{"doc_id": "033f95601efaa5a711ac178b4df54962", "text": "1 \n \nCentral Bank of Nigeria Communiqué No. 81 of the Monetary Policy \nCommittee Meeting of Monday and Tuesday, January 30 and 31, \n2012 \n \nThe Monetary Policy Committee (MPC) met on January 30 and 31, \n2012 with all 12 members in attendance to review the domestic \neconomy in 2011 and the nature of current challenges against the \nbackground of developments in the international economic and \nfinancial environments. \n \nAt the outset, the Committee recalled that in a bid to ensure price \nand financial stability, the Committee, held six (6) regular meetings \nand one (1) extra-ordinary meeting in 2011 during which it raised the \nMonetary Policy Rate (MPR) six (6) times, from 6.25 to 12.0 per cent; \nraised the Cash Reserve Requirement (CRR) three (3) times from 1.0 \nto 8.0 per cent; and the liquidity ratio (LR) once from 25.0 to 30.0 per \ncent. It also reduced the foreign exchange net open position of \nDMBs from 5.0 to 3.0 per cent, and adjusted the mid-point of the \nexchange rate band from N150/US$1 to N155/US$1. These decisions \nsignalled to the market the Committee‟s clear and unambiguous \ncommitment to the primacy of price stability as its key mandate. \n \nThe Global Economy \nLatest projections by the International Monetary Fund (IMF) \nindicated that global output growth which had slackened from 5.2 \n2 \n \nper cent in 2010 to 3.8 per cent in 2011 could decelerate further to \n3.3 per cent in 2012. Advanced economies are expected to record \na lower rate of growth of 1.2 per cent in 2012 compared to the \nestimated 1.6 per cent in 2011. The US economic growth in the \ncoming quarters would depend a great deal on growth of the Euro \narea. The Euro area is projected to record a negative growth of 0.5 \nper cent in 2012 essentially on account of the burden of high public \ndebt and the fragility of the credit and financial markets. Output \ngrowth in emerging and developing economies slowed down in \n2011. China, India and Brazil all posted lower growth rates in 2011 \nthan in 2010. Sub-Saharan Africa has been a major exception to the \nglobal trend: it is estimated to have grown by 4.9 per cent in 2011 \nand is expected to record a higher growth of 5.5 per cent in 2012. \n \nInflation rates in most of the advanced economies trended upward \nin 2011 with the exception of Japan. In the US, UK, and Germany, \ninflation rose from 1.4, 3.7, and 1.7 per cent in 2010 to 3.0, 4.2, and \n2.1 per cent in 2011, respectively. The Euro-zone debt crisis worsened; \nleading to credit ratings downgrades, change of governments, and \nimplementation of austerity measures, even as a few nations \nappeared to have entered into a recession. \n \nThe Committee felt that in the light of the expected deceleration in \nthe economies of the country‟s major trading partners, and the \n3 \n \nabsence of adequate commitment of most advanced economies \nto effectively address the fiscal imbalances and to reform their \nfinancial systems, there would be continued pressure on Nigeria‟s \nexternal sector in 2012. The anticipated slack in external demand \nwould, in the view of the Committee, have to be offset by \ngenerating the needed domestic demand. This, however, would \nrequire a shift in the economic development strategy that allows \ngreater diversification of the economy without losing sight of the \nneed to pursue sound demand management policies. \n \nKey Domestic Macroeconomic and Financial Developments \n \nOutput and Prices \n \nProvisional data from the National Bureau of Statistics (NBS) \nindicated that real Gross Domestic Product (GDP) grew by 8.68 per \ncent in the fourth quarter of 2011 up from 6.64, 7.72, and 7.40 per \ncent in the 1st, 2nd and 3rd quarters, respectively. The overall GDP \ngrowth rate in 2011 was estimated by the NBS at 7.69 per cent, \nmarginally lower than the 7.87 per cent recorded in 2010. This \nprojection is based on the estimated Quarter III and Quarter IV \ngrowth rate of 7.40 per cent and 8.68 per cent respectively. The \n2012 Budget proposal assumed a growth rate of 7.2 per cent. This is \nin line with the latest World Bank forecast of 7.1 per cent growth for \nNigeria in 2012. The Committee noted with satisfaction, the good \n4 \n \nperformance of non-oil activities including agricultural and services \nsectors as well as the recovery in crude oil output in 2011, particularly \nin the fourth quarter. In the Committee‟s view, the opportunity to \nbuild on the robust non-oil growth with further investments in \ninfrastructure and manufacturing and processing activities should be \nutilized in order to mitigate any negative impacts from the likely \nexternal shocks during the year. \n \nThe Committee also noted the NBS survey data on the rise in the \nunemployment rate to 23.9 per cent in 2011 from 21.4 per cent in \n2010. The latest unemployment rate is considerably higher than the \n12.3 per cent recorded in 2006 by the NBS survey, which suggests \nthat the consistently high output growth during this period had failed \nto create adequate employment for the growing labour force. \n \nIn view of this, the Committee recommends that in addition to the \nstructural reforms being currently pursued, emphasis should be \nplaced on technical and vocational education in order to produce \na labour force that is compatible with the current stage of the \ncountry‟s development. \n \nIn 2011, the Inflation rate fluctuated within the lower double-digits \nrange during the early part of the year, but moderated thereafter. \nThe year-on-year headline inflation rate, which was 12.1 per cent in \n5 \n \nJanuary 2011 rose to 12.8 per cent in March, before moderating to \n10.2, 10.3, and 10.3 per cent in June, September, and December, \nrespectively. Similarly, food inflation rose from 10.3 per cent in \nJanuary 2011 to 12.2 per cent in March and thereafter moderated to \n9.2, 9.5, and 11.0 per cent in, June, September, and December, \nrespectively. Core inflation also rose from 12.1 per cent in January \nto 12.8 per cent in March stabilizing at 11.5, 11.6, and 10.8 per cent in \nJune, September and December, respectively. \n \nThe headline inflation rate stood at 10.3 per cent in December 2011, \nby far the lowest since December 2008 and lower than the average \nof 12.75 per cent during the period 2001-11. Food inflation, at 11.0 \nper cent in December 2011, was lower than its level in the preceding \nthree years. Similarly, the year-on-year core inflation declined in \n2011. At 10.8 per cent in December 2011, core inflation was \nmarginally lower than the 10.9 per cent in December 2010 and 11.2 \nper cent in December 2009. The Committee noted that both food \nand core inflation have remained high exerting immense pressure on \nthe headline inflation rate. The Committee was therefore of the view \nthat while the focus on growth continues to be a key imperative, the \ncontainment of inflation equally deserves immediate attention. It \nnoted that the inflation outlook in the short- term will be impacted by \nthe anticipated fiscal injections in relation to the proposed 2012 \nbudget, the recent partial deregulation of pump price of PMS, and \n6 \n \nnew tariff regimes on certain food imports. The Committee has also \nnoted comments indicating possible plans by the National Assembly \nto revise the budget benchmark price of oil from $ 70 per barrel to \n$75 or even $80 per barrel. Such a measure would significantly \nincrease expenditures especially given the already high oil output \nassumptions. In addition, it would reduce accretion to the Excess \nCrude Account (ECA) and increase the inflationary pressure already \nin place on the supply-side. In the event of this happening, the \nlikelihood of further tightening during 2012 increases. The Committee \nwould like to reaffirm its commitment to price and exchange rate \nstability and its determination not to pursue an accommodative \npolicy stance. The Committee