nat N805.52 billion in 649,551 deals \ncompared with 59.39 billion shares, \nvalued at N803.82 billion in 491,300 \ndeals in the second half of 2017. On a \nyear-on-year basis, market turnover \nalso increased by 52.67 per cent from \n44.16 billion shares, valued at N467.67 \nbillion in 448,950 deals. Foreign portfolio \ninvestment outflow exceeded inflow \nby N68.94 billion in the first half of 2018, \nlargely \nattributable \nto \nsustained \nmonetary policy normalization in some \nadvanced economies coupled with \npolitical uncertainties which affected \ninvestor confidence in the Nigerian \neconomy. \n \nFigure 5.10 \nPortfolio Inflows (May 2017 – May 2018) \nSource: NSE \n \n5.3.3 Sectoral Contribution to Equity \nMarket Capitalization \nDespite the lull in market activity, the \nconstruction \nsector \nstill \ndominated \noverall market capitalization, driven \nprimarily by activities in the building \nmaterials sub-sector. The contribution \nof the building materials sub-sector \ndeclined to 29.85 per cent at end-June \n2018 from 32.36 per cent at end-\nDecember 2017. Other major sub-\nsectors \nwere \nbanking, \nfood \n& \nbeverages and breweries, with market \nshares of 14.66, 13.80 and 11.35 per \ncent, respectively, at end-June 2018 \n(Figure 5.12). \n \nCBN Monetary Policy Review \n54 \nFigure 5.11 \nNSE Market Capitalisation by Sector as at End-\nDecember 2017 \nFood and \nBeverages \n13.65%\nBanking\n19.10%\nInsurance\n1.13%\nBreweries\n13.52%\nConglomerat\nes\n0.75%\nOil and Gas\n5.14%\nBuilding \nMaterials\n32.36%\nOther Sectors\n11.40%\n \nSource: NSE \n \nFigure 5.12 \nNSE Market Capitalisation by Sector as at End-\nJune 2018 \nFood and Beverages \n13.80%\nBanking\n14.66%\nInsurance\n1.06%\nBreweries\n11.35%\nConglomerates\n0.78%\nOil and Gas\n2.28%\nBuilding Materials\n29.85%\nOther Sectors\n26.22%\n \nSource: NSE \n \n5.3.4 The Warren Buffett Valuation \nMetric and Nigeria’s Equities \nMarket \nThe Warren Buffett valuation metric \nwhich measures the market value of \nsecurities as a ratio of GDP showed \nthat the Nigerian equities market was \nfairly-valued in the review period. At \n92.29 and 84.29 per cent in the first and \nsecond quarters of 2018, the metric \nwas within the threshold of 75.0 - 115.0 \nper \ncent. \nThe \ndevelopment \nwas \nattributable to a number of factors, \nincluding \nimproving \neconomic \nconditions, reflected in the modest \noutput recovery of 1.95 per cent in the \nfirst quarter of 2018, increased investor \nactivity in the capital market during \nthe early part of the review period, as \nwell as sustained yields on domestic \nassets. In addition, the continuous \ndownward \ntrend \nin \ninflation \nand \nrelatively \nstable \nforeign \nexchange \nmarket, supported improved stock \nmarket valuation. The improved stock \nmarket \nvaluations \nalong \nwith \nencouraging \nmacroeconomic \noutcomes are expected to continue to \nattract foreign investment into the \neconomy. \n \nFigure 5.13 \nWarren Buffett Valuation of Nigerian Equities \nMarket \n0.00\n10.00\n20.00\n30.00\n40.00\n50.00\n60.00\n70.00\n80.00\n90.00\n100.00\nQ1-2014\nQ2-2014\nQ3-2014\nQ4-2014\nQ1-2015\nQ2-2015\nQ3-2015\nQ4-2015\nQ1-2016\nQ2-2016\nQ3-2016\nQ4-2016\nQ1-2017\nQ2-2017\nQ3-2017\nQ4-2017\nQ1-2018\nQ2-2018\nPer cent\nWARREN BUFFET INDICATOR\n Source: NSE \n \n \nCBN Monetary Policy Review \n55 \n5.3.5 Bond Market \nIn the first half of 2018, the bond \nmarket was dominated by transactions \nin debt instruments of the Federal \nGovernment of Nigeria (FGN). The Sub-\nnational government and corporate \nbonds segments also witnessed some \nactivity, with the latter recording the \nleast share by market volume. \n \n5.3.5.1 FGN Eurobond \nAt 5.90 per cent, the 10-year dollar-\ndenominated bond yield for Nigeria \nincreased by 143 basis points at end-\nJune 2018, from 4.47 per cent at end-\nDecember 2017. When compared with \nend-June 2017 yield of 4.80 per cent, it \nincreased by 33 basis points (Figure \n5.14). \nThe \ndevelopment \nwas \nattributable to perception of rising \nsovereign risk by investors. \n \nFigure 5.14 \n10-Year U.S. Dollar-denominated Bond Yield for \nNigeria (June 30, 2017 – June 29, 2018) \n4.00\n4.50\n5.00\n5.50\n6.00\n6.50\n6/30/2017\n7/11/2017\n7/22/2017\n8/2/2017\n8/13/2017\n8/24/2017\n9/4/2017\n9/15/2017\n9/26/2017\n10/7/2017\n10/18/2017\n10/29/2017\n11/9/2017\n11/20/2017\n12/1/2017\n12/12/2017\n12/23/2017\n1/3/2018\n1/14/2018\n1/25/2018\n2/5/2018\n2/16/2018\n2/27/2018\n3/10/2018\n3/21/2018\n4/1/2018\n4/12/2018\n4/23/2018\n5/4/2018\n5/15/2018\n5/26/2018\n6/6/2018\n6/17/2018\n6/28/2018\nNigeria\n \nSource: NSE \n \nAt 13.19 per cent, the yield on FGN \nBonds for June 2018 decreased by an \naverage of 355 basis points and 107 \nbasis points when compared with 16.74 \nand 14.26 percent on June 30, 2017 \nand December 31, 2017, respectively. \nThe yield curve for June 2018 had a \nconcave \nshape, \nsuggesting \nan \noptimistic \nmacroeconomic \noutlook. \nThis can be attributed to the sustained \nrecovery in oil and other commodity \nprices, improved oil production, as well \nas stability in the foreign exchange \nmarket (Figure 5.15). \n \nFigure 5.15 \nFGN Bonds Yield Curves: end-June. 2017 vs. end-\nDec. 2017 vs. end-June. 2018 \n0.00%\n5.00%\n10.00%\n15.00%\n20.00%\n25.00%\n0.00\n5.00\n10.00\n15.00\n20.00\n25.00\nyield\nTime to Maturity\nFGN Bond Yield Curves: June 30, 2017 vs. Dec. 31, \n2017 vs. June 29, 2018\nJune 2018\nDec. 2017\nJune 2017\n \nSource: NSE \n \n5.3.5.2 State/Local Government Bonds \nIn the review period, activity at the \nsub-national bonds market improved \nmoderately. Total value of outstanding \nstate/local \ngovernment \nbonds, \nincreased by 2.97 per cent to N565.82 \nbillion at end-June 2018, from N562.81 \nbillion \nat \nend-Dec \n2017. \nWhen \ncompared with N563.58 billion at end-\nJune 2017, it also increased by 0.14 per \ncent. \n \n \nCBN Monetary Policy Review \n56 \n5.3.5.3 Corporate Bonds \nActivity \nin \nthe \ncorporate \nbonds \nsegment declined during the review \nperiod. At N267.72 billion, the value of \noutstanding corporate bonds at end-\nJune 2018 declined by 1.41 and 7.04 \nper cent from N276.50 billion and \nN297.44 billion in the preceding half \nyear and the corresponding period of \n2017, respectively. The development \ncould be attributed to the continued \npresence of inherent fragilities in the \nmacroeconomy, \ncontinued \nlull \nin \neconomic activities stemming from low \nfiscal operations of Government, as \nwell \nas \nincreasing \ninvestor \nrisk \nperception \nassociated \nwith \nthe \nforthcoming general elections. \n \n5.3.5.4 Overall Analysis of the Nigerian \nCapital Market \nThe value of FGN bonds increased \nsignificantly by 9.85 per cent to N9.26 \ntrillion at end-June 2018 from N8.43 \ntrillion at end-Dec 2017, and by 38.83 \nper cent when compared with N6.67 \ntrillion at end-June 2017. FGN bonds \naccounted for 48.69 per cent of \naggregate market capitalization as at \nend-June \n2018. \nThe \nvalue \nof \nstate/municipal \nbonds, \ncorporate \nbonds and supranational bonds were \nN565.82 billion, N267.72 billion and \nN12.95 billion, accounting for 2.97, 1.41 \nand 0.07 per cent of aggregate \nmarket \ncapitalization, \nrespectively, \nduring the same period. The equities \nmarket contributed 46.9 per cent of \naggregate market capitalization at \nend-June 2018, while FGN bonds, \nstate/municipal \nbonds, \ncorporate \nbonds \nand \nsupranational \nbonds \naccounted for the balance of 53.10 \nper cent (Figure 5.16). \n \nFigure 5.16 \nStructure of the Nigerian Capital Market (June, \n2018) \n \nSource: NSE \n \n5.4 \nGlobal \nFinancial \nMarket \nDevelopments \nIn review period, the global financial \nmarket \nexperienced \nsignificant \nvolatility \ndue \nto \nseveral \nfactors \nincluding: the earlier threat of military \naction against North Korea by the US; \nrising trade tensions between the US \nand its major trading partners; and the \nwithdrawal of the US from the Iranian \nnuclear deal. Also, the continued \nuncertainties \naround \nthe \nBREXIT \nnegotiations; \nprogressing \nmonetary \npolicy divergence in the advanced \neconomies; \nand \nsustained \ngeo-\npolitical tensions in the Middle East \nfurther \nheightened \nmarket \nnervousness. The effect of these factors \nwere, \nhowever, \nsignificantly \nmoderated by the commencement of \npeace talks on the Korean Peninsula, \nsustained recovery in oil and other \ncommodity \nprices, \nrebound \nin \nCBN Monetary Policy Review \n57 \ninvestment and manufacturing output \nas well as improving asset prices and \nlong term yields in major financial \nmarkets. \nConsequently, \nthe \nperformance of major global stock \nmarkets was mixed on account of \nintensified monetary policy divergence \nin the advanced economies and \nfurther strengthening of the US dollar \nagainst key currencies. The European \nCentral Bank (ECB) and the Bank of \nJapan (BOJ) continued with a broad \nstance of monetary accommodation \nas \ninflation \nremained \nconsiderably \nbelow their targets, while the US Fed \nraised policy rates on two occasions in \nthe review period. As a consequence, \nthe US dollar appreciated against most \ncurrencies. \nThus, \non \naccount \nof \nimproving macroeconomic conditions \nin \nthe \nadvanced \neconomies, \ncommodity \nprices \nsustained \ntheir \nrecovery in the review period. \n \n5.4.1 Money \nMarket \nand Central \nBank Policy Rates \nWith \nimprovements \nin \nglobal \nmacroeconomic \nconditions \nand \ncontinued monetary accommodation \nacross \nthe \nmajor \nadvanced \neconomies, \nasset \nprices \nin \nmajor \nfinancial \nmarkets \ncontinued \ntheir \nupward \ntrend. \nIn \nthe \nadvanced \neconomies, \nprice \ndevelopment \nshowed a mixed trend with rising prices \nin the US and the UK, pushing inflation \nbeyond central