The Monetary Policy Committee
met on 23rd and 24th of May 2016 for the 250th
time and 9 out of 12 members were present. The meeting was to deliberate on the
harsh and challenging global and domestic economics and financial conditions
confronting the country. The Committee discussed the following matters: 
International
Economic Developments
The Committee
noted with concern,
the tapered growth
and continued decline in
global output since 2014.
At an estimated
3.2 per cent,
global output in 2016 was
only 0.1 percentage point below the 3.1
per cent in the corresponding
period of 2015.
The sluggish global
output was traced
to weak fundamentals in
both the advanced
economies and Emerging Markets and Developing Economies
(EMDEs), including increased volatility in
global financial markets,
sustained softness in
commodity prices, sluggish global
trade, resulting in
persistent fragility, particularly
in the EMDEs.
The United
States (US) economy
slowed to 0.5
per cent in
Q1 2016, a steep decline compared with the 1.4 per
cent growth recorded in the last quarter
of 2015. The deceleration in
US growth was
attributed to contraction in
non-residential fixed investment
and energy businesses,
a strong dollar which harmed exports, slowdown in government spending
and moderation in private
consumption expenditure (PCE).
Japan which is currently in deflation is projected to grow by 0.5 per
cent in 2016, the same as in 2015, on the back of persistently weak aggregate
demand. The Bank of Japan’s (BoJ)
monthly asset purchase of ¥6.7 trillion (US$61.73 billion) resulted in
the Bank holding
about one-third of
outstanding government bonds,
while the economy remained largely intractable with a credit crunch, indicating
that the programmme may have lost its steam. In response to the contraction in credit,
BoJ since January 2016, adopted a negative interest rate policy.
Real GDP
growth in the
Euro area at
0.6 per cent
in Q1, 2016
was a phenomenal improvement
compared with the 0.3 per cent achieved in Q4 2015. The European Central Bank
(ECB), at its meeting of 21st April, 2016 maintained the soft policy
stance by holding its refinancing rate at 0.0 percent, lending rate at 0.25 per
cent and deposit rate at -0.4 per cent. The Bank also
maintained its monthly
asset purchase program
of €80 billion (US$87.2 billion), hoping to further
stimulate output growth and achieve its 2 per cent inflation target.
The Bank
of England (BoE)
also retained its
monthly assets purchase programme, financed
through the issuance
of reserves at
₤375 billion (US$543.75 billion).
At the end of its April 13, 2016 meeting, BoE retained its policy rate at 0.5 per
cent, with a commitment to raise inflation to its 2.0 per cent long run path. Weaknesses
in major EMDEs, including low capital
inflows, rising costs of funds and continuing
geopolitical factors, have
been identified as key
constraints to growth.
Adverse commodity prices
continued to provide strong headwinds
against growth, defining
other economic and
financial conditions in the EMDEs.
Consequently, the IMF (WEO April 2016 Update) downgraded the 2016 growth
forecast for this group of countries from 4.3 to 4.1 per cent. Disruptions to
oil supply in
Canada, Nigeria and
Kuwait and, demand spikes
following expectations of
a US interest
rate hike and
buildup of crude oil
inventories, contributed to
mild oil price
recovery in April
2016.
Inflation remains
largely suppressed in the advanced
countries but tepid consumption spending and vulnerabilities in the financial markets continue to hamper financial intermediation
and growth. Consequently, the monetary policy stance in most advanced economies
remained largely accommodative and most likely to be maintained throughout 2016. On the contrary, monetary policy in the EMDEs
could continue to diverge substantially, reflecting the diversity of shocks
confronting them.