therefore, strongly supports the \nrecommendations of the Executive for a benchmark price of a \nmaximum of $70 per barrel. \n \nMonetary, Credit and Financial Market Developments \nBroad money supply (M2) growth was sluggish up to May, 2011, \naccelerated thereafter to 5.66, 9.50 and 15.40 per cent in June, \nSeptember, and December 2011, respectively. When annualised, M2 \ngrew by 11.32, 12.67, and 15.40 per cent in June, September and \nDecember, respectively, which hovered around the indicative \ngrowth benchmark of 13.75 per cent for 2011. Thus, M2 growth of \n15.4 per cent in 2011 was higher than the 6.9 per cent growth in \n2010. The significant increase in credit to the private sector as result \n7 \n \nof loan to AMCON to finance its activities was a major factor \nunderlying growth in monetary aggregates in 2011. \n \nThe Committee noted that money market rates moved upward in \n2011. The average OBB rate increased to 15.50 per cent in \nDecember from 6.22, per cent in January. Similarly, the average \ncall rate rose to 14.09 per cent in December from 6.42, per cent in \nJanuary. The rise in money market rates should be viewed in the \noverall context of monetary tightening stance of the Bank in 2011 \nthrough hikes in the monetary policy rate (MPR) as well as the sharp \nincrease in the cash reserve ratio (CRR) from 4 per cent in \nSeptember to 8 per cent in October. The Committee observed that \nmonetary tightening was also used to restore stability in the foreign \nexchange market. In January 2012, money market rates have been \nhovering within a range of 12.85-15.70 per cent. Long term bond \nyields have tended to move in the range of 14-15 per cent. \n \nResponding positively to the hike in policy rates, both the lending \nand deposits rates of deposit money banks also moved up in 2011, \nalthough substantially less in the case of the latter. The maximum \nlending rate increased to 23.21 per cent in December from 21.75, \n22.02, 22.02 and 22.09 per cent in January, March, June and \nSeptember, respectively. Also, the prime lending rate rose to 16.75 \nper cent in December from 15.73, 15.81, 15.76 and 15.87 per cent in \n8 \n \nJanuary, March, June and September, respectively. The spread \nbetween the maximum lending rate and the average deposit rate \nwhich was at 19.22 percentage points in June moved up to 20.12 \npercentage points in December. \n \nExternal Sector Developments \nForeign exchange reserves amounted to US$ 32.64 billion as at end \nDecember 2011, more or less flat relative to the US$32.34 billion as at \nend December 2010, despite the higher oil price in 2011. \nNotwithstanding the high prices of Nigeria‟s reference crude oil \n(Bonny Light) which averaged US$106.32 per barrel for the year, the \nlimited accretion to external reserves was due to the high demand \nfor foreign exchange in the market. The Committee noted that \npressure on the exchange rate emanating from the high demand \nreflected the import-dependent nature of the economy, probably \ncompounded by the activities of speculators. The reduction in \narbitrage opportunities in the oil marketing sectors combined with \nstronger controls in foreign exchange practices have already led to \na noticeable moderation in foreign exchange net demand. \n \nThe official wDAS rate (inclusive of 1 per cent commission) moved up \nfrom N151.62 per US$1 in January 2011 to N154.45/US$1 in June and \nfurther to N158.21/US$1 in December 2011. The volatility in the official \nrates, however, was limited with the coefficient of variation being \n9 \n \n1.28 per cent for the year as a whole compared to 0.32 per cent in \n2010. The Committee commended the CBN for its efforts at \nestablishing stability in the market. It also urged the CBN to strive to \neliminate speculative demand for foreign exchange. \n The \nCommittee also noted that as at January 24, 2012, the exchange \nrate was N158.57/US$1, while the foreign exchange reserves \namounted to $34.18 billion on January 27, 2012, which could finance \nover 6 months of imports of goods and services. The outlook for oil \nprices in the short-term as well as the forecast demand/supply \nbalance, suggest that the current exchange rate band should be \nretained while still achieving moderate continuous accretion to \nreserves \n \nThe Committee’s Considerations \nThe Committee is pleased that ahead of most African countries, \nNigeria had been proactive by responding to the threats of inflation \ninduced by fiscal spending and global food, fuel and other \ncommodity prices as well as to the challenges of financial stability. \nThe Committee observed that the mandate of the Bank was largely \nachieved, as inflation was contained within tolerable levels and the \nexchange rate was generally stable throughout 2011. The resolution \nof the banking crisis during the year was also commended. Against \nthis background, the Committee welcomed the stated fiscal stance \nof the Federal Government as part of its programmed movement \n10 \n \ntowards fiscal consolidation. The increased share of capital \nexpenditure in the proposed total expenditure in 2012 is an \nimportant signal of the commitment of the Federal Government to \nimprove the productive capacity of the economy. The Committee \nfinds the current environment to be conducive for improved co-\noperation \nand \ncoordination \nbetween \nfiscal \nand \nmonetary \nauthorities. \n \nThe Committee acknowledged that the decision to remove the fuel \nsubsidy was a major development that took place since its last \nmeeting in November 2011. It commended the Federal Government \non the partial removal of subsidy on Premium Motor Spirit (PMS), \nwhich it noted will have salutary effects on the external reserves and \nexchange rate as well as on investment in oil and gas downstream \nsector. It further commended the Federal Government for the \ncommitment towards the passage of the Petroleum Industry Bill (PIB) \nwhich, it believes, would further complement the benefits of the fuel \nsubsidy removal. On the other hand, it recognized the possible \nnegative impact of the partial removal of fuel subsidy on the general \nprice level and hence inflation in the short run. In this regard, it \nunderscored the need for the speedy implementation of the \npalliative measures and entrenchment of social safety nets for the \nmore vulnerable groups. However, the long-term benefits far \noutweigh the likely short term costs as far as inflation is concerned. \n11 \n \nFurthermore, the Committee commended the fiscal authorities for \nthe benchmark crude oil price of $70 per barrel as proposed in the \n2012 budget and advocated for its retention as any upward revision \nwould tend to undermine macroeconomic stability. \n \nThe Committee considered the need to sustain the high output \ngrowth that the country has seen in recent years partly because of \nthe slowdown in the advanced and other emerging economies and \npartly because of the need to generate employment in the \neconomy. However, to help generate new jobs, it would be essential \nfor the Federal Government to move quickly with the structural \nreforms such as (a) power sector reforms, (b) implementing the \nagricultural sector transformation programmes and the associated \nvalue chain, and (c) refocusing attention to the provision of \ntechnical and vocational training to bring about skills development \nthat would match the needs of the economy. \n \nThe Committee underscored the need for maintaining price stability \nin a manner conducive to the achievement of employment-\ngenerating growth. In this connection, it observed that the \nannounced increase in import duties on some food items by the end \nof June 2012 would exert further pressure on food prices which would \ncompound the effect of increased transportation costs induced by \n12 \n \nthe partial removal of the fuel subsidy on the general price level and \nthe associated inflation expectation. \n \nThe Committee noted that