banks’ targets, while in \nthe EU and Japan, inflation remained \nrelatively subdued. In most emerging \nmarket and developing economies, \nrelatively \nstable \ncurrencies \nand \nmoderating inflation rates, resulting \nfrom \nimproved \noil \nand \nother \ncommodity \nprices, \nprovided \nextra \npolicy space for monetary adjustment. \nKey \nconcerns \nto \nglobal \nmacroeconomic stability confronting \ncentral \nbank \npolicy \nmakers \nwith \ntendency to influence the direction of \ncapital flow in the review period \nincluded: the earlier threat of military \naction against North Korea by the US; \nrising trade tensions between the US \nand \nits \nmajor \ntrading \npartners; \nwithdrawal of the US from the Iranian \nnuclear deal; continued uncertainties \naround \nthe \nBREXIT \nnegotiations; \ncontinued \nmonetary \npolicy \ndivergence between the US and the \nUK on one hand and the euro area \nand Japan, on the other hand; the \nstrengthening US dollar; and geo-\npolitical tensions in the Middle East. \nIn the light of these developments, the \nUS Federal Reserve Bank continued its \nmonetary \npolicy \nnormalization \nprogramme, as indicators suggested \nthe likelihood of further rise in inflation \nin the medium term, while the Bank of \nEngland (BOE) gave strong indications \nof progressing with its normalization \nprogramme in the second half of 2018. \nThe European Central Bank (ECB) and \nthe Bank of Japan (BOJ), however, \ncontinued with a broad stance of \nmonetary accommodation as inflation \nremained considerably below their \ntargets. Accordingly, the US Fed raised \nits policy rate on two occasions, while \nthe BoE, ECB and BOJ held their rates \nsteady. \n \nCBN Monetary Policy Review \n58 \nAmongst the emerging market and \ndeveloping economies, Brazil, Russia, \nGhana, Kenya and South Africa all \nlowered \ntheir \npolicy \nrates, \nas \nexchange rates stabilized and inflation \nmoderated. In China, however, the \npolicy rate was maintained to support \nits \nrebalancing \nprogramme, \nwhile \nNigeria maintained rates to attract \nforeign inflows and moderate price \ndevelopment. \n \nTable 5.8: \nPolicy Rates of Selected Countries January – \nJune 2018 \nCountry \nJan 18 \nFeb. \n18 \nMar. \n18 \nApr. \n18 \nMay. \n18 \nJun \n18 \nKenya \n10.00 \n10.00 \n9.50 \n9.50 \n9.50 \n9.50 \nS. Africa \n6.75 \n6.75 \n6.50 \n6.50 \n6.50 \n6.50 \nGhana \n20.00 \n20.00 \n18.00 \n18.00 \n17.00 \n17.00 \nNigeria \n14.00 \n14.00 \n14.00 \n14.00 \n14.00 \n14.00 \nBrazil \n7.00 \n6.75 \n6.50 \n6.50 \n6.50 \n6.50 \nUSA \n1.25-\n1.50 \n1.25-\n1.50 \n1.50-\n1.75 \n1.50-\n1.75 \n1.50-\n1.75 \n1.75-\n2.00 \nJapan \n-0.10 \n-0.10 \n-0.10 \n-0.10 \n-0.10 \n-0.10 \nEuro \nArea \n0.00 \n0.00 \n0.00 \n0.00 \n0.00 \n0.00 \nIndia \n6.00 \n6.00 \n6.00 \n6.00 \n6.00 \n6.25 \nRussia \n7.75 \n7.50 \n7.25 \n7.25 \n7.25 \n7.25 \nChina \n4.35 \n4.35 \n4.35 \n4.35 \n4.35 \n4.35 \nUK \n0.50 \n0.50 \n0.50 \n0.50 \n0.50 \n0.50 \nIndonesia \n4.25 \n4.25 \n4.25 \n4.25 \n4.75 \n5.25 \n \n5.4.2 Capital Market \nThe performance of major global \nstock markets was mixed during the \nreview period mainly on account of \nintensified monetary policy divergence \nin the advanced economies and \nfurther strengthening of the US dollar \nagainst key currencies. The effect of \nthese factors was further amplified by \nUS-propelled trade tensions arising from \nthe implementation of aggressive tariff \nregimes \nagainst \nher \nkey \ntrading \npartners, \nnotably \nChina \nand \nthe \nEuropean Union. As a consequence, in \nEurope, the French CAC 40 increased \nby 0.21 per cent, while the UK FTSE 100 \nand German DAX indices decreased \nby 0.66 and 4.73 per cent, respectively. \nIn North America, the United States S&P \n500 and Canadian S&P/TSX Composite \nindices increased by 1.67 and 0.42 per \ncent, respectively, while the Mexican \nBolsa decreased by 3.43 per cent. In \nSouth America, the Columbia COLCAP \nindex increased by 4.9 per cent, while \nthe Brazilian Bovespa and Argentine \nMerval indices decreased by 4.76 and \n13.40 per cent, respectively. In Asia, \nthe Indian BSE Sensex index increased \nby 4.01 per cent, while the Japanese \nNikkei 225 and Chinese Shanghai SE \nindices decreased by 2.02 and 13.90 \nper cent, respectively. The African \nstock markets experienced the effect \nof capital reversals, as the Nigerian NSE \nAll-Share, South African JSE All-Share \nand Kenyan Nairobi NSE 20, indices \ndecreased by 1.61, 3.68 and 11.48 per \ncent, respectively, while the Egyptian \nEGX CASE 30 and Ghanaian GSE All \nShare indices increased by 8.85 and \n11.59 per cent, respectively, as these \ncountries \nwere \nunder \nInternational \nMonetary \nFund \n(IMF) \nmonitored \nprogrammes which helped to restore \ninvestor confidence. \n \n \n \n \n \n \n \n \nCBN Monetary Policy Review \n59 \nTable 5.9 \nSelected International Stock Market Indices as at June, 2018 \nCountry\nIndex\nEnd-Dec \n2017\n29-Mar-18\n29-Jun-18\nDecember 29, 2017-\n29 June, 2018 % \nChange\n29 March-29 \nJune, 2018 \n% Change\nAFRICA\nNigeria\nASI\n38,243.19\n41,504.51\n37,625.59\n-1.61\n-9.35\nSouth Africa\nJSE African AS\n59,504.67\n55,474.52\n57,313.88\n-3.68\n3.32\nKenya\nNairobi NSE 20 \n3,711.94\n3,845.30\n3,285.73\n-11.48\n-14.55\nEgypt\nEGX CSE 30\n15,019.14\n17,450.15\n16,348.55\n8.85\n-6.31\nGhana\nGSE All Share\n2,579.72\n3,366.85\n2,878.66\n11.59\n-14.50\nNORTH AMERICA\nUS\nS&P 500\n2,673.61\n2,604.47\n2,718.37\n1.67\n4.37\nCanada\nS&P/TSX Composite\n16,209.13\n15,367.29\n16,277.73\n0.42\n5.92\nMexico\nMexico Bolsa (IPC)\n49,354.42\n46,124.85\n47,663.20\n-3.43\n3.34\nSOUTH AMERICA\nBrazil\nBovespa Stock \n76,402.08\n85,365.56\n72,762.51\n-4.76\n-14.76\nArgentina\nMerval \n30,065.61\n31,114.93\n26,037.01\n-13.40\n-16.32\nColombia\nCOLCAP\n1,513.65\n1,455.52\n1,577.01\n4.19\n8.35\nEUROPE\nUK\nFTSE 100\n7,687.77\n7,056.61\n7,636.93\n-0.66\n8.22\nFrance\nCAC 40\n5,312.56\n5,167.30\n5,323.53\n0.21\n3.02\nGermany\nDAX \n12,917.64\n12,096.73\n12,306.00\n-4.73\n1.73\nASIA\nJapan\nNIKKEI 225\n22,764.94\n21,159.08\n22,304.51\n-2.02\n5.41\nChina\nShanghai SE A \n3,463.48\n3,309.98\n2,982.00\n-13.90\n-9.91\nIndia\nBSE Sensex\n34,056.83\n32,968.68\n35,423.48\n4.01\n7.45\nSource: Bloomberg \n \n5.4.3 Commodities \nGlobal commodity prices sustained \ntheir \nrecovery \nduring \nthe \nreview \nperiod, \nlargely \non \naccount \nof \nimproving macroeconomic conditions \nin \nthe \nadvanced \nand \nemerging \nmarket and developing economies. In \nparticular, \ncrude \noil \nprices \nwere \nbuoyed by geopolitical tensions in the \nMiddle East, sustained compliance by \nOPEC and Non-OPEC members on \nproduction \nadjustments, \nlarge \ndrawdown of US crude inventories and \nprospects of higher oil demand. As a \nresult, the OPEC reference basket rose \nby 17.40 per cent to US$75.69 at end-\nJune 2018 from US$64.47 at end-\nDecember 2017. With crude oil being a \nmajor component of the global energy \nmix, the Energy Price Index also rose by \n17.65 per cent to 91.57 points in June \n2018 from 77.83 points in December \n2017. \nThe non-fuel commodity price index \n(including aluminum and tin) also rose \nby 6.27 per cent to 89.83 points in June \n2018 from 84.53 points in December \n2017, reflecting the strengthening of \nglobal demand. The price per metric \ntonne of metals for aluminum and tin \nrose to US$2,299.67 and US$20,858.83 in \nMay \n2018 \nfrom \nUS$2,080.47 \nand \nUS$19,476.37 \nin \nDecember \n2017, \nrespectively. \n \nThe prices of food commodities equally \nrose during the review period. The \nCBN Monetary Policy Review \n60 \nFood and Agriculture Organization \n(FAO) Food Price Index rose by 3.67 \nper \ncent \nfrom \n169.1 \npoints \nin \nDecember 2017 to 175.3 points in June \n2018. The sub-indices of meat, dairy \nand cereals drove the increase, while \nvegetable oil and sugar fell. \n \n5.4.4 Foreign Exchange Market \nIn the first half of 2018, most currencies \ndepreciated against the US dollar. This \nwas \nlargely \non \naccount \nof \nthe \nimplementation of the ‘America First’ \npolicy of the Trump Administration in \nthe United States through bullish trade \ninstruments which helped to increase \nthe flow of foreign investments into the \nUS. Other factors were: the significantly \nimproved economic conditions in the \nUS; and rising treasury yields, following \nsustained \nmonetary \npolicy \nnormalization by the US Fed. As a \nresult, in North America, the Canadian \ndollar \nand \nthe \nMexican \npeso \ndepreciated against the US dollar by \n4.28 and 1.25 per cent, respectively. In \nSouth America, the Brazilian real and \nthe \nArgentine \npeso \ndepreciated \nagainst the U.S. dollar by 14.65 and \n35.62 per cent, respectively, while the \nColombian peso appreciated by 1.92 \nper cent in the period under review. \nIn Europe, the British pound, the Euro \nand the Russian ruble all depreciated \nagainst the U.S dollar by 2.25, 2.66 and \n8.15 per cent, respectively. In Asia, the \nChinese yuan and the Indian rupee \nboth depreciated by 1.61 and 6.72 per \ncent, respectively, while the Japanese \nyen appreciated against the U.S dollar \nby 1.74 per cent. \n \nIn Africa, the South African rand, \nEgyptian pound and the Ghanaian \ncedi depreciated against the U.S. \ndollar by 9.78, 0.59 and 4.76 per cent, \nrespectively, while the Nigerian naira \nand \nKenyan \nshilling \nappreciated \nagainst the U.S dollar by 0.08 and 2.15 \nper cent, respectively. \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \nCBN Monetary Policy Review \n61 \n \nTable 5.10 \nExchange Rates of Selected Countries (value in currency units to US$) \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \nCurrency\n29-Dec-17\n29-Jun-18\n Dec. 17 - Jun 18 \n(% App/Dep)\nAFRICA \nNigeria \nNaira\n306.00\n305.75\n0.08\nSouth Africa \nRand\n12.38\n13.73\n-9.78\nKenya \nShilling\n103.18\n101.01\n2.15\nEgypt \nPound\n17.81\n17.92\n-0.59\nGhana\nCedi\n4.51\n4.73\n-4.76\nNORTH \nAMERICA \nCanada \nDollar\n1.26\n1.31\n-4.28\nMexico \nPeso\n19.66\n19.91\n-1.25\nSOUTH \nAMERICA \nBrazil \nReal\n3.31\n3.88\n-14.65\nArgentina \nPeso\n18.62\n28.93\n-35.62\nColombia \nPeso\n2986.84\n2930.50\n1.92\nEUROPE \nUK \nPound\n0.74\n0.76\n-2.25\nEuro Area \nEuro\n0.83\n0.86\n-2.66\nRussia \nRuble\n57.63\n62.74\n-8.15\nASIA \nJapan \nYen\n112.69\n110.76\n1.74\nChina \nYuan\n6.51\n6.62\n-1.61\nIndia\nRupee\n63.87\n68.47\n-6.72\nSource: bloomberg \n Exchange Rates of Selected Countries (Value in currency units to US$)\nCBN Monetary Policy Review \n62 \nCBN Monetary Policy Review \n63 \nCHAPTER SIX \nECONOMIC OUTLOOK \n \n6.1 \nOVERVIEW \nlobal output growth for 2018 \nwas projected to rise to 3.9 per \ncent, up from 3.7 per cent in \n2017 \n(WEO \nJuly, \n2018). \nThe \ndevelopment was expected to be \ndriven, \namong \nothers, \nby \nthe \nstrengthening of domestic investment \ndemand, relatively easier financing \nconditions \nin \nthe \nadvanced \neconomies and sustained recovery in \noil and other commodity prices, amid \nlimited spillovers of trade tensions to \nother \nmarkets, \nparticularly \nin \nthe \nadvanced economies. The downside \nrisks to growth would include: growing \nprotectionist measures; the weakening \nof the global cooperation mechanism; \npotential buildup of financial sector \nvulnerabilities, which could weaken \nmarket \nsentiments \nand \nundermine \ngrowth; and insufficient fiscal buffers to \nsupport recovery. \n \nThe \ngrowth \noutcomes, \nhowever, \ndiffered across regions and markets. In \nthe advanced economies, growth was \nprojected at 2.4 per cent in 2018, same \nas \nin \n2017, \nlargely \nreflecting \nmoderations in the euro area and \nJapan. Output growth in the US was \nestimated to increase to 2.9 per cent in \n2018 from 2.3 per cent in 2017, in \nresponse \nto \nfiscal \nstimulus \nand \nincreased private final demand which \npropped \noutput \nfurther \nabove \npotential, \nthereby \nlowering \nunemployment. On the other hand, \ngrowth in the euro area was projected \nto decline to 2.2 per cent in 2018 from \n2.4 per cent in 2017, owing to widening \nsovereign spreads in the wake of \nheightened political uncertainties that \nweighed down domestic demand. In \nthe United Kingdom, growth was also \nprojected to slow down to 1.4 per cent \nin 2018 from 1.7 per cent in 2017, as \nsentiments from BREXIT continued to \nweigh on investments. Owing to weak \nprivate consumption and investment, \nthe Japanese economy was also \nestimated to grow lower by 1.0 per \ncent in 2018, compared with 1.7 per \ncent in 2017. \n \nIn \nthe \nemerging \nmarket \nand \ndeveloping \neconomies \n(EMDEs), \ngrowth was uneven, reflecting the \ncombined influences of rising oil prices, \nhigher yields in the United States, \nspillover \neffects \nof \ntrade \ntensions \ncoupled with political uncertainties in \nthe \ndomestic \nenvironment. \nAccordingly, growth in the EMDEs was \nestimated at 4.9 per cent in 2018 up \nfrom 4.7 per cent in 2017. Growth in \nIndia was projected to rise to 7.3 per \ncent in 2018 from 6.7 per cent in 2017, \nas the effects of the goods and \nservices \ntax \nand \ncurrency \ndemonetization \nexercise \nwaned. \nOutput growth in Brazil was estimated \nto expand to 1.8 per cent in 2018 from \n1.0 per cent in 2017. Similarly, output \ngrowth in Russia was projected to rise \nby 1.7 per cent in 2018 up from 1.5 per \ncent in 2017, owing to stabilizing oil \nprices, \nimproved \nconfidence, \nand \nrecovering \ndomestic \nand \nexternal \ndemand. \nChina’s \ngrowth \nwas \nestimated at 6.6 per cent in 2018 down \nG \nCBN Monetary Policy Review \n64 \nfrom 6.9 per cent in 2017, as the \ntightening of the financial sector was \nsustained along with weaker external \ndemand. \n \nIn Sub-Saharan Africa (SSA), growth \nwas estimated to increase to 3.4 per \ncent in 2018 from 2.8 per cent in 2017, \ndue to improved performance in \nNigeria and South Africa, the region’s \nlargest \neconomies. \nThe \nNigerian \neconomy was estimated to grow by \n2.1 per cent in 2018 up from 0.8 per \ncent in 2017, sustained by improved \nprospects for oil prices and production. \nGrowth of the South African economy \nwas also projected to rise by 1.5 per \ncent in 2018 up from 1.3 per cent in \n2017, as the change in the country’s \nleadership ushered in a climate of \nimproved \nconfidence, \nthus \nstrengthening private investment. \n \n6.2 \nOutlook for Global Output \nGlobal \noutput \nis \nexpected \nto \nstrengthen to 3.9 per cent apiece in \n2018 and 2019 from 3.7 per cent in \n2017. The projection is premised on \ngrowth recovery in the emerging \nmarket and developing economies \n(EMDEs) and still strong growth in the \nadvanced economies. The factors \nexpected to drive the global growth \nprojection would include: the broadly \naccommodative financial conditions in \nthe advanced economies; the global \nspillovers \nof \nthe \ncurrent \nUS \nexpansionary fiscal policy; sustained \nrecovery in commodity prices; and \nfavorable market sentiment despite \nthe looming trade war between the US \nand \nsome \nof \nher \nmajor \ntrading \npartners. \n \nGrowth in the advanced economies is \nexpected to remain unchanged at 2.4 \nper cent in 2017 and 2018, easing \nslowly to 2.2 per cent in 2019, largely \nreflecting moderations in the euro area \nand Japan. In the United States, \ngrowth is projected to strengthen to 2.9 \nand 2.7 per cent in 2018 and 2019, \nrespectively, from 2.3 per cent in 2017, \ndue largely to the ongoing fiscal \nstimulus that is expected to further \nstrengthen private final demand and \nlower unemployment. The euro area \neconomy is, however, projected to \nslow gradually from 2.4 per cent in \n2017 to 2.2 and 1.9 per cent in 2018 \nand 2019, respectively. Similarly, Japan \nis forecast to slow down by 1.0 and 0.9 \nper \ncent \nin \n2018 \nand \n2019, \nrespectively, from 1.7 per cent in 2017, \nfollowing a contraction traceable to \nweaker \nprivate \nconsumption \nand \ninvestment in the first quarter of 2018. \nThe \neconomy \nwould, \nhowever, \nstrengthen over the remainder of 2018 \nand further in 2019, supported by \nstronger private consumption, external \ndemand, and investment. \n \nIn \nthe \nemerging \nmarket \nand \ndeveloping \neconomies, \ngrowth \nis \nforecast to expand to 4.9 and 5.1 per \ncent in 2018 and 2019, respectively, \nfrom \n4.7 \nper \ncent \nin \n2017. \nThe \nexpansion would be supported by \nseveral factors including: rising crude \noil prices; and an appreciating US \ndollar, making goods from emerging \nmarket economies more competitive. \nCBN Monetary Policy Review \n65 \nChina is forecast to further slowdown \nto 6.6 and 6.4 per cent in 2018 and \n2019, respectively, from 6.9 per cent in \n2017, due to the ongoing economic \nrebalancing \nprogramme. \nGrowth \nforecast for India is expected to \nimprove to 7.3 and 7.5 per cent in 2018 \nand 2019, respectively, from 6.7 per \ncent in 2017, due to improved private \nand government consumption as well \nas fixed investment. In Brazil, growth is \nprojected to rise to 1.8 and 2.5 per \ncent in 2018 and 2019, respectively, \nfrom 1.0 per cent in 2017, following the \nrecovery of crude oil prices as well as \npolitical stability. \n \nIn Sub-Saharan Africa, the prospects \nfor output recovery is likely to continue, \nsupported by rising commodity prices. \nGrowth in the region is expected to \nexpand to 3.4 and 3.8 per cent in 2018 \nand 2019, respectively, from 2.8 per \ncent in 2017. The improved growth \nforecast reflects favourable prospects \nfor the Nigerian and South African \neconomies. Nigeria’s growth is forecast \nto expand to 2.1 and 2.3 per cent in \n2018 and 2019, respectively, from 0.8 \nper cent in 2017. The improved outlook \nis largely attributable to favourable oil \nprices and restoration of stability in \neconomic management. Despite the \nperennial labour and energy crises, the \nSouth African economy is expected to \nrecover from the weak performance in \nthe first quarter into stronger growth \nover the rest of 2018 and into 2019, \nlargely \non \naccount \nof \nimproved \nconfidence associated with the new \npolitical leadership. Consequently, the \nSouth African economy is forecast to \nexpand by 1.5 and 1.7 per cent in 2018 \nand 2019, respectively, from 1.3 per \ncent in 2017. \n \nGrowth in the Middle East and North \nAfrica (MENA) region is projected to \nstrengthen to 3.5 and 3.9 per cent in \n2018 and 2019, respectively, from 2.2 \nper cent in 2017. The growth outlook is \npremised on the expectation that \nmany countries in the region will \nbenefit from the improved outlook for \noil prices, although, the outlook for oil \nimporting countries remains fragile. \nSeveral economies in the region would \nneed to implement fiscal consolidation \nprogrammes, even as the threat of \nheightened \ngeopolitical \nconflict \nremains a key drag on growth in the \nregion. \n \n6.3 \nDownside \nRisks \nto \nGlobal \nOutlook \nThe \ngrowth \nprojections, \nalthough \npromising, are laden with significant \nrisks, the balance of which is tilted to \nthe downside in the medium term. \nThese include: the possibility of tighter \nfinancial conditions in some vulnerable \neconomies; the possibility of escalating \nand \nsustained \ntrade \nactions; \nthe \ngrowing trend towards protectionism; \nand weakening of global cooperation \nframeworks. The recently announced \ntariff increases by the United States \nand retaliatory measures by trading \npartners have increased the likelihood \nof escalating trade tensions, which \ncould undermine economic recovery \nand growth prospects. \n \nCBN Monetary Policy Review \n66 \nIn the advanced economies, financial \nmarket \nconditions \nremain \naccommodative with low volatility, \nresulting in narrowing spreads, which is \nprone to sharp changes under adverse \nmarket \nconditions. \nThe \nfactors \nexpected \nto \ntrigger \nthis \nadverse \nmarket \nconditions \nwould \ninclude: \nheightened trade tensions; conflicts, \nand \ngeopolitical \ninstability; \nand \ngrowing political uncertainty as well as \nlingering disagreements over migration \npolicies and BREXIT negotiations in \nEurope. These will likely hurt investment \nactivity, capital flows and growth in the \nshort –to- medium term. \n \nIn emerging markets and developing \neconomies, the ongoing normalization \nof monetary policy in the US could \nresult in sharp capital outflows, leading \nto shortage of capital in the domestic \neconomies. The response of this group \nof countries would be to raise policy \nrates to stem capital reversals, resulting \nin tighter financial conditions, which \nmay potentially lead to disruptive \nportfolio \nadjustments \nand \nsharp \nmovements in the exchange rate. This \nwould \nlikely \nbe \npronounced \nin \ncountries with heightened political risks \nand weak economic fundamentals. \nThe net effect of these adjustments \nwould undermine growth. \nThe key risks to the outlook in the \nMiddle East and sub-Saharan Africa \nregions include: domestic political risks; \ninsurgency and armed conflicts; as \nwell as extreme weather and other \nnatural \ndisasters, \nwhich \ncould \npotentially undermine growth. \n \n \nTable 6.1 \nGlobal Output and Inflation Outlook \n \n \n \n \n \nYear on Year \nProjections \n \n2016 \n2017 \n2018 \n2019 \nA. World Output \nWorld Output \n3.2 \n3.7 \n3.9 \n3.9 \nAdvanced \nEconomies \n1.7 \n2.4 \n2.4 \n2.2 \nUSA \n1.5 \n2.3 \n2.9 \n2.7 \nEuro Area \n1.8 \n2.4 \n2.2 \n1.9 \nJapan \n1.0 \n1.7 \n1.0 \n0.9 \nUK \n1.8 \n1.7 \n1.4 \n1.5 \nCanada \n1.4 \n3.0 \n2.1 \n2.0 \nOther \nAdvanced \nEconomies \n2.3 \n2.7 \n2.8 \n2.7 \nEmerging & \nDeveloping \nEconomies \n4.4 \n4.7 \n4.9 \n5.1 \nCommonwea\nlth of \nIndependent \nStates \n0.4 \n2.1 \n2.3 \n2.2 \nLatin America \nand the \nCaribbean \n-0.6 \n1.3 \n1.6 \n2.6 \nMiddle East \nand North \nAfrica \n5.0 \n2.2 \n3.5 \n3.9 \nSub-Saharan \nAfrica \n1.5 \n2.8 \n3.4 \n3.8 \nB. Commodity \nPrices (US' \nDollars) \n \n \n \n \nOil \n-15.7 \n23.3 \n33.0 \n-1.8 \nNon-fuel \n-1.5 \n6.8 \n6.0 \n0.5 \nC. Consumer \nPrices \n \n \n \n \nAdvanced \nEconomies \n0.8 \n1.7 \n2.2 \n2.2 \nEmerging & \nDeveloping \nEconomies \n4.3 \n4.0 \n4.4 \n4.4 \nSource: IMF WEO Update, July 2018 \n \n \n \nCBN Monetary Policy Review \n67 \n6.4 \nGlobal Inflation Outlook \nGlobally, \nconsumer \nprices \nare \nprojected to rise modestly in 2018, \npartly reflecting increase in crude oil \nand other commodity prices. Global \ninflation is projected to rise to 3.5 and \n3.4 per cent in 2018 and 2019, \nrespectively, from 3.0 per cent in 2017. \nIn the advanced economies, the \nexpected increase in headline inflation \nwould largely be on account of firming \ngrowth, thereby gradually closing the \nnegative output gap. The outlook for \ninflation in the emerging market and \ndeveloping economies is to maintain \nan upward trend. Among the EMDEs, \noil exporting countries may witness \nmoderation in prices of goods and \nservices, while oil importing countries \nare likely to experience rising inflation \nfrom the recovery of oil and other \ncommodity prices. \n \nIn the Advanced Economies, headline \ninflation is projected at 2.0 and 1.9 per \ncent in 2018 and 2019 respectively, \nfrom 1.7 per cent in 2017, due to the \nmodest recovery of oil and other \ncommodity prices and the ongoing \nquantitative easing programme in the \nEuro area, the United Kingdom and \nJapan. \nIn \nGermany, \ninflation \nis \nprojected to moderate to 1.6 per cent \nin 2018 from 1.7 per cent in 2017, but \nrise to 1.7 per cent in 2019. \n \nIn the United States, inflation is forecast \nto rise to 2.5 and 2.4 per cent in 2018 \nand 2019, respectively, up from 2.1 per \ncent in 2017. This rise is expected on \nthe back of the government’s ongoing \nexpansionary fiscal policy. In the Euro \narea, headline inflation is expected to \nstabilize at 1.5 per cent in 2018 the \nsame as in 2017, and rise to 1.6 per \ncent 2019. Headline inflation in Japan \nis projected at 1.1 per cent apiece in \n2018 and 2019 from 0.5 per cent in \n2017, \nas \nthe \nBOJ \nmaintains \nits \nquantitative easing programme. \n \nIn \nthe \nemerging \nmarket \nand \ndeveloping \neconomies, \ninflation \nis \nexpected to rise to 4.6 and 4.3 per \ncent in 2018 and 2019, respectively, \nfrom 4.0 per cent in 2017, due to the \nimpact of rising commodity prices on \nsome \nlarge \nemerging \nmarket \neconomies such as China and India. In \nChina, inflation is forecast to increase \nto 2.5 and 2.6 per cent in 2018 and \n2019, respectively, from 1.6 per cent in \n2017. In India, inflation is projected at \n5.0 per cent apiece in 2018 and 2019, \nfrom 3.6 per cent in 2017. In Brazil, \ninflation is estimated to rise to 3.5 and \n4.2 per cent in 2018 and 2019, \nrespectively, from 3.4 per cent in 2017. \nOn the other hand, inflation in Russia is \nforecast to decline to 2.8 per cent in \n2018 from 3.7 per cent in 2017, but rise \nto 3.8 per cent in 2019. Similarly, \ninflation in Nigeria is expected to fall \nfrom 16.5 per cent in 2017 to 14.0 per \ncent in 2018, and marginally rise to 14.8 \nper cent 2019, driven by relative \nexchange rate stability. \n \nIn South Africa, inflation is projected at \n5.3 per cent apiece in 2018 and 2019, \nsame as in 2017. Similarly, in Sub-\nSaharan Africa, inflation is expected to \nfall to 9.5 and 8.9 per cent in 2018 and \n2019, respectively, from 11.0 per cent in \nCBN Monetary Policy Review \n68 \n2017. In the MENA region, including \nAfghanistan and Pakistan, headline \ninflation is expected to rise to 8.2 and \n6.8 per cent in 2018 and 2019, \nrespectively, from 6.3 per cent in 2017. \n \n6.5 \nOutlook \nfor \nDomestic \nOutput \nGrowth \nThe domestic economy is expected to \ncontinue on the path of recovery. Real \nGDP grew by 1.95 per cent (year-on-\nyear) in the first quarter of 2018. This \nrepresents a stronger growth of 2.87 \npercentage points compared with -\n0.91 per cent in Q1 2017. The outcome \nwas, however, a decline of 0.16 \npercentage point compared with 2.11 \nper cent recorded in the preceding \nquarter. During the second quarter, \nreal output declined to 1.50 per cent \nfrom the 1.95 per cent recorded in the \nfirst quarter. The development was, \nhowever, \nan \nexpansion \nby \n0.78 \npercentage point when compared \nwith the growth of 0.72 per cent in the \ncorresponding \nperiod \nof \n2017. \nNonetheless, the outlook for 2018 and \nbeyond is positive, as the economy is \nprojected to grow by 2.1 per cent in \n2018 and 1.9 per cent in 2019 (IMF, \n2018). Similarly, the World Bank projects \na growth of 2.5 per cent in 2018 and \n2.8 per cent in 2019. The outlook is \nanchored on higher crude oil prices \nand production, improved electricity \nsupply, \nprospects \nfor \nimproved \nagricultural \nperformance \nand \ncontinuing \nreforms \nin \nthe \nforeign \nexchange \nmarket, \namong \nothers. \nNevertheless, the unemployment rate \nremained high at 18.8 per cent, \nrequiring targeted fiscal spending to \nfurther strengthen output and create \njobs. \n \nAs a key driver of the outlook for \noutput, oil prices which rebounded to \nan average of US$52 per barrel in 2017 \nare projected to rise to over US$71 per \nbarrel in 2018 and beyond (US Energy \nInformation \nAdministration). \nOil \nproduction also increased from 1.81 \nmillion barrels per day in 2016 to 1.89 \nmillion barrels per day in 2017 and 2.0 \nby Q1, 2018 following sustained peace \nin the Niger Delta region. The trend is \nexpected to continue in 2018 and \n2019, in tandem with the production \nagreement between OPEC and some \nnon-OPEC members. \n \nIn \naddition, \nthe \nrenewed \nanti-\ncorruption campaign, reduction of \nleakages in government revenues, and \nfiscal consolidation, among other on-\ngoing \nreforms, \npresent \nimproved \nprospects for targeted government \nspending. \nNigeria’s \nincreased \nleadership and visibility in the regional \neconomy \nwould, \namong \nothers, \nreduce trade barriers, cut down costs, \nimprove manufacturing, and expand \nopportunities for employment. \n \nFurthermore, \nthe \nactivities \nof \nthe \nPresidential \nEnabling \nBusiness \nEnvironment \nCouncil \n(PEBEC) \nare \nexpected to continue to improve \nNigeria's ranking in the World Bank \nEase of Doing Business Report, thereby \nattracting Foreign Direct Investments. \nAlso, \nthe \nsustained \ncollaboration \nbetween \nthe \nCBN \nand \nState \nGovernments \nfor \nexpansion \nof \nCBN Monetary Policy Review \n69 \nagricultural output as reflected in the \nAnchor Borrowers Programme (ABP) is \nexpected \nto \ncontinue \nto \nboost \nagricultural production. \n \nThe downside risks to the outlook are: \nongoing security challenges; loss of \nmarket share for Nigeria’s crude oil \nexport; increased political uncertainty \ndue to electioneering activities which \nmay trigger capital outflows; and weak \nprivate sector credit growth. \n \n6.6 Outlook for Domestic Inflation \nStaff estimates suggest that year-on-\nyear headline inflation is projected to \nmoderate to 10.94, 10.66, 10.41, 10.26 \nand 10.01 per cent in July, August, \nSeptember, October and November \n2018, respectively. Thereafter, inflation \nis forecast to inch up slightly to 10.36 \nper cent in December 2018. Upside \nrisks \nto \ninflation \ninclude \nthe \nimplementation of the 2018 budget \nand increased spending towards the \n2019 general elections. Others are: \npoor power supply; increased cost of \ntransportation; and persistent clashes \nbetween \nherdsmen \nand \nfarmers, \nleading