Domestic
Economic and Financial Developments
Output
In the
first quarter of
2016, the economy
suffered from severe
shocks related to energy shortages and price hikes, scarcity of foreign
exchange and depressed consumer demand, among others. Consequently economic agents could
not undertake new
investments or procure
needed raw materials. Shortage of foreign exchange arising from low
crude oil prices manifested in low replacement levels for raw materials, other inputs
as well as new investments. In
addition, the energy crisis experienced in the first five months
of the year,
resulted in increased
power outages and
higher electricity tariffs, as well as
fuel shortages; which led to factory closures in some
cases. The prolonged
budget impasse denied
the economy the timely
intervention of complementary
fiscal policy to
stimulate economic activity in
the face of dwindling foreign
capital inflows. Aggregate credit to the
private sector remained highly tapered while credit to government grew beyond the
programmed benchmark for the period. The
Committee, however, noted that
many of the
prevailing conditions in
the economy during the review
period were outside the direct control of monetary policy, but hopes that the
implementation of the 2016 Federal
Budget, supported by relevant sectorial
policies and easing supply shocks in energy and critical inputs, would provide
the needed boost to the economy.
Against this backdrop, data
from the National Bureau of Statistics (NBS) for May 2016, indicated that domestic output in Q1,
2016 contracted by
0.36 per cent, the first negative growth in many
years. This represents a drop of 2.47
percentage points in output from
the 2.11 per cent reported in the last 5 quarter of
2015, and 4.32
percentage point lower
than the 3.96 per
cent recorded in the corresponding period of 2015. Aggregate output contracted in almost
all sectors of the
economy, with the
non-oil sector declining by about 0.18 per cent in Q1 2016, compared with 3.14 per cent
expansion in the preceding quarter. Only agriculture and trade grew by
0.68 per cent and 0.40 per cent,
respectively, while Industry,
Construction and Services recorded negative
growth of -0.93,
-0.26 and -0.08
percentage point, respectively.
Prices
The Committee noted a further
increase in year-on-year headline inflation to 12.77 per cent and 13.72 percent
in March and April 2016, respectively, from 11.38
per cent in February 2016. The
increase in headline inflation in
April reflected increases
in both food
and core components
of inflation. Core inflation rose
sharply for the third
time in a row to 13.35
per cent in April from 12.17 per cent in March, 11.00 per cent in
February and 8.80 percent in January
having stayed at
8.70 per cent
for three consecutive months through December, 2015.
Food inflation also rose to 13.19 per cent from 12.74 per cent in March, 11.35 per cent in February, 10.64 per cent in January and
10.59 per cent
in December, 2015.
The rising inflationary pressure continued
to be traced
to legacy factors
including energy crisis reflected in incessant scarcity of refined
petroleum products, exchange rate pass
through from imported goods, high
cost of electricity, high
transport cost, reduction in food output, high cost of inputs and low
industrial output.
The Committee
observed that in an economy characterized
by high import dependence, the
shortage of foreign
exchange provided some
basis for price increases
as currently being experienced. The Committee noted that the
economy needed to aggressively earn and build up its stock of foreign reserves
in order to avoid distortions when faced with severe shocks. The Committee further
noted that the
current inflation trend,
being largely a product
of structural rigidities
and inadequate foreign
exchange earnings would continue
to be closely
monitored, and in
coordination with fiscal policy, with a view to addressing the underlying
drivers of the upward price movements.
Monetary, Credit and Financial
Markets Developments Broad money supply
(M2) grew by
3.49 per cent
in April 2016,
a 1.29percentage growth
from the March
level of 2.20
per cent and
compared with the 3.67
per cent in April 2015.
When annualized, M2 grew by 10.47 per cent in April 2016 against the
provisional growth benchmark of 10.98 per cent for 2016. Net domestic credit
(NDC) grew by 7.87
per cent in the same period and
annualized at 23.61
per cent. At this rate, the growth
rate of NDC was above the provisional benchmark of 17.94 per cent for 2016.
The development
in NDC essentially
reflected the significant
growth in credit to government
of 35.97
per cent in the month, annualized to 107.91 per cent. Credit
to the private sector grew by
3.52 per cent in April
2016, which annualized to
a growth of
10.56 per cent,
below the benchmark growth of 13.28 per cent.
The Committee observed with
concern, the continuous dismal performance of growth in credit to the private
sector, noting that in spite of the Bank’s efforts, DMBs continued to direct
credit largely to low employment elastic sectors of the economy, a phenomenon
that had significantly contributed to the low performance of the economy.