historically, upward adjustments in the \nprice of PMS have tended to have a short-term impact on the rate \nof inflation. A review of previous instances of adjustment in fuel \nprices shows that without exception, each instance is accompanied \nby an increase in the rate of inflation followed almost immediately \nby a moderation in the short - to - medium term. Staff estimates \nindicate that inflation in the first two quarters of 2012 would range \nbetween 11.0 per cent and 14.5 per cent, and then moderate \nsteadily towards the single digit zone by late 2013. Real interest rates \nare therefore likely to remain positive on a trend basis, even if the \nrate of inflation were to rise briefly above the MPR in the second \nquarter. \n \nFinally, the Committee recognized the current security challenges \nand Government‟s efforts to find a lasting solution through dialogue, \neconomic measures and enhanced intelligence. It expressed \nconfidence on the ability of Government to resolve the problem. \n \n \n \n \n13 \n \nDecisions \nIn the light of the above, and considering the clear impact of \nprevious tightening on the rate of inflation and exchange rates up to \nDecember 2011, the Committee unanimously decided as follows: \n1. Retain MPR at 12.0 per cent with interest rate corridor of +/- 200 \nbasis points; \n2. Retain CRR at 8.0 per cent; \n3. Retain minimum liquidity Ratio of 30.0 per cent; and \n4. Retain the Mid-point of exchange rate at N155/US$1 with a \nband of +/-3.0 per cent. \n \n \nThe Committee also resolved to watch closely developments with \nrespect to the fiscal stance and to respond appropriately if, and \nwhen, the need arises. \n \n \nSanusi Lamido Sanusi, CON \nGovernor \nCentral Bank of Nigeria \n \nJanuary 31, 2012 \n \n \n \n14 \n \nPERSONAL STATEMENTS BY MPC MEMBERS: \n1.0 ALADE, SARAH \nThis Committee meeting is the first for the year 2012, and is coming on the back \nof a partial fuel subsidy removal and nation-wide labor strike that affected \neconomic activities for a week in the country. Although economic prospects for \nthe country remain optimistic, it has many challenges. Headline inflation \nmoderated to 10.3 in December 2011; however, staff projection for 2012 \nsuggests a temporary spike before trending downwards in 2013. Money market \nrates indicate tight liquidity conditions in the market as interbank rates and other \ninterest rates have trended upwards, posing constraint to private sector growth \nand job creation. These developments, coupled with uncertain global \neconomic environment, calls for a stay of action on policy rate to help address \nthe growth needs in the economy. \n \nRemoval of Oil subsidy will have inflationary impact, albeit temporary. Although \nfull subsidy removal was not achieved, the partially compromised removal of 50 \npercent price increase reached between labor and government will have an \ninflationary impact on the economy. This increase in petroleum prices will \nimpact transportation, energy and food prices, leading to temporary \ninflationary pressure. However, as consumers result to expenditure switching, \nrather than spend more income, the inflationary impact should be short-lived. \nAdditionally, the staggered nature of the subsidy removal and introduction of \npalliative measures such as public transport system by government is expected \nto cushion the impact of the higher fuel prices on the poor and help moderate \nthe inflationary impact. Inflation, which ended 2011 at 10.3 percent, is \nexpected to increase temporarily in the first few months of the year. Staff \nestimate suggest that it will then moderate to single digit by 2013. This is \nbecause, since there are no additional increase in salaries/wages, consumers \nwill only switch spending towards fuel related expenditure, away from other \nextra expenditure items. Although inflation is projected to rise, the preemptive \n15 \n \ntightening stance adopted by the Bank in 2011 calls for a pause for now, to \nallow for the full effect of the policy. \n \nFiscal consolidation is enshrined in the 2012 budget and the fiscal authority has \nplaced greater emphasis on transparency and prudent spending. The 2012 \nbudget proposal of N4,749 trillion, presented to a joint session of the National \nAssembly on December 13, 2011 reduced budget deficit to 2.77 percent of GDP \nin 2012 down from 3.0 percent recorded in 2011 budget. This is within the \nthreshold of 3 percent of GDP stipulated in the Fiscal Responsibility Act of 2007. \nCrude oil production is expected to reach the budget target of 2.48 bpd, and \nprice is expected to remain high in international market on the back of \ndisrupted supply in the Middle East and renewed recovery in the US that saw \n2011 fourth quarter GDP grew by 2.8 percent, the highest quarterly growth rate \nrecorded in more than two years. If the budget is implemented as proposed, the \ninflationary pressure coming from fiscal injection will be contained. \n \nDevelopments in the domestic money market indicate tight monetary \nconditions. Money market rates increased in the fourth quarter of 2011, with \nmaximum lending rate reaching 23 percent by December 2011 from 22.02 \npercent in June. Similarly, average OBB rate increased from 9.6 percent in June \nto 15.5 percent in December 2011. This is as a result of monetary tightening \nimplemented by CBN in 2011 and further tightening could increase lending cost \nto private sector and further constrain economic activities. \n \nGlobal growth prospect remain fragile and weak. Developments in the global \neconomy are still of concern as most advanced economies are projected to \nshow a lower rate of growth in 2012. The latest IMF estimates project growth in \nadvanced economies to decelerate to 1.2 percent in 2012 from 1.6 percent \nrecorded in 2011. The Euro-area would be the hardest hit on the back of high \n16 \n \npublic debt and fragile financial market. The Federal Reserve Bank has \nindicated that it will keep key interest rate very low till late 2014, in an effort to \ngive the growth prospects in the US an extra push and also in an attempt to \nshield the US economy from a potentially more severe recession in Europe. The \nEuro-zone debt crisis has worsened, leading to crediting rate downgrade in \nsome countries and recession in others. In such an uncertain global outlook, \ntightening will not be a good option. \n \nBased on the above, I will recommend a “no change” in monetary policy rate \nand Cash Reserve Requirement (CRR). The combination of weak global \neconomic environment and domestic challenges calls for prudent monetary \npolicy stance to help maneuver the uncertain environment. \n \n \n2.0 BARAU, SULEIMAN \nA. \nDevelopments Since the last MPC \nA.1 \nGDP is forecast to grow from 7.40% in Q3 to 8.68% in Q4. The non-oil sector \nremained the main driver of GDP growth. Agriculture, Wholesale and \nRetail Trade, and Services are expected to contribute 2.28, 2.39 and 2.23 \npercent, respectively. Overall, GDP growth is forecast at 7.69 percent in \n2011. \nA.2 \nYear-on-Year (YOY) Headline Inflation remained stable at 10.3%, though \nthe Month-on-Month (MoM) measure showed an increase of 1.02%. Year-\non-Year (YoY) Core Rate also increased to 10.8%. However, Month-on-\nMonth Inflation rates also increased by 1.9% and 0.4% for Food and Core \nmeasures, respectively. \n17 \n \nA.3 \nMoney market rates were largely volatile dictated as usual by \nGovernments‟ fiscal operations particularly delays associated with the \nactivities of FAAC recently. \nB. \nComments/Context Setting \nB.1 \nCurrent inflation numbers do support my earlier view that the rather very \nproactive policy measures that we have taken in the recent past have \ncontained the inflation risk that we face, as reflected particularly, by the \nYear-on-Year \nindicators. \nHowever, \nthe \nMonth-on-Month \nmeasures \nindicate upside risk to inflation. Inflation upside risk is further compounded \nby the