to disruptions in the food \nsupply and distribution chain. As the \nBank continues to manage liquidity \nconditions in the domestic economy, \ninflationary \ndevelopments \nwill \nalso \ncontinue to be monitored to ensure \nthat the risks to inflation and growth \nare minimized. \nStatus\nMonth\nHeadline Food \nCore \nStatus\nMonth\nHeadline Food \nCore \nJan-18\n15.13\n18.92\n12.09\nJan-18\n16.22\n19.62\n13.01\nFeb-18\n14.33\n17.59\n11.71\nFeb-18\n15.93\n19.52\n12.67\nMar-18\n13.34\n16.08\n11.18\nMar-18\n15.60\n19.29\n12.33\nApr-18\n12.48\n14.80\n10.92\nApr-18\n15.20\n18.89\n12.02\nMay-18\n11.61\n13.45\n10.71\nMay-18\n14.79\n18.36\n11.83\nJun-18\n11.23\n12.98\n10.39\nJun-18\n14.37\n17.75\n11.65\nJul-18\n10.94\n12.73\n9.84\nJul-18\n13.93\n17.09\n11.45\nAug-18\n10.66\n12.24\n9.74\nAug-18\n13.48\n16.41\n11.23\nSep-18\n10.41\n12.00\n9.38\nSep-18\n13.01\n15.71\n11.00\nOct-18\n10.26\n12.17\n8.56\nOct-18\n12.54\n15.05\n10.69\nNov-18\n10.01\n12.06\n7.78\nNov-18\n12.06\n14.39\n10.32\nDec-18\n10.36\n12.44\n8.22\nDec-18\n11.66\n13.84\n10.00\n YEAR-ON-YEAR INFLATION RATE\n12-MMA INFLATION RATE\nActual\nActual\nForecast\nForecast\n \n \n \n \n \n6.7 Outlook for Monetary Policy in 2018 \nMonetary Policy will continue to be \nanchored \non \nthe \nMedium-Term \nFramework. This will enable the Bank \nconsistently anchor expectations and \nprevent market agents from overly \nengaging in speculative activities, in \nresponse to temporary shocks. While \nthe primary objective of monetary \npolicy remains the maintenance of \nprice stability, the Bank will sustain its \nfocus on the reduction of inflationary \npressures through effective liquidity \nmanagement, thereby creating an \nenvironment conducive to inclusive \nand sustainable growth. \n \nCBN Monetary Policy Review \n70 \nThe Bank will continue to monitor \ndevelopments in the global economy \nwhich \ninfluences \nthe \ndirection \nof \nmonetary policy in the near to medium \nterm. The U.S. Fed raised its rate by \n0.5% in June 2018 to a target range of \n1.75 – 2.00% following strengthening \nlabour \nmarket \nconditions. \n \nThe \nrenewed certainty around the steady \npace of normalization of US monetary \npolicy \nhas \nimplications \nfor \nthe \nappreciation of the U.S. dollar and \nthus, depreciation of the naira. Other \nchallenges to monetary policy include: \nexchange rate movements, financial \nmarket volatility and constrained credit \ngrowth. Furthermore, headline, food \nand core inflation are likely to trend \nslightly upwards in the near term, due \nto the election spending towards 2019 \ngeneral elections and the end of the \nbase effect in July 2018. These issues \nwill \ncontinue \nto \ndemand \nclose \nattention and monitoring in monetary \npolicy implementation. \n \nThe thrust of monetary policy in the \nnear term would be supported by the \nexpectations of moderate rise in crude \noil price and accretion to reserves, \nrenewed peace in the Niger-Delta and \nimproved \nagricultural \nproduction. \nMoreover, \nsustained \nstability \nin \nexchange \nrate \nsupported \nby \nincreased foreign portfolio inflow is \nexpected to bolster the Bank’s efforts \nat controlling inflation during the rest of \n2018 \nCBN Monetary Policy Review \n71 \nAppendices \nCENTRAL \nBANK \nOF \nNIGERIA \nCOMMUNIQUÉ \nNO \n117 \nOF \nTHE \nMONETARY \nPOLICY \nCOMMITTEE \nMEETING \nOF \nTUESDAY \n3RD \nAND \nWEDNESDAY 4TH APRIL, 2018 \n \n1.0 \nBackground \nThe re-constituted Monetary Policy \nCommittee (MPC) held its maiden \nmeeting, the 260th meeting of the \nCommittee, its first in 2018, on 3rd and \n4th of April, 2018 against the backdrop \nof strengthening global growth and \nimproving \ndomestic \neconomic \nconditions. The Committee assessed \nthe developments in the global and \ndomestic \neconomic \nenvironments \nduring \nthe \nfirst \nquarter \nof \n2018, \nincluding the risks to price stability, \nfinancial \nstability, \nand \neconomic \ngrowth in the short-to-medium term. \nNine members of the Committee \nattended the meeting. \n \nGlobal Economic Developments \nThe \nstrong \nheadwinds \nwhich \nconfronted the global economy in \n2017 showed signs of moderation, \ngiving way to prospects for stronger \ngrowth in 2018. Consequently, global \noutput is projected to grow by 3.9 per \ncent in 2018 from 3.7 per cent in 2017 \non the heels of rebound in investment \nas a result of improvements in investor \nconfidence, strengthening commodity \nprices, rising aggregate demand and \naccommodative \nmonetary \npolicy, \nespecially \nin \nsome \nadvanced \neconomies. \nWith \nthe \nsustained \nrecovery \nin \noil \nprices, \naggregate \ndemand is expected to continue to \nfirm up. Growth in the advanced \neconomies is projected at 2.3 per cent \nin 2018, and 4.9 per cent for emerging \nmarkets and developing economies \n(EMDEs). \nThe \nMonetary \nPolicy \nCommittee noted some downside risks \nto the outlook for global growth to \ninclude: continuing normalization of \nmonetary policy in the advanced \neconomies; new U.S. trade policy; \nuncertainties \nassociated \nwith \nthe \nBREXIT negotiations; and rising geo-\npolitical tensions in the Middle-East and \non the Korean Peninsula. \n \nIn \nthe \nadvanced \nand \nemerging \nmarket \neconomies, \ninflation \nis \nprojected at 1.9 and 4.5 per cent in \n2018, respectively. However, the broad \nindication from the IMF is that over the \nmedium to long term, inflation may rise \nat \na \nmodest \npace \nas \ngeneral \neconomic conditions remain subdued. \nAsset prices and long-term yields in \nmajor financial markets are also on the \nincrease, confirming the possibility of a \nfuture rise in the price level. \n \nDomestic Output Developments \nData from the National Bureau of \nStatistics (NBS) indicate that real Gross \nDomestic Product (GDP) grew by 1.92 \nper cent in the fourth quarter of 2017, \nup from 1.40 and 0.72 per cent in the \nthird \nand \nsecond \nquarters, \nrespectively. \nThe \neconomy \ngrew \noverall by 0.83 per cent in 2017. The \nmain drivers of real GDP growth were \nagriculture (1.08%), industry (0.56%) \nand trade (0.35%). Non-oil real GDP \ngrew by 1.45 per cent in the fourth \nCBN Monetary Policy Review \n72 \nquarter of 2017 compared with a \ncontraction of 0.76 per cent in third \nquarter of 2017, indicating that the \neconomy is gradually returning to a \npath of sustainable positive growth. \nThe \nCommittee \nalso \nnoted \nthe \ncontinuous positive outlook based on \nthe \nManufacturing, \nand \nNon-\nmanufacturing Purchasing Managers’ \nIndex (PMI), which stood at 56.7 and \n57.2 \nindex \npoints, \nrespectively, \nin \nMarch 2018, indicating expansion for \nthe twelfth and eleventh consecutive \nmonths. The Committee believes that \neffective \nimplementation \nof \nthe \nEconomic Recovery and Growth Plan \n(ERGP) by the Federal Government \nand quick passage of the 2018 budget \nwill continue to enhance aggregate \ndemand \nand \nconfidence \nin \nthe \nNigerian economy. \n \nDevelopments in Money and Prices \nThe Committee noted that money \nsupply (M2) grew marginally by 0.07 \nper cent in February 2018 (annualised \nto 0.42%), in contrast to the provisional \ngrowth benchmark of 10.29 per cent \nfor 2018. The development in M2 \nlargely \nreflected \ngrowth \nin \nnet \ndomestic credit (NDC) of 4.05 per cent \n(annualised to 24.30%), emanating \nmajorly from net credit to government, \nwhich \ngrew \nby \n19.99 \nper \ncent \n(annualised to 119.94%) against the \nprovisional benchmark of 33.12 per \ncent. Credit to the private sector also \ngrew by 1.49 per cent (annualised to \n8.94%) in February 2018, compared \nwith the provisional annual benchmark \nof 14.88 per cent. Net foreign assets \n(NFA), contracted by 2.82 per cent, \nannualized \nto \n16.92 \nper \ncent, \ncompared \nwith \nthe \nprovisional \nbenchmark of -29.31 per cent. Narrow \nmoney (M1), also contracted by 2.77 \nper cent (annualised to 16.62%). The \nCommittee \nurged \nthe \nFederal \nGovernment \nto \nstrongly \nexercise \nrestraint on domestic borrowing in \norder to lower the cost of credit to the \nprivate sector. \n \nThe \nCommittee \nnoted \nthat \nthe \ncontinued low level of lending by \nbanks remains a constraint to growth \nof the real sector of the economy. The \nCommittee advised the Management \nof the CBN to continue to provide the \nrequired policy impetus to engender \nimproved credit delivery by the deposit \nmoney banks to the economy. \n \nInflationary pressures in the economy \ncontinued to moderate with headline \ninflation (year-on-year) receding for \nthe thirteenth consecutive month to \n14.33 per cent in February 2018 from \n18.72 per cent in January 2017. Month-\non-month food inflation fell by 133 \nbasis points to 17.59 per cent in \nFebruary 2018, and core inflation also \ndeclined marginally by 38 basis points \nto 11.71 per cent during the same \nperiod. \n \nMoney market interest rates reflected \nliquidity conditions in the banking \nsystem as the average inter-bank call \nrate increased to averagely 12.42 per \ncent in February 2018 from 9.49 per \ncent in December 2017. The Open buy \nback (OBB) rate also increased to \n13.19 per cent in February 2018 from \nCBN Monetary Policy Review \n73 \n8.46 per cent in December 2017. The \nmovement in the net liquidity position \nand \ninterest \nrates \nreflected \nthe \ncombined effects of OMO auctions, \nforeign exchange interventions and \nstatutory allocation to state and local \ngovernments. \n \nThe \nCommittee \nalso \nnoted \nthe \ncontinuous improvement in the level of \nexternal \nreserves, \nwhich \nstood \nat \nUS$46.699 billion as at March 29, 2018. \nSimilarly, the All-Share Index (ASI) rose \nby 8.5 per cent from 38,243.19 on \nDecember 29, 2017, to 41,504.51 on \nMarch 29, 2018. Market Capitalization \n(MC) improved by 