Money market interest rates reflected
the continuing liquidity surfeit in the banking system. Average inter-bank call rate, which stood
at 4.50
per cent on 21st March 2016,
closed at 8.67 per cent
on March 18, 2016.
Between March 25th and 14th April 2016, interbank call rate averaged
2.00 per cent.
The Committee noted a decline in activity in the inter-bank
market in the period under review,
which was due
to the payment
of FAAC statutory allocations and the maturity of CBN
securities. The Committee also noted
a further improvement
in the equities segment of the
capital market as the All-Share
Index (ASI) rose
by 3.34 per
cent from 25,899.91 on
March 24, 2016
to 26,763.86 on
May 18, 2016. Similarly, Market
Capitalization (MC) rose
by 3.14 per
cent from N8.91 trillion to
N9.19 trillion during
the same period.
However, relative to end December 2015, the indices declined by 6.56 per
cent and 6.70 per cent, respectively.
Globally, however, the equities markets were generally bearish.
External
Sector Developments
The average
naira exchange rate
remained stable at
the inter-bank segment of
the foreign exchange
market during the
review period. The exchange rate at the interbank market opened
at N197.00/US$ and closed at N197.00/US$, with a daily average of N197/US$
between March 25th and May 13th, 2016. The Committee, therefore, remains committed
to its mandate of maintaining a stable naira exchange rate. The
MPC noted the level
of activity in
the autonomous foreign
exchange market especially, following the
deregulation of the
downstream petroleum sector
with attendant increased demand
in the interbank market, thus further exerting pressure on the naira.
The Committee recalls that over
the last two consecutive meetings, it had signaled the imperative of reform of the
foreign exchange market. In the intervening period,
the Committee interrogated
the issues around
the current foreign exchange
market regime, tracing
them to the
low foreign exchange earnings
of the economy.
Consequently, in the Committee’s
opinion, the key
issue remains how
to increase the
supply of foreign exchange to
the economy. The
Committee observed that
while the Bank has
been working on
a menu of
options to ensure
increased supply of foreign exchange, there
was no easy and quick fix to the foreign exchange scarcity problem as supply remained essentially a
function of exports and the investment
climate.
The Committee
is aware that a dynamic
foreign exchange management framework that
guarantees flexibility could
not replace the
imperative for the economy to
increase its stock of foreign exchange through enhanced export earnings.
Consequently, such a structure must evolve to provide basis for
radically improved investment climate to attract new investments.
The Committee
recognizes the exchange
rate as a
very important macroeconomic variable,
which must be
earned by increased
productive activity and exports,
noting with satisfaction that the Bank had made very significant and satisfactory
progress with the reforms framework.
The Committee
was of the
view that the
current adverse global
and domestic economic and financial conditions and the imperative
imposed by the demand and supply shocks to the domestic economy and considering the express
intensions of Government as enunciated in the 2016 budget, policy must
respond appropriately as the market continues to
demonstrate confidence in the
Bank’s ability to
deliver a credible
foreign exchange market.
Accordingly, the MPC decided that the Bank should embrace some level of
flexibility in the foreign exchange market.
Given the imperative for growth, the Management of the Bank has been
given the mandate to work out the modalities for achieving the desired
flexibility that is in the overall interest of the Nigerian economy and when
the implementation of the new framework would begin.
The
Committee’s Considerations
The Committee
acknowledged the severely
weakened macroeconomic environment, as
reflected particularly in
increased inflationary pressure, contraction in real output and
rising unemployment. The Committee recalls that in July 2015, it had hinted on
the possibility of the economy falling into recession unless appropriate
complementary measures were taken by the monetary and fiscal authorities. Unfortunately
the delayed passage of the 2016 budget constrained the much desired fiscal
stimulus, thus edging the economy towards contractionary output. As
a stop-gap measure,
the Central Bank continued to deploy all the instruments within its
control in the hope of keeping
the economy afloat.