recent upward adjustment in the prices of petroleum products \nwhich has indeed translated into similar, and often, more radical \nadjustment of the prices of general goods and services. \nHowever, the very comprehensive staff presentation on inflation outlook \nusing models that trended inflation after successive past adjustments in \nthe prices of petroleum products, suggests observed initial spike in inflation \nrates, and which is usually followed by declines. \nThe inflation numbers just released did not show significant build in inflation \nexpectations, except mildly, as indicated by the Month-on-Month \nmeasures. The explanation for this is perhaps the fact that the adjustment \nwas sudden, with the adjustment actually expected to be effected in \nApril, 2012. \nHaving reviewed the above, it is my firm belief that in the context of \neffectiveness of the policy measures taken in the recent past, it does \nappear compelling to hold and watch trends in the next few weeks in \norder to decide whether to actually recommend measures to contain the \nupside risk to inflation. \n18 \n \nB.2 \nIt is also significant to hold any new policy measure pending the outcome \nof the review of the Appropriation Bill currently before the National \nAssembly. The provisions in the Bill appear realistic under the \ncircumstance, with particular reference to the benchmark price for crude \noil sales. Given the structure of our expenditures, with a larger recurrent \ncomponent, any attempt by the National Assembly to increase the \nbenchmark would increase the expansionary nature of the budget, the \nproportionate deficit and ultimately increase the associated inflation risk. \nThis is a risk I recognize but would caution that we watch developments in \nthis regard. Therefore, in the context of my earlier comment on the \npetroleum price adjustment related risk, we should come up with \ncomplementary response package to these combined risks in due course. \nB.3 \nIt is commendable that we now have unemployment numbers from the \nNational Bureau of Statistics. With unemployment rate at 29% and with a \nwhopping 16 million Nigerians being unemployed, we do not need to go \nfar to explain the negative commentaries on our state of governance, the \nstrike in response to petroleum price adjustment by a segment of the \nsociety and the general security challenges that we currently face as a \ncountry. \nThe unemployment numbers, in my view, conveyed two important \nmessages. The first is that contrary to general uninformed commentary \nthat is now perverse, the economy has been creating new jobs, though \ndismal, in the last three years. This, therefore, gives me hope. Secondly, \nwhereas the economy has grown at an average of over 6% since 2006, \ntrending unemployment growth over the same period showed flat \ngrowth. The hope that I had just referred to, must be supported by an \naggressive incentive plan and structure to make our youth to gravitate \ntowards vocational and job creating education rather than white collar \n19 \n \ntype. We can borrow a leaf from the current programme in South Korea \nand other countries. This should complement CBN‟s current efforts and \nthose of related organizations in providing access to finance for Micro, \nSmall and Medium Enterprises, and the provision of vocational education. \nGovernment through relevant Ministries must elicit necessary policies and \nmore aggressively put the infrastructure for generating employment. \nIn other words we are currently challenged as a country to translate \neconomic growth into job creating and poverty reducing economic \ndevelopment. \nB.4 \nIn light of the foregoing and in the context of my arguments for hold \nposition during the last MPC, I‟m compelled to also ask for maintenance \nof status quo today. \nC. \nRecommendation for Policy \n Maintain the tightening stance; \n Keep MPR at 12%; \n Keep CRR at 8%; and \n Maintain the existing corridor. \n \n \n3.0 GARBA, ABDUL GANIYU \nDecision \nI vote for: \nI. Holding the MPR at 12% \nII. Maintaining the subsisting Corridor for SLF and SDF \nIII. Holding CRR at 8% \n \n20 \n \nObservations \nSince the last MPC Meeting on November 21st, 2011 \na. The National Bureau of Statistics (NBS) released inflation figures for \nNovember and December which show that Headline inflation was \n10.3% in December and 10.5% in November compared to 10.5% in \nOctober 2011. Indeed, the NBS data from January 2010 indicates \nthat headline inflation has been trending downwards. While Food \nInflation exhibited its characteristic seasonal trend (rising in \nDecember by 1.4% year on year relative to November), its effects \nwere moderated by a 0.7% decline in core inflation in December. \nThe downward trend of headline and core inflation in 2010-2011 \nsupported Staff forecasts that year on year Headline inflation would \nfall below 10% by February 2012. \nb. The gap between the operating targets (OBB and Call rate) \nnarrowed from a peak of 5.4% (December 1, 2011) to an average \nof 0.65% from December 28th to January 24th 2012. In addition, both \nrates have declined from peak levels in early December 2012 to \naverage 14.0% (call rate) and 13.4% (OBB) in the last month. The \naverages of call rate and OBB are within expected target rates \n(MPR + 2%). The moderation in rates correlates with expansion in M1 \n(12.6%) and M2 (10.8%) in late December 2011. \nc. The short term interest rates - Prime Lending Rate and Maximum \nLending Rates - averaged 16.8% and 23.3% respectively. The \naverages for 2011 were respectively 22.4% and 16%. The interest \nrate spread of 6.5% indicates high risks of lending to small and \nmedium scale businesses and the high rates correlate with declines \nin Deposit Money Banks‟ Loans and Advances to the private sector. \n21 \n \nThe rate in December was -4% which was significantly higher than \nthe 2011 average of - 0.17%. \nd. On the first day of 2012, the economy experienced a strong supply \nand demand shock in the form of a sharp increase in the price of \nPremium Motor Spirit (PMS) from N65 per liter to N141 per liter on \nJanuary 1 2012. Following the crisis that followed, the government \nreduced the price to N97 per liter. The shock shifts the Aggregate \nSupply to the left. In addition, it shifts the aggregate demand \nleftwards, alters relative prices and the general price level thus, \nreducing the demand for many commodities. The change in real \nincomes and relative prices has distributive consequences that can \nsignificantly deepen and widen poverty and, limit the poverty \nreducing elasticity of growth. This is particularly serious given that a \nrange of 90 – 150 million Nigerians are estimated to be living below \n$2 a day. \ne. The supply shock has inevitably altered the path of inflation in 2012 \nand 2013 as Staff estimates projections have shown that inflation \nlevels will rise above earlier projections and elongate the period for \nattaining target inflation rate of under 10% from February 2012 to \nlate 2013. \nf. The international economic outlook for Euro zone remains very \nbleak as the political system grapples with the challenges of \nsovereign debt and the dangers of contagion. The signs of recovery \nin the United States‟ economy are good and investors have \nresponded positively to the decision of the Federal Reserve to \nmaintain a policy of low interest rates to the end of 2014. The EU \nban on imports of Iranian crude and, the ongoing crisis in Syria and \n22 \n \nthe good signs of US recovery all suggest a good outlook for \nNigerian crude prices at least in the near term. High crude prices \noffer Nigeria with good opportunities to build reserves and to \ngenerate \nadditional \nrevenue \nto \nfinance \ninfrastructural \ndevelopment. However, the benefits are conditional on a \ntransformation of the fiscal system (1) to bring into compliance with \nprovisions of Fiscal Responsibility Act 2007; (2) to significantly cut the \nwaste in