10.2 per cent from \nN13.61 trillion on December 29, 2017, to \nN14.99 trillion during the same period. \nThe Committee observed that, while \nthis development may be a reflection \nof improved investor confidence in the \neconomy, \nit \ncautioned \nthat \nthe \nManagement of the Bank should \ncarefully monitor the developments \nand \nto \nestablish \nmechanisms \nfor \nsafeguarding the stability of the foreign \nexchange market in the event of a \nsudden \ncapital \nreversal. \nThe \nCommittee observed the continued \nrise in oil prices, but acknowledged the \ninherent volatility in commodity prices \nand urged the Bank not to relent in \nbuilding \nexternal \nreserves \nbuffers \nagainst any future price downturns \nand as a means of sustaining investor \nconfidence in the economy. \n \nThe Committee noted the relative \nstability \nin \nthe \nforeign \nexchange \nmarket, with declining premia across \nall segments of the market. It observed \nwith satisfaction, the sustained high \nlevel of activity at the Investors’ and \nExporters’ (I&E) window of the foreign \nexchange \nmarket. \nThe \nwindow \ncontinues to attract more investors, \nthus boosting foreign exchange supply. \nConsequently, total foreign exchange \ninflow \nthrough \nthe \ncentral \nbank \nincreased \nby \n73.00 \nper \ncent \nin \nFebruary 2018, compared with the \nprevious month. This was attributed to \nthe increase in receipt of proceeds \nfrom \nPetroleum \nProfit \nTax \n(PPT), \nroyalties and crude oil & gas. Total \noutflow also increased in February 2018 \nby 15.69 per cent, as a result of higher \npayments \nfor \ninvisibles, \ninterbank \ntransactions as well as JVC cash call \npayments. \n \n2.0. \nOverall Outlook and Risks \nForecasts \nof \nkey \nmacroeconomic \nindicators give a positive outlook for \nthe Nigerian economy in 2018. This is \npredicated on the quick passage and \neffective implementation of the 2018 \nbudget, improved security, foreign \nexchange market stability as well as \nfavourable crude oil prices. On the \ndownside, the Committee noted the \npotential impact of the 2019 election-\nrelated spending, against the weak \nbackdrop \nof \ntax \nrevenue \nefforts, \nherdsmen related violence and rising \nyields in the advanced economies. \nIndications in the US and the UK point \nto higher interest rates in the short to \nmedium term. \n \n3.0. \nThe \nConsiderations \nof \nthe \nCommittee \nCBN Monetary Policy Review \n74 \nThe Committee noted with satisfaction \nthe gradual return to macroeconomic \nstability \nas \nreflected \nin \nthe \nthird \nconsecutive quarterly growth in real \nGDP in the fourth quarter of 2017. It \nalso noted the continued moderation \nin all measures of inflation as well as \nsustained \nstability \nin \nthe \nnaira \nexchange rate and urged the Bank to \nsustain the stability to avoid a mission \ndrift. In particular, the Committee \nwelcomed \nthe \nnarrowing \nof \nthe \nexchange rate premium between the \nBDC segment and the Investors’ and \nExporters’ (I&E) window of the foreign \nexchange \nmarket. \nOverall, \nthe \nCommittee noted that the recovery of \nthe economy was strengthening, in \nview of the return to growth of the \nServices Sector. As the fiscal sector \ncontinues to settle its outstanding \nliabilities, it reduces its domestic debt \nprofile, thus increasing the liquidity of \nthe banking system. However, the \nMonetary Policy Committee observed \nincreasing monetization of oil proceeds \nas evident in the growing FAAC \ndistribution, relative to the 2017 level of \ndisbursements. The Committee urged \nthe Government to initiate strong \nstabilization programmes and to freeze \nthe \ngrowth \nin \nits \naggregate \nexpenditure and FAAC distributions in \norder to create savings; needed to \nstabilize the economy against future oil \nprice related shocks. \n \nNotwithstanding \nthe \ngeneral \nimprovement \nin \nmacroeconomic \nconditions, the Committee noted the \nrather slow pace of moderation in \nfood inflation. It also took note of the \npotential risk of a pass-through from \nrising global inflation to domestic \nprices. Members, however, expressed \nconfidence that the tight stance of \nmonetary policy would continue to \ncomplement \nother \npolicies \nof \ngovernment in addressing some of the \nstructural \nissues \nunderlying \nthe \nstickiness \nof \nfood \nprices. \nThe \nCommittee noted that at 14 per cent, \nthe policy rate was tight enough to \nrein-in current inflationary pressures. \nThe Committee, therefore, reaffirmed \nits \ncommitment \nto \nprice \nstability \nconducive to sustainable and inclusive \ngrowth. \n \nThe Committee noted with satisfaction \nthe gradual implementation of the \nEconomic Recovery and Growth Plan, \nin an effort to stimulate economic \nrecovery. \nIn \nthe \nsame \nvein, \nthe \nCommittee urged quick passage of \nthe 2018 Appropriation Bill by the \nNational Assembly, so as to keep fiscal \npolicy on track and deliver the urgently \nneeded reliefs in terms of employment \nand growth for the citizenry. \n \nThe Committee noted the relatively \nstrong balance sheets of the deposit \nmoney banks’ and the stable outlook. \nThis is in spite of the concentration of \nnon-performing loans in a few sectors, \nwhich the Committee observed was \nsatisfactorily \nbeing \naddressed \nby \nadequate mechanisms established by \nthe Bank to address the phenomenon. \nThe Committee also noted that as \nGovernment \npays \noff \nits \nhuge \ncontractor debts, a sizeable portion of \nthese non-performing loans will be \nCBN Monetary Policy Review \n75 \naddressed. The Committee urged the \nBank \nto strengthen \nits \nsupervisory \noversight and early warning systems to \npromptly identify, monitor compliance \nwith \nextant \nprudential \nregulations, \nsustain macro-prudential policy and \nmanage emerging vulnerabilities in the \nbanking system. \n \nThe Committee reiterated the Bank’s \ncommitment to delivery of low interest \ncredit as evidenced in its bold steps to \nadopt \nunconventional \nmonetary \npolicy to aid credit flow to vulnerable \nand growth enhancing sectors of the \nNigerian economy. The Committee, \ntherefore, \nenjoined \nthe \nBank \nto \ncontinue to support and encourage \ncredit delivery at single digit interest \nrate through other mechanisms in the \ninterim, while encouraging the banking \nsystem to establish frameworks to \nincrease \ncredit \ndelivery \nto \nthe \nemployment generating sectors of the \neconomy. In consideration of available \ndata and evolving macroeconomic \nindicators, \nthe \nMonetary \nPolicy \nCommittee is committed to revisiting its \ndecisions in the short to medium term \nas the fundamentals evolve. \n \n4.0. \n The Committee’s Decisions \nIn reaching its decision, the Committee \nappraised potential policy options in \nterms of the balance of risks. The \nCommittee also took note of the gains \nmade so far as a result of its earlier \ndecisions; including the stability of the \nforeign \nexchange \nmarket, \nthe \nmoderation in inflation rate as well as \nthe restoration of economic growth. \nThe launching of the Food Security \nCouncil by the Federal Government to \nimprove food sustainability is a step in \nthe right direction. The Committee was \nconcerned about the fiscal distortions \nassociated with absence of buoyancy \nbetween \nGDP \ngrowth \nand \ntax \nrevenue, \nand \nurged \nthe \nfiscal \nauthorities \nto \ndeploy \nappropriate \ncorrective measures to address this \nphenomenon. \n \nThe Committee was of the view that \nfurther tightening would strengthen the \nimpact of monetary policy on inflation \nwith complementary positive effects \non capital flows and exchange rate \nstability. \nNevertheless, \nit \ncould \npotentially \ndampen \nthe \npositive \noutlook \nfor \ngrowth \nand \nfinancial \nstability. However, the Committee is of \nthe \nview \nthat \nloosening \nwould \nstrengthen the outlook for growth by \nstimulating \ndomestic \naggregate \ndemand through reduced cost of \nborrowing. This may, however, lead to \na rise in consumer prices, generating \nexchange \nrate \npressures \non \nthe \ncurrency \nin \nthe \nprocess. \nThe \nCommittee \nalso \nbelieves \nthat \nloosening could worsen the current \naccount balance through increased \nimportation. On the argument to hold, \nthe Committee believes that key \nmacroeconomic \nvariables \nhave \ncontinued to evolve in a positive \ndirection in line with the current stance \nof macroeconomic policy and should \nbe allowed more time to fully manifest. \nIn consideration of the foregoing, the \nCommittee decided unanimously by a \nvote of all members present to retain \nthe Monetary Policy Rate (MPR) at 14.0 \nCBN Monetary Policy Review \n76 \nper cent alongside all other policy \nparameters. \nConsequently, \nthe \nMPC \nvoted \nunanimously to retain the \n(i) MPR at 14.0 per cent; \n(ii) CRR at 22.5 per cent; \n(iii) Liquidity Ratio at 30.0 per cent; and \n(iv) Asymmetric corridor at +200 and -\n500 basis points around the MPR. \n \nThank you for listening. \n \nGodwin I. Emefiele \nGovernor, Central Bank of Nigeria \n4th April, 2018 \n \n \n \n \nCBN Monetary Policy Review \n77 \nCENTRAL \nBANK \nOF \nNIGERIA \nCOMMUNIQUÉ \nNO \n118 \nOF \nTHE \nMONETARY \nPOLICY \nCOMMITTEE \nMEETING \nOF \nMONDAY \n21ST \nAND \nTUESDAY 22ND MAY, 2018 \n \n1.0 \nBackground \nThe Monetary Policy Committee (MPC) \nmet on the 21st and 22nd of May, 2018 \nagainst the backdrop of optimistic \nglobal growth outlook and sustained \nrecovery in the domestic economy. \nThe \nCommittee \nexamined \nthe \nperformance, risks, vulnerabilities in the \nglobal and domestic economies up to \nMay 2018, and the outlook for the rest \nof the year. In attendance were nine \nmembers of the Committee. \n \nGlobal Economic Developments \nThe momentum of