The actions, however, proved insufficient to fully avert the impending
economic contraction. With some of the conditions
that led to
the contraction in
Q1, 2016 still
largely unresolved, the weak
outlook for growth which was
signaled in July 2015 could
extend to Q2.
To this effect,
today’s policy actions
have to be predicated on a less optimistic outlook for the economy in the short term, given that,
even after the
delayed budgetary passage
in May 2016,
the initial monetary injection
approved by the
Federal Government may
not impact the economy
soon, as the
processes involved in
MDAs finalizing procurement
contracts before the disbursement
of funds may further delay the
much needed financial stimulus to restart growth.
The Committee noted
that the CBN
had implemented accommodative monetary policy from July 2015,
with the hope of achieving growth, up until March 2016,
when the MPC
switched into a
tightening mode. However, while the
underlying conditions necessitating
tight monetary policy remained largely in place, sundry
administrative measures implemented by the
Bank and recent
macroeconomic conditions on
the back of
the 2016 Budget are expected to
significantly dictate a key policy preference in the dilemma now
faced by monetary
policy - stagflation.
Given the current limited policy space, it
is imperative to balance stability with growth stance while working
on options that
in the short
term, are certain
to isolate seasonal and transient
factors fuelling the current price spiral.
Other than credit to
government, growth in all monetary aggregates remained largely below their
indicative benchmarks, yet; headline inflation spiked in April 2016, far above the
upper limit of the policy reference band.
Inflation has continued to be driven mainly
by supply side factors such as fuel
scarcity, increase in
tariff and deterioration
in electricity supply, increase in the price of petrol, higher input costs as a result of
scarcity of foreign exchange, persistent security challenges and exchange rate pass
through to domestic prices of import. While the Committee believed that the recent
deregulation of the downstream sector of the petroleum sector was in the right direction and would
lead to increased supply, the
pass-through effect of prices
to other products
has to be
factored in policy considerations. Mindful of the limitations of monetary policy
in influencing structural imbalances in the economy, the Committee stressed the
need for policy coordination with the fiscal authorities in order to
effectively address the identified pressure points.
The Committee
noted that the
continued excess liquidity
in the banking system was responsible for the low
level of activity in the interbank market. This is in addition to contributing
to the sustained pressure in the foreign exchange market. The Committee expressed hope that efficient implementation
of the recently passed 2016 Federal Budget, especially; the capital expenditure
portion, would help invigorate growth in the economy as business confidence
rejuvenates.
The Committee expressed concern
over sustained pressure in the foreign exchange market and the necessity of
implementing reforms to engender greater flexibility of rate and transparency
in the operation of the inter-bank foreign exchange market. Accordingly,
the Committee noted
that it was time
to introduce greater
flexibility in the
management of the
foreign exchange market. The
Committee reaffirmed commitment
towards maintenance of price
stability and reiterated
the need to
reappraise the coordination mechanism
between monetary and
fiscal policy and
initiate reforms, for the
purpose of more
efficient policy synchronization and management.
The
Committee’s Decisions
The Committee, in its
assessment of the relevant
risk profiles, came to the conclusion
that although, the balance of risks
remains tilted against growth; previous
decisions need time
to crystalize. Consequently, in a period of stagflation, the
policy options are very limited. To avoid
complicating the conditions, the
Committee decided on the least
risky option to
hold. The foreign exchange
market framework, now
ready, the MPC
voted unanimously to adopt
greater flexibility in
exchange rate policy to
restore the automatic adjustment
properties of the
exchange rate. Consequently, all 9
members voted to
hold and introduce greater
flexibility in managing the foreign exchange rate. The Bank
would however, retain a small window for funding critical transactions. Details of operation of the market would be released
by the Bank at an appropriate time.
In summary, the MPC voted to:
(i) Retain the MPR at 12.00 per cent;
(ii) Retain the CRR at 22.50 per cent;
(iii) Retain the Liquidity
Ratio at 30.00 per cent; and
(iv) Retain the Asymmetric
Window at +200 and -500 basis points around the MPR
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