recurrent and capital budget; (3) to significantly raise the \nshare of investments in infrastructures and (4) to shifts to \nperformance budgeting from the current line item budget. \nKey Concerns \na. The growing levels of unemployment from 12.3% in 2006 to 23.9% in \n2011 is serious especially since the most active population group \n(16-44) are the most affected. The coincidence of rising \nunemployment and real GDP growth is inconsistent with Okun‟s Law \ngiven that an average growth of 6.8% in the period is not creating \njobs. It is expected that as the economy grows beyond a threshold \n(3% in the US), unemployment falls. The NBS claims that agriculture, \nservices and wholesale and retail trade are the growth drivers. \nTypically, the formal employment elasticity is not high enough to \nprovide decent jobs for a growing labor force. \nb. Despite the much vaunted emphasis on FDI and Portfolio \ninvestments, the inflows are very small compared to outflows of \ninvestment income and service payments. For instance, available \ndata for the first three quarters of 2011 shows that whereas, the net \noutflows from investment incomes and services averaged N1.6 \nTrillion per quarter, the net inflows from FDI and Portfolio investments \n23 \n \naveraged N408 billion per quarter. Thus, the economy has to \nmaintain a surplus trade balance of an average of N1.38 Trillion and \nsupplemented by remittances from its top quality labor force \ndrained to Eurozone, North America and other countries to offset \nthe hemorrhage of investible resources. The challenge for policy \nmakers is how to alter incentives through new institutions and \ncompetitive infrastructures and policy environment to alter (1) \ncomposition of output and (2) composition of exports to align (1) \nNigeria‟s aggregate demand and aggregate supply and (2) \nincrease the job elasticity of economic growth. Clearly, such \nstructural issues fall within the domain of fiscal authorities. \nc. The size of the fiscal deficit and public debt and its crowding-out \neffects on credit to real sectors of the economy and implications for \nmonetary aggregates has been a major concern since the global \nfinancial crisis impacted on Nigeria in 2008. In addition, the monthly \n“FAAC effect” has tended to unsettle the money market causing \nthe interbank rate to exhibit FAAC related volatilities. It is necessary \nfor the fiscal authorities to better manage the allocation of the \nAccruals to the Federation Account in Fiscal Year 2012 in ways that \ndo not unsettle the money market. \nd. The performance of the capital market is also a key concern. In 2011 it \nlost about N2.2 Trillion of its value with Banking Stocks the worse hit. In \n2012 it is important that the vulnerabilities of the market are addressed. \nA more supportive fiscal regime will minimize the need to mop up \nliquidity and raise MPR which seems to have the expected theoretical \neffects on stock prices, market index and market capitalizations. \n \n24 \n \nDeciding Issues \n1. The supply shock is already inflationary and its dynamic and general \nequilibrium effects are still unfolding. An expansionary monetary policy at \nthis time is inappropriate: it will amplify the inflationary impacts of the \nsupply shock without delivering a positive output response or a reduction \nin unemployment. It may also, undermine the commitment to a stable \nexchange rate, which is key to achieving inflation targets. For it is obvious \nthat (1) stable prices of PMS depend strongly on the stability of the stable \nexchange rate and (2) the price of PMS has significant effects on \nheadline inflation. \n2. Holding \na. allows the menu of tightening policies of 2011 to work through the \neconomic system; \nb. provide investors policy stability as they plan their investment \nstrategies for 2012 and beyond; and \nc. Incentivizes the fiscal authorities to undertake the fiscal and \nassociated fundamental reforms required to change the incentive \nsystem, begin to build the infrastructural system that will make the \neconomy competitive in oil and gas, solid minerals, industry and \nagriculture so as to create the jobs needed to reverse the trend of \nunemployment. \n \n4.0 KIFASI, DANLADI \nKey domestic macroeconomic indicators were largely favourable in 2011. \nOverall, GDP grew by 7.69% for 2011, marginally lower than the 7.78% recorded \n25 \n \nin 2010. However, unemployment increased from 21.4% in 2010 to 23.9% in 2011. \nThe rising rate of unemployment, which is of great concern, is being addressed \nby government through making employment generation one of the cardinal \nobjectives of the Transformation Agenda. \n2. The year-on-year headline inflation rate which was 11.8% in December, 2010 \nmoderated to 10.3% in December, 2011. The inflationary pressures moderated \ntowards the end of the year following series of monetary policy tightening \nmeasures adopted by the Central Bank of Nigeria, as well as the restraint on \ngovernment expenditure which culminated in a lower deficit than planned. \n3. The MPC adjusted the mid-point of the exchange rate band from \nN150.00/US$1.00 to N155.00/US$1.00 in November, 2011 to stabilize the foreign \nexchange market. It is hoped that the deregulation policy of the Government \nwould further assist in moderating the pressure on foreign exchange demand \nand thus boost the external reserve position. \n 4. Output growth projection for 2012 remained robust. The prospect for robust \nGDP growth was anchored on the expectations of increased crude oil \nproduction; stable naira exchange rate; and increased credit delivery by banks \ndue to the operations of AMCON, amongst others. \n5. Forecasts for inflation for 2012 based on N97 per litre of petrol indicate that \nthe year-on-year headline inflation will remain above 10.0% but not likely to \nexceed 13%. This is premised on the maintenance of the prevailing monetary \npolicy stance and interest rate regime as well as government‟s initiative to \ncontrol expenditure and minimize budget deficit. \n 5. In view of the above, I recommend that the MPR should be retained at the \ncurrent level of 12% for the next two months when another review will be due for \nconsideration. \n26 \n \n5.0 LEMO, TUNDE \nThe Global economic outlook remains unstable and growth projection has been \nrevised downwards by IMF to 3.3% in 2012 well below the unimpressive growth of \n3.8% in 2011. Euro area remains a major concern as it is almost certain to shrink \nin 2012 largely as a result of unresolved debt crises in a few member countries. \nUS economic growth forecast in 2012 may be affected by the recession in Euro \narea. Japan recorded trade deficit, the first in 30 years – no thanks to the \nappreciation of the yen. The global economy‟s growth is therefore largely \nexpected to come from the BRIC countries and Sub-Sahara Africa. \n \nOn the domestic front, output projection is fairly robust in spite of the current \nsecurity challenges. GDP growth estimate in 2011 was 7.69%, slightly lower than \n7.87% recorded in 2010. The 2012 growth estimate of 7.2% will largely be on the \nback of the agricultural sector which is expected to benefit from additional \nbank credit, now made possible by the CBN led NIRSAL programme. The stable \ncrude oil price outlook will also help to anchor this expectation. \n \nInflation outlook presents an upside risk as a result of the pass through effect of \nthe partial deregulation of petroleum product prices, extension of the 2011 \nbudget implementation to the first quarter of 2012, continued implementation of \nthe national minimum wage as well as the expected increase in the tariff on \nimportation of rice and wheat during the year. This can be further heightened \nby any increase of the benchmark price beyond USD70 per barrel by the \nNational Assembly. This is clearly not recommended. \n \nIn my view, the recent partial deregulation is painful but necessary to ensure the \ncountry‟s long term