global economic \nactivities remained broadly sustained, \nwith outcomes likely to be shaped by \nemerging geo-political issues including: \neasing geo-political tensions on the \nKorean \nPeninsula; \nreduced \ntrade \ntensions \nbetween China and the \nUnited States; United States withdrawal \nfrom the 2015 Iranian Nuclear Deal; \neasy financing conditions in the Euro \nArea, the UK and Japan; as well as \ndifficulties associated with the BREXIT \nnegotiations. \nAccordingly, \nglobal \noutput is projected to grow at 3.9 per \ncent in 2018, up from 3.8 per cent in \n2017. \nGrowth \nin \nthe \nadvanced \neconomies is projected to strengthen \nto 2.5 per cent in 2018 from 2.3 per \ncent in 2017 premised on improved \ninvestments \nand \nconsumption \nspending. Similarly, output growth in \nthe emerging markets and developing \neconomies (EMDEs) is projected to rise \nmarginally at 4.9 per cent in 2018 \nreflecting improvements from 4.8 per \ncent in 2017, led by oil exporters, such \nas Russia, Brazil, and Nigeria. The \nCommittee noted that despite these \noptimistic developments, the downside \nrisks to global growth include: the geo-\npolitical tensions in the Middle-East; \nlingering \nuncertainties \nfrom \nBREXIT \nnegotiations; \nand \ngrowing \ntrend \ntowards trade protectionism. \n \nInflation in the advanced economies is \nprojected to rise by 2.0 per cent and \nwould remain subdued relative to the \nlong term trend. In the emerging \nmarkets and developing economies, \nprice developments could surge by 4.6 \nper cent in 2018. The International \nMonetary Fund (IMF) forecasts that \ninflation may rise modestly over the \nmedium to long-term, due to rising \nasset prices and long-term yields in the \nmajor financial markets. \n \nDomestic Output Developments \nThe Committee noted improvements in \nthe domestic economy, attributable to \nthe steady decline in inflation, rebound \nin oil prices and increase in production \nlevel, as well as the continued stability \nin \nthe \nforeign \nexchange \nmarket. \nAccording to data from the National \nBureau of Statistics (NBS), real Gross \nDomestic Product (GDP) for Q4 2017 \nwas revised upwards from 1.92 per \ncent to 2.11 per cent, while a growth \nof 1.95 per cent was recorded in the \nfirst quarter of 2018, up from a \ncontraction of 0.91 per cent in the \ncorresponding period of 2017. The \nCBN Monetary Policy Review \n78 \ndevelopment was due to growth in the \noil and non-oil sectors by 14.77 and \n0.76 \nper \ncent, \nrespectively. \nThe \nMonetary Policy Committee also noted \nthe sustained positive outlook based \non \nthe \nManufacturing, \nand \nNon-\nmanufacturing Purchasing Managers’ \nIndices (PMI), which rose for thirteenth \nand twelfth consecutive months to 56.9 \nand 57.5 index points, respectively, in \nApril 2018. The Committee welcomed \nthis development but believes that \ngrowth remains largely fragile and \ncould benefit from further reforms and \nstimulus. In this regard, the MPC urged \nthe various levels of government to \naccelerate \nthe \nsettlement \nof \ncontractor debt and salary arrears as \nwell \nas \nfacilitate \nthe \nquick \nimplementation of the 2018 Federal \nGovernment budget. \n \nDevelopments in Money and Prices \nThe Committee noted that broad \nmoney supply (M2) grew by 2.16 per \ncent in April 2018 from 1.26 per cent in \nMarch 2018, annualised to 6.48 per \ncent. This was in contrast to the \nprovisional growth benchmark of 10.48 \nper cent for 2018. The performance of \nM2 was mainly driven by the growth in \nNet Domestic Credit (NDC) of 6.24 per \ncent (annualised to 18.72%), owing \nlargely to net credit to government, \nwhich \ngrew \nby \n46.13 \nper \ncent \n(annualised to 138.39%) against the \nprovisional benchmark of 54.97 per \ncent. Credit to the private sector, \nhowever, contracted by 0.16 per cent \n(annualised to -0.47%) in April 2018, in \ncontrast to the provisional annual \nbenchmark of 5.64 per cent. Net \nForeign Assets (NFA) grew by 7.38 per \ncent in April 2018, annualized to 22.13 \nper \ncent, \ncompared \nwith \nthe \nprovisional benchmark of 18.15 per \ncent. Narrow money (M1), however, \ncontracted \nby \n3.31 \nper \ncent \n(annualised to -9.94%), compared with \nthe provisional benchmark of 8.04 per \ncent. \n \nInflationary \npressures \ncontinued \nto \nmoderate with headline inflation (year-\non-year) declining for the fifteenth \nconsecutive month to 12.48 per cent in \nApril 2018 from 13.34 per cent in March \n2018. Food and Core inflation also \ndecelerated to 14.80 and 10.92 per \ncent from 16.08 and 11.18 per cent, \nrespectively, during the same period. \nThe \naverage \ninter-bank \ncall \nrate \ndecreased to 3.34 per cent in April \n2018 from 9.49 per cent in December \n2017. Similarly, the average Open Buy \nBack (OBB) rate fell to 2.96 per cent in \nApril 2018 from 8.46 per cent in \nDecember 2017. The movement in the \nnet liquidity position and interest rates \nreflected the combined effects of \nOpen \nMarket \nOperations \n(OMO) \nauctions, \nforeign \nexchange \ninterventions and statutory allocation \nto state and local governments. \n \nThe \nCommittee \nwelcomed \nthe \nsustained improvement in the level of \nexternal \nreserves, \nwhich \nstood \nat \nUS$47.79 billion on May 18, 2018, \ncompared with US$46.73 billion at the \nend of March 2018. The Committee \nurged \nthe \nBank \nto \nsustain \nthis \nmomentum and continue to boost \ninvestor confidence in the economy. \nCBN Monetary Policy Review \n79 \nThe Committee also welcomed the \ncontinued rise in the price of crude \nand \ncalled \non \nthe \nFederal \nGovernment to seize the opportunity to \nbuild fiscal buffers against future oil \nprice shocks. \n \nThe All-Share Index (ASI) decreased by \n6.6 \nper \ncent \nfrom \n43,330.54 \non \nFebruary 28, 2018 to 40,472.45 on May \n18, 2018, owing largely to profit taking \nactivities of investors, and capital \nreversals in response to monetary \npolicy \nnormalization \nin \nsome \nadvanced economies particularly, the \nUnited \nStates. \nSimilarly, \nMarket \nCapitalization (MC) fell by 5.7 per cent \nfrom N15.55 trillion on February 28, 2018 \nto N14.66 trillion on May 18, 2018. The \nCommittee \nnoted \nthe \nneed \nto \nmaintain remunerative domestic rates \nto stem the trend towards huge capital \noutflow. \n \nThe MPC welcomed the continued \nstability \nin \nthe \nforeign \nexchange \nmarket, promoted by improved dollar \nliquidity in the market due to the high \nlevel of activity at the Investors’ and \nExporters’ (I&E) window, that is equally \ndriving rates towards convergence at \nall segments of the market. Total \nforeign exchange inflow through the \neconomy from January to March 2018 \nstood at US$24.719 billion, of which \nfunding from the CBN was US$8.81 \nbillion \nor \n28.5 \nper \ncent, \nwhile \nautonomous sources accounted for \nthe larger balance of US$15.91 billion \nor 71.5 per cent of the total. In \naddition, the Committee welcomed \nthe US$2.5 billion or RMB 15 billion \nCurrency Swap between the Central \nBank of Nigeria (CBN) and the People’s \nBank of China (PBoC). This swap, the \nCommittee noted, will ease pressure in \nthe foreign exchange market by the \nreduction \nin \nreliance \non \na \nthird \ncurrency for trade settlement between \nNigeria and China. They further noted \nthat this swap arrangement could be \nthe \nbasis \nfor \nan \nexpanded \nand \nmutually \nbeneficial \neconomic \nrelationship \nbetween \nNigeria \nand \nChina. \n \n2.0. \nOverall Outlook and Risks \nThe macroeconomic environment that \npropelled the economy’s exit from \nrecession has remained positive and is \nlikely to continue in the near-term. The \nexpectation was premised on speedy \nimplementation of the 2018 budget, \nimproved security, continued stability \nin the foreign exchange market as well \nas increase in crude oil production and \nprices. The Committee noted the \ndownside \nrisks to the outlook to \ninclude: \nthe \nlate \napproval \nand \nimplementation of the 2018 budget; \nfarmers-herdsmen \nconflict; \nweak \ndemand \nand \nconsumer \nspending \nassociated with outstanding salaries \nand contractor debt; and the growing \nlevel of sovereign debt. \n \nThe outlook for inflation indicates \ncontinued moderation in the price \nlevel, even though the risks include \nhuge \nliquidity \ninjections \nthat \nis \nexpected \nto \narise \nfrom \nthe \nimplementation of the proposed N9.12 \ntrillion 2018 FGN budget; expenditure \ntowards the 2019 elections; monthly \nCBN Monetary Policy Review \n80 \nFAAC \ninjections, \napproval \nand \nimplementation of the proposed new \nnational \nminimum \nwage, \npossibly \nfinance by a supplementary budget. \nThese \ncould \nimpact \naggregate \ndemand and put pressure on domestic \nprices in the remaining months of 2018 \nand may dampen the gains already \nmade by the Bank in stabilizing prices. \nStaff forecasts, given the anticipated \nliquidity injections into the economy, \nindicates upward trending pressure on \ndomestic prices from the second half \nof \nfiscal \n2018. \nConsequently, \nthe \nCommittee \nadvocates \nan \norderly \ninjection of the anticipated liquidity by \nthe fiscal authorities to prevent a \nnegative shock to prices that would \nderail the positive but fragile recovery \nso far achieved. \n \nGiven the CBN’s interventions, the \ncurrent \nlevel \nof \noil \nprices \nand \ndevelopments in the global economy, \nwe expect rates to remain stable in the \nforeign exchange market in the near-\nterm. However, the bearish signs in the \ncapital market associated with profit \ntaking activities of investors, call for a \ncareful calibration of policy so as to \nmoderate the trend of capital outflows \nin \nan \nera \nof \nmonetary \npolicy \nnormalization in the United States. This \nis \ngiven \nthat \nthere \nare \nalready \nindications of severe attacks on the \nforeign exchange markets of some \nemerging economies. \n \nNevertheless, there is significant high \nlevel of uncertainties that could arise \nfrom \nthe \nfiscal \noperations \nof \ngovernment in the near term. Amongst \nthese are: when the implementation of \nthe 2017 budget will end; dwindling \nrevenue projections; as well as the \npossibilities of full implementation of \nthe \n2018 \nFederal \nbudget. \nConsequently, we expect a likely \nbunching of government spending in \nview of the late passage of the budget \nand government’s commitment to \nhonour prior obligations. This could \npose a serious challenge to the Bank’s \nprice stability mandate. \n \nRevenue is expected to increase in \nview of the favourable prices of crude \noil \nand \nimprovements \nin \nnon-oil \nrevenue, particularly taxes. In addition, \nproduction levels have also increased \nin recent times and this is expected to \nbe \nmaintained. \nHowever, \nthe \nimplications of a China-US trade deal \non China’s oil imports from Nigeria \nremain unclear, especially as the US \nhas included energy imports on the list \nof items for negotiation with China. \n \n3.0. \nThe \nConsiderations \nof \nthe \nCommittee \nThe Committee expressed satisfaction \non the positive outlook in the domestic \neconomic environment as the real \nGDP grew for the fourth consecutive \nquarter by the first quarter of 2018 and \nthe positive trend in the Manufacturing \nand \nNon-manufacturing \nPurchasing \nManagers’ Indices in the first quarter of \n2018. \nIt \nnoted \nthe \ncontinued \ndeceleration in headline inflation as \nwell as stability in the foreign exchange \nmarket and therefore, called on the \nBank to sustain the momentum in order \nto further subdue inflation and ensure \nCBN Monetary Policy Review \n81 \ngrowth. \nThe \nCommittee \nexpressed \nsatisfaction with the level of activities in \nthe Investors’ and Exporters’ (I&E) \nwindow of the foreign exchange \nmarket. \n \nThe Committee further noted the \noverall upward growth momentum of \nthe economy with key activity sectors \nreturning positive growth. Despite the \nimproving \nmacroeconomic \nenvironment, the Committee noted \nthat disruptions to the supply chains in \nmajor food producing states of the \ncountry remains a concern as food \nprices remained sticky downwards. It \nalso noted the potential adverse effect \nof \nthe \nrising \nglobal \ninflation \non \ndomestic prices and therefore, urged \nthe Government not to relent on \ncurtailing the security challenges to \nadvance controlling inflation to its \nhistorical path. \n \nMembers of the Committee were \nsatisfied with the progress made with \nthe implementation of the Economic \nRecovery and Growth Plan, but were \nconcerned on the effect of delay in \nthe passage of the 2018 Appropriation \ncould derail the programme and \nurged the Federal Government to \nsustain its implementation to further \naccelerate the economic recovery \nthus far achieved. The Committee \nurged the Government to set the \nmachinery \nfor \nthe \neffective \nimplementation of the 2018 budget to \nfurther stimulate the economy. It also \nencouraged \nthe \nGovernment \nto \nsustain current efforts at boosting tax \nrevenue generation notwithstanding \nthe increase in crude oil and other \ncommodity prices. The MPC, however, \nnoted \nthe \npotential \neffects \nof \nexpansionary fiscal budget of 2018 \nand the liquidity impact of rising FAAC \ndistribution, following increase in the \nprices of crude oil as well as the build \nup \nin \nelection \nrelated \nspending \ntowards the 2019 general elections. \n \nThe Committee took note of the \nimproved \nperformance \nof \ndeposit \nmoney banks and observed that the \nrelatively high levels of non-performing \nloans in the industry was moderating \nand urged Government to promptly \nsettle outstanding contractor arrears as \nearlier \npromised. \nThe \nCommittee \ncommended the effort of the Bank in \nachieving the positive outlook for the \nindustry and advice the Bank to \nintensify efforts to further improve \nbanking sector soundness. It called on \nthe Bank to sustain its monitoring \napparatus to ensure compliance with \nexisting \nprudential \nregulations \nand \nearly detection and management of \nemerging vulnerabilities. Also, it similarly \nencouraged the Bank not to relent in \nensuring that liquidity continues to flow \nfrom the banking sector to the real \nsector to further strengthen economic \nrecovery and employment generation. \n \n4.0. \nThe Committee’s Decisions \nThe Committee critically evaluated the \npolicy \noptions \nin \nterms \nof \ndevelopments in the international and \ndomestic \nenvironments, \nnoting \nin \nparticular progress made in stimulating \noutput growth, including stability in the \nforeign exchange market increase in \nCBN Monetary Policy Review \n82 \nthe level of foreign exchange reserves, \nand sustained deceleration in the rate \nof inflation. \n \nThe \nCommittee \nconsidered \nthe \nforecast of high liquidity injection in the \nsecond half of 2018, upward pressure \non prices, driven largely by substantial \nexpansionary fiscal policy, which will \narise from the late passage of the 2018 \nappropriation bill, outstanding balance \nfrom the 2017 budget and the pre-\nelection expenditures. Thus, tightening \nwould ensure the mop-up of excess \nliquidity. \nMindful \nthat \ndespite \nthe \nmoderation in inflation, the current \ninflation rate is still above targeted \nsingle digit and that real interest rate \nonly turned positive in the review \nperiod. The objective of the policy \nstance \ntherefore, \nwould \nbe \nto \naccelerate a reduction in the inflation \nrate \nto \nsingle \ndigit \nto \npromote \neconomic \nstability, \nboost \ninvestor \nconfidence, \nand \npromote \nforeign \ncapital \nflows \nwith \ncomplementary \nimpact on exchange rate stability. \nConversely, the Committee believes \nthat \nraising \ninterest \nrate \nwould, \nhowever, depress consumption and \nincrease the cost of borrowing to the \nreal sector. Moreover, such policy \nwould make deposit money banks to \nre-price their assets. \n \nIn reviewing the choice of loosening, \nthe \nCommittee \nevaluated \nthe \npotential \nimpact \nof \nstimulating \naggregate demand through lower \ncost \nof \ncredit. \nNevertheless, \nthe \nCommittee \ndeliberated \non \nthe \neffectiveness of the choice at a time \nwhen liquidity injection had been \nforecast to rise tangentially in the \nsecond half of the year. The outcome \ntherefore, \nwould \nmost \nlikely \nexacerbate \ninflationary \npressure, \ncause \nhigher \npressure \non \nthe \nexchange rate as demand for forex \nincreases and return real rate into \nnegative territory as nominal interest \nrate fall lower than the inflation rate. \nOwing \nto \nthe \npoor \ntransmission \nmechanism as a result of structural \nrigidities, the reduction in the MPR may \nnot necessarily transmit to lowering \nmarket lending rate on account of the \nhigh cost of doing business. The \nCommittee \nfurther \nnoted \nthat \nloosening could worsen the current \naccount balance through increase in \nimportation, margin lending, lowering \nof risk evaluation in accessing loans \nwhich will drive up loans and likely \nincrease \nin \nNPLs \nwith \npotential \nnegative consequence on the stability \nof the banking industry. The cost of \nliquidity management would also rise \nconsiderably. \n \nThe Committee, while arguing for a \nhold, observed that the downside risk \nto growth and upside risk to inflation \nappears \nbalanced \nas \ngrowth \nis \nimproving while inflation is moderating. \nMaintaining the current policy stance \nwould sustain gradual improvements in \nboth indices. It was noted that there is \nneed to see how all the components \nof GDP would evolve in the second \nquarter of 2018 in order to gain greater \nclarity on the direction of monetary \npolicy. In summary, the predominant \nargument for a hold at this time is to \nCBN Monetary Policy Review \n83 \nawait more clarity on the evolution of \nkey indicators i.e. the passage and \nimplementation \nof \nthe \nbudget, \neconomic activities, and traction in \nfiscal policy in 2018. \n \nOverall, \nthe \nCommittee \nwas \nconvinced that the economy needed \na new impetus of increased lending by \nthe banking system and would work \nwith the Bank to adopt innovative \nways to encourage the deposit money \nbanks (DMBs) to adopt innovative \nways to accelerate credit growth, \nincluding a reduction in the policy rate \nwhen conditions for such a decision \narise. The MPC noted that at single \ndigit inflation and higher reserve levels, \nthe risks associated with a policy rate \nreduction \nunder \nconditions \nof \nwavering foreign capital inflows and \nan unstable oil market, including other \nsevere uncertainties, could be better \nmanaged to deliver macroeconomic \nstability in Nigeria. In consideration of \nthe \nforegoing, \ntherefore, \nthe \nCommittee decided by a vote of 8 \nmembers to retain the Monetary Policy \nRate (MPR) at 14.0 per cent alongside \nall other policy parameters. One (1) \nmember, however, voted to increase \nthe MPR by 50 basis points. \n \nConsequently, the MPC voted to retain \nthe: \n(i) MPR at 14.0 per cent; \n(ii) CRR at 22.5 per cent; \n(iii) Liquidity Ratio at 30.0 per cent; and \n(iv) Asymmetric corridor at +200 and -\n500 basis points around the MPR. \n \nThank you for listening. \nGodwin I. Emefiele \nGovernor, Central Bank of Nigeria \n22nd May, 2018 \nCBN Monetary Policy Review \n84", "source": "CBN", "stratum": "cb_requests", "fetch_date": "2026-05-11", "url": "file:///CBN/Monetary_Policy_Review/MPR Aug 18 Reviewed new.pdf"}
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