fiscal sustainability and therefore commendable. The near-\nterm inflation outlook however confirms that the inflation pressure will be short-\n27 \n \nlived and it is projected to moderate after the second quarter of 2012 with \ncomplementary tight fiscal stance. \n \nThe foreign exchange market is relatively stable with mild accretion to reserve in \nspite of the high demand of foreign exchange in the second half of the year. \nThe outlook is stable as international crude oil price is expected to be strong, \ngiven the on-going EU sanction on Iran and the inability of Libya to resume \ncrude oil export. \n \nGiven the stable forex outlook, the present level of liquidity in the system and the \nindication of moderation of inflation after the second quarter, as well as the \nrelatively high money market rates of up to 15:7%, maximum and marginally \npositive real interest rates, further tightening may be in expedient now and may \ntherefore constrain growth. \nI therefore vote as follows: \n(a) Retention of the MPR at 12% as well as the symmetric corridor of +/- 200 \nbasis points \n(b) 8% of CRR to remain unchanged \n(c) Minimum liquidity Ratio of commercial banks to remain 30% \n \n \n6.0 MOGHALU, KINGSLEY CHIEDU \nAs the Monetary Policy Committee considers its position on the Monetary Policy \nRate and other indices of monetary policy at its first meeting in 2012, I believe \nthe MPC should hold the MPR at 12% and adopt a wait-and-see posture until its \nnext review meeting in March 2012. The Committee should also hold the Cash \n28 \n \nReserve Ratio at 8% and maintain the present corridor of plus/minus 2% for the \nStanding Lending Facility and the Standing Deposit Facility. \nThe most important development since our last meeting in November 2011 was \nthe partial deregulation of the price of Premium Motor Spirit (PMS) at the \nbeginning of 2012, which has introduced a price shock in the economy. Despite \nthis development, which the MPC anticipated and factored into its decisions on \nthe MPR in the second half of 2011, there is no overwhelming argument to raise \nthe MPR at this time. There are several reasons to hold steady, some of which I \nbriefly outline below. \nFirstly, it is essential to pause and give adequate time for the pass-through \neffects of previous rate hikes – the last of which, from 9.25% to 12% in October \n2011, was a steep increase – to filter through the economy. A rate hike at this \ntime could introduce serious disequilibrium into the economy when added to \nthe initial price shock of the partial fuel subsidy removal. \nSecondly, staff estimates indicate that headline inflation will go up to 14.5% at \nthe end of the second quarter of 2012, and that Core and Food Price Inflation \nare projected at 16.1% and 14.5% respectively. While these projects are \nsignificant, they do not argue for a rate hike at the present time because a \ndetailed study of 17 previous fuel price hikes over the past nine years since 2003 \nhave established that in the medium to long term such fuel price increases have \nnot had a direct causative relationship with inflation. The implication, then, is \nthat if all things are equal, the price shocks we have witnessed in January 2012 \nas a result of fuel subsidy removal may not be sustainable. Staff projections \npoint to an ultimately downward trend in inflation back towards a single digit by \nthe end of 2013. \nThirdly, raising rates when, as now, it is not absolutely necessary will stifle the \ngrowth of credit to the private sector, in particular the real sector. \n29 \n \nFourth, at a time when the global economic looks bleak and the threat of a \nrecession looms in several industrialized economies especially the Eurozone \ncountries, it is wise to be cautious. While there is no reason to adopt an \naccommodative monetary policy stance in 2012, and in fact the possibility of \nfurther monetary tightening remains if circumstances warrant, it appears more \nappropriate to hold for now. \nFinally, it should be stressed that the monetary policy stance of the MPC for the \nremainder of 2012 will depend largely on the fiscal authorities‟ continuation of \nmeasures to improve fiscal discipline. Should fiscal expansion resume, the MPC \nwill have no choice but to resume monetary tightening in order to maintain \nprice stability. This is quite apart from the important issue of the need to \nmaintain positive interest rates depending on how much, in fact, inflation \nincreases in 2012. This is why it would be a matter of concern if the legislature \nwere to change the benchmark crude oil price of $70 in the 2012 budget to a \nhigher figure of $75 or $80. Such an action would do more harm than good to \nprice stability. \nOverall, on the balance the MPC should maintain the MPR, CRR, Liquidity Ratio \nand the exchange rate at their present levels, in order to avoid running too far \nahead of possible inflation, and in order to foster an environment that supports \nreal sector growth. This is especially important in an environment of a high \nunemployment rate of 23%. \n \n7.0 OLOFIN, SAM \nThe long awaited removal of “fuel subsidy” (for want of any other more \nappropriate name) as a necessary major fiscal policy step in the much needed \nfiscal consolidation process has at long last been taken. It would appear that it \n30 \n \nhad become sufficiently obvious to the fiscal authorities that this so-called \nsubsidy, with all its attendant rent seeking leakages that was increasingly being \nfunded from government borrowing was no longer sustainable. There are also \nstrong indications that the fiscal authorities in the aftermath of the partial \nremoval of the subsidy, and in reaction to its fall-out effects, are beginning to \nsee the need for strong commitment to fiscal prudence. This is a very much \nwelcome development, if the major domestic and external challenges \nconfronting a fragile single commodity dependent economy like ours are to be \neffectively tackled. This is particularly more so, if the uncertainty surrounding the \nweak and sluggish recovery of the country‟s major trading partners are taken \ninto consideration. From the monetary policy perspective of ensuring stable \nprices, the tight monetary policy stance of the last several meetings should, all \nthings being equal, ameliorate the inflationary impact of this measure. An initial \npredictable upward adjustment in other prices in response to the shock is to be \nexpected; but there is no reason to believe that this would translate into a \nsustained inflationary pressure in the medium term, if the experiences with earlier \nhikes in petroleum prices are anything to go by. \nOther developments in the economy show that the overall GDP growth rate is \nlikely to be sustained around 8 percent in 2012, without significant impact on the \nlevel of unemployment. The NBS recently released figures show that the \nunemployment rate remains high and was estimated to have increased from \n21.4 percent in 2010 to 23.9 percent in 2011. Headline inflation rate remained at \na two digit level, hovering around 10-12 percent prior to the partial removal of \nthe petroleum subsidy. There is strong evidence that measures taken to curb the \nspeculative attack on the Naira at the October 2011 extraordinary meeting are \ncontinuing to succeed in stabilizing the exchange rate, despite the observed \nslight depreciation of about 5 percent in the value of the Naira. \n31 \n \nThe short to medium term outlook for the economy and the corresponding \npolicy challenges suggest that there may be no need for substantial revision of \nthe monetary policy measures put in place at the October and November 2011 \nmeetings. As much as there may be justifiable fear of inflationary pressure \nresulting from the PMS subsidy removal, this is not likely to be significant enough \nto warrant additional tightening measures at this time. The challenges of \nsustaining the stability in the foreign exchange market and that of improving the \nrate of accretion to external reserves as a buffer against any likely external \nshocks also remain. While real interest rates remain at levels that are less than \ncompetitive for attracting net direct foreign investment compared with \ncountries like Ghana and South Africa, the more pressing need for achieving \ngreater competitiveness lies with ensuring a safer business environment devoid \nof social unrest and insecurity. \nIn the light of the foregoing there may be no need for any further major tinkering \nwith the MPR, the CRR and LR at this meeting. Rather, more time should be \nallowed for the full impact of the various policy measures introduced at the last \ntwo to three meetings to take effect before any further reappraisal. One would \ntherefore vote for leaving the MPR and other related measures at their current \nlevels, while we monitor any significant domestic and/or external developments \nthat may warrant further major policy interventions in the near future. \n \n8.0 OSHILAJA, JOHN \nThe Monetary Policy Committee unanimously decided today to maintain its \nPolicy and associated interest rates at levels initiated at our extraordinary \nmeeting of October 2011. The new FX trading bands first announced in \nNovember also remain unchanged. With inflation just beginning to recede last \nyear, this was also a unanimous decision to withhold further preemptive moves \n32 \n \nin order to allow market supply and demand adjustments to naturally settle first-\norder effects of recent sharp increases in domestic petrol prices. \nThe Public should be aware that in price indices monitored by the Committee, \nthere are other quantitatively weightier components besides PMS to consider \n(imported foodstuffs, to name just one). This in no way diminishes due \nrecognition of the hardships and pains expressed by the Public in the immediate \naftermath of the Federal Government‟s abrupt action on its PMS subsidy. Our \ndecision was supported by an objective review of behavioral effects of prior \nprice-hikes, and econometric projections suggesting that the deflationary trend, \nwhich first began surfacing in the closing stages of 2011, is likely to resume in \nearnest; possibly before the end of next year. \nThe key ingredient to successfully realizing MPC expectations for 2012-13 \nnonetheless remains the fiscal stance of Government. All bets (and maybe \neven gloves) come off, however, if Government continues executing poorly on \ninitial, meaningful, steps towards boosting domestic productive capacities and \nemployment. Better execution entails, among other factors, attacking blatantly \nwasteful recurrent expenditures with conviction, and concentrating the savings \nachieved on high-impact investments – i.e. in public, productivity-enhancing, \ngoods and services – and social safety initiatives. \nThe type of revisions that pass in a reconstituted 2012 Federal Budget should \noffer further clues on prospects for our current poise on inflation management \nthis year. \nI agree with the maintenance of our current non-accommodative monetary \nstance, and foresee interesting opportunities arising for further refinements in \nimplementation. These should be aimed at curbing local financial market \ninefficiencies (another source of Public Subsidization, albeit of the implied \nvariety). Such refinements could make available Policy tools less blunt and \n33 \n \nmore responsive. However, should the consolidations proposed by the Fiscal \nAuthorities turn out to be ineffectual for the purposes officially stated then, in \nultimate fulfillment of our Price Stability mandate, the MPC may have little \nchoice but to recourse to blunter, more aggressive measures than were initiated \nlast October. \n9.0 SALAMI, ADEDOYIN \nDespite the increase in the Pump Price of Petroleum Motor Spirit (PMS), my vote \nto support the option of leaving Monetary Policy instruments unchanged was \nnot a difficult one. Simply stated, monetary policy should not react to the kind of \nstructural change, represented by higher fuel prices, even though it will \nadversely affect prices. \n \nIf the economy in Nigeria is to grow at the kind of pace which its potentials \nsuggest and the challenge posed by unemployment requires, reform to ease \nstructural bottlenecks and reduce incentive for resource misuse becomes \ncannot be understated. This, in my judgment, is the light in which the partially \nsuccessful attempt to introduce a regime of fully market determined prices in \nthe „downstream‟ oil sector should be seen. Notwithstanding the inability of \nNigeria‟s government to remove itself from determination of prices, the \nreduction in subsidy achieved will doubtless raise inflation. \nIndeed Central Bank Staff estimates suggest that in the absence of other shocks, \nHeadline Inflation will peak at 14.5 percent at the end of the 2nd quarter of this \nyear. Similarly, Core and Food Price Inflation are expected to be 16.1 percent \nand 14.5 percent respectively. These estimates are sharply higher than forecasts \n34 \n \nmade ahead of the increase in fuel prices. It is noteworthy that Bank Staff \nexpect that inflation will return to single digit at the end of the 2013. \nIt is however pertinent to draw attention to potential „flies in the ointment‟ which \nmay leave colleagues and I on the Monetary Policy Committee no choice but \nto deal with second round effects – perhaps aggressively. Noises from the \nNational Assembly suggesting that the Budget Benchmark Price of crude oil will \nbe raised are a source of concern. If, as proposed, the budget benchmark price \nrises to US$75 per barrel, the resulting increase in government sector – Federal \nGovernment and States – holds the potential to exert a destabilizing influence – \nespecially on Foreign exchange. \nThe imperative of tightly managing fiscal conditions cannot be overemphasized. \nThe US Federal Reserve Bank‟s announcement that it will keep interest rates at \ncurrent levels until 2014 may serve to keep crude oil prices firm as „cheap \ndollars‟ provide funding for speculative demand for crude oil thereby negating \nthe adverse effect of slower growth in global output on the demand for oil. I \nremain concerned that firmer oil prices will inspire fiscal looseness in Nigeria. \nBearing in mind that the 32 percent growth in Credit to the Private Sector \nrecorded last year, indicated by provisional CBN data, overstates the true \nposition, as it doesn‟t discount for the influence of AMCON bonds, loose fiscal \npolicy will ensure that the environment remains unfriendly to growth in credit. \n \n10.0 UCHE, CHIBUIKE \nFor the Nigerian economy, 2012 started on a very shaky note. The withdrawal of \n„subsidy’ on Petroleum Motor Spirit (PMS) by the federal government led to a \nnationwide strike which culminated in a compromise PMS pump price of 97 \nNaira per litre. While this fifty percent increase in the pump price of PMS is \n35 \n \nexpected to have inflationary consequences for the Nigerian economy, I \nstrongly believe that raising the MPR at this stage will be inappropriate. This is so \nbecause the current MPR of 12 percent is unlikely to be eroded into negative \nterritory by the inflationary consequences of this increase in the pump price of \nPMS in the short run. It has for instance been projected that this policy action will \nlead to an increase in the headline inflation from 10.3 percent (December 2011) \nto 11 percent (March 2012). Although inflation may further increase in \nsubsequent quarters of 2012, the expectation is that it will gradually trend \ntowards single digit in 2013. \nIn opting for the maintenance of the status quo, I am also mindful of the fact \nthat borrowing rates are already too high. The negative impact of high interest \nrates on the growth of the real sector is well known and documented. Given \nthe entwinement of banking sector health and stability and real sector growth, \nraising the MPR at this stage will also not be beneficial to the health of our \nbanking sector which is still recovering from a major crisis. \nDespite its inflationary impact, the increase in the pump price of PMS and the \nensuing national crisis that followed has had some positive consequences for \nfiscal management in the country. Government has for instance now \ncommitted to prudent financial management. The issue of widespread \ncorruption in government has also, thankfully, now been brought to the fore. \nGovernment fiscal indiscipline which has sometimes been fuelled by corruption \nhas, in my view, been both a major cause of inflation and an impediment to the \nformulation of effective monetary policy in the past. I am therefore cautiously \noptimistic that current national developments could mark a turning point for \nmonetary policy formulation in Nigeria. \n \n \n36 \n \n11.0 YAHAYA, SHEHU \nI vote to retain the MPR at the current level of 12%, along with the CRR and the \ncorridor. My position is based on the following: \n The partial removal of the subsidy on PMS has already impacted on petrol \nprices and, thereby, on price levels of food, transport and others. While \nsome of the secondary effects are still unfolding, the main price effects \nhave already hit the economy \n Headline inflation is projected to peak in the second quarter of the year \nand, thereafter, begin to moderate \n The Naira exchange rate is expected to remain stable at least at the short \nterm, partly due to the stable outlook on oil prices (the decline in demand \ndue to slow down of the economies in Europe and US may be \ncounterbalanced by uncertainties surrounding Iran, Libya) and the \ngradual building up of reserves. \n It is hoped that fiscal injections in the economy would be moderate within \nthe first months of the first quarter of 2012 \n The effects of monetary policy tightening from 2011 are still being played \nout \n In the near term, there are plans to take important steps to develop \nagricultural production and agriculture value chains and it is important to \nhave a supportive monetary stance \nGiven the circumstances described above, we propose to maintain the current \nlevel of the MPR and to carefully watch developments in the economy in the \nnext two months to determine subsequent courses of action. \n \n \n37 \n \n12.0 SANUSI, LAMIDO SANUSI \nGovernor of the Central Bank of Nigeria and Chairman of the \nMonetary Policy Committee \nWe are holding our first meeting of 2012 at a time that is possibly a turning point \nin the economic history of the country. The dark clouds in the global horizon \nremain present. Forecasts are for slower growth rates in the developed world \nand emerging markets. The violence and tragic bombings in northern Nigeria \ncontinue to pose a source of concern for investors, and efforts are underway to \nfind a lasting solution. The recent demonstrations by citizens and opposition \nparties against fuel subsidy removal have also raised temperatures in the \npolitical space. \n \nIn spite of all the above, there are many positives to take from recent \nexperience. First, the Federal Government has significantly reduced the fiscal \nburden of unsustainable subsidies and the partial reduction in subsidies was the \nfirst in over five years. Secondly, the protests have brought to the fore a number \nof important concerns that have been central to us - opacity in the subsidy \nregime, poor execution of capital projects, high levels of recurrent expenditure \nand overheads and general questions about governance and transparency. \n \nAs a result, by implementing this most difficult of reforms and managing the \nfallout successfully, the government has laid a marker for its commitment to \nother reforms including electricity tariffs and deregulation of the oil industry. On \nthe other hand, the issues raised by civil society, if kept in focus and in the public \nspace, should move us towards an era of better fiscal management, tighter \ncontrols on spending, improvement in foreign exchange savings and thus a \nmore stable environment. \n38 \n \n \nThe principal factors underpinning inflation outlook in the short-term appear to \nbe supply side factors- mainly the cost-push effects of higher fuel and \ntransportation costs compounded by the impact of anticipated higher tariffs on \nimported food like rice, aimed at protecting domestic growers and processors. \nIn such a situation, a monetary response is not, to my mind, the appropriate one. \nThese structural factors will be addressed by improving refining capacity, \nreducing dependence on imported fuel and investing in agricultural \nproductivity (irrigation, storage, seeds, fertilizer, training, market access, finance \netc.) in a manner that makes local output cheaper and more competitive vis-à-\nvis imports. \n \nThe position is further supported by recent experience. December headline \ninflation at 10.3 percent per annum is in line with our implicit high single digit \ntarget and, without subsidy removal, was forecast to decelerate further down to \naround eight percent per annum by middle of the year. However, sequel to the \nfuel subsidy removal, the forecasts have changed and staff estimate inflation to \nrange between 11% and 14.5% over the first six months of the year and begin a \ndeceleration in the third quarter, heading back close to single digit at the end \nof 2013, ceteris paribus. With yields in the fixed income market generally in a \nrange above the inflation rate, we expect real returns to remain positive and \ncompetitive and indeed we have seen no reversal of capital flows in the face of \nstrong signals that we will not tighten at this MPC. The exchange rate has \nremained fairly stable, albeit pushing the upper region of our band and records \nof every increase in fuel prices going bank to 1998 show that the initial spike in \ninflation is followed almost immediately by a deceleration, thus weakening the \ncorrelation between the level of fuel prices and the rate of inflation. The \nprincipal concern therefore, is not so much inflation, which is our mandate, but \nthe impact on the budget line and welfare effects on the most vulnerable \n39 \n \nsegments of society, particularly given the rise in food prices and the weight of \nfood in the consumption basket. This is a matter for the fiscal authorities, and the \nneed for designing and giving effect to safety-nets cannot be overemphasized. \nFor us, as a monetary authority, the main concern comes from the signals that \nthe legislature plans to change the benchmark oil price in the 2012 budget from \nUS$70/bbl. to US$75/bbl. or even US$80/bbl. This is an indication of a lack of \ntotal commitment to fiscal discipline and consolidation. \n \nAt US$70/bbl., we believe the fiscal stance would be compatible with price \nstability and the current interest and exchange rate stance, without placing \nforeign assets at risk. An overly ambitious expansion may constitute a big risk to \nprice stability, leading to a rise in already high interest rates, or a reversal of the \npositive trend in reserve accumulation. These will have an impact on the real \neconomy and its ability to cope with external shocks. We can however wait \nuntil the next MPC meeting for clarity on the fiscal stance and see if it warrants a \nchange in monetary policy. \n \nFor the above reasons, I vote for maintenance of the status quo for now, in MPR, \nCRR, LR and exchange rates. \n \nI am satisfied that tightening at this point will be too pro-cyclical and unlikely to \nreverse any inflationary consequence of supply-side shocks. \n \nI vote for: \n1. Maintaining MPR at 12% ± 2% \n2. Maintaining CRR at 8% \n3. Maintaining LR at 30% and \n4. Maintaining exchange rate at N155/$1 ± 3%", "source": "CBN", "stratum": "cb_requests", "fetch_date": "2026-05-11", "url": "file:///CBN/MPC_Communiques/communique for jan  30-31 2012 mpc meeting with personal statements of 12 mpc members.pdf"}