mpc communique no 79_10-10-2011

8/3/2019 MPC Communique No 79_10-10-2011

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Central Bank of Nigeria Communiqu No. 79 of the Monetary Policy

Committee Meeting, October 10, 2011

The Mone ta ry Polic y Comm ittee (MPC) held a n extra ord inary

meeting o n 10th October, 2011 in response to unusual developments

in the global and domestic economy, with potential negative

impact on domestic liquidity conditions and renewed threats to

p ric e and exc hange ra te stab ility.

The g lob a l ec ono mic horizon rema ins highly unc erta in, with the signsget ting more ominous as polic y makers find it increasing ly d iffic ult to

take the nec essa ry ec onom ic dec isions that may avert a new wa ve

of rec ession. Three self-re inforc ing nega tives c ontinue to define the

g lob a l ec ono my: the sovereign deb t c risis in the Eurozone, signific ant

undercapitalization of internationally-active banks, and negative

market sentiment leading to continuing flight to cash as a safehaven a nd deleve rag ing . The first and sec ond aspec ts intensify the

third , and w ithout c onfidenc e a nd some a ppetite for fina nc ia l assets

and credit, the debt crisis and financial solvency concerns in turn

bec ome deeper.

As a result of these concerns about the Eurozone, coupled with the

US defic it p rob lem , infla tion in eme rg ing ma rkets, deb a tes about a

soft or hard-landing in China and other pessimistic scenarios, there is

a trend towards reversal of capital flows to emerging and frontier

markets, and a recent depreciation in the national currencies of


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many economies in Asia and Latin America including India,

Indonesia , Ma laysia , South Korea , Brazil, Chile, Co lomb ia , and

Mexico, among others. In Africa, the national currencies of Kenya,

South Afric a , Gab on, Ghana and Nige ria have a lso been under

pressure. Central banks have generally responded through direct

intervent ion in the fore ign exc hange ma rket to stab ilize the c urrenc y

and, in some cases, a significant hike in policy rates. It is worthy of

note tha t fund ma nag ers have not b een ea ge r to exit environme nts

with rela tive ly high rea l ra tes of interest and benign infla tion outloo k.

The Domestic Economy and Committee s Deliberations

The g row th outlook for the ec ono my d oes not a ppea r to ha ve

changed much, driven largely by the positive forecasts for the non-

oil sec tor as noted in the last MPC c ommuniqu. Infla tion had c ome

down to 9.3 per cent in August but, as indicated in the same

communiqu, a combination of monetary, fiscal and structural

fac tors c ontinue to advise a ga inst c omp lac enc y.

The na ira has c ome under inc reasing p ressure, a nd has rec ently

traded outside the band of N150 +/- 3.0 per cent. In the

Committees view, the increasing pressure on the domestic currency

has been emana ting from a number of sourc es not a ll of whic h c a n

be addressed by purely monetary interventions. First, there are

concerns about the likely impact of a double dip recession on oil


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p ric es and a lrea dy dec lining foreign reserves. Sec ond , there a re a lso

concerns about the delay in implementing fundamental economic

dec isions tha t w ill shore up reserves. Spec ific a lly, it is estima ted tha t

simp ly passing the Petroleum Ind ustry Bill (PIB) a nd removing sub sid ies

on Premium Motor Spirit (PMS) will add at least US$10 billion to

na tiona l reserves annua lly. The p etroleum subsidy for 2011 a lone is

estima ted to be about US$6 billion. A substantial pa rt o f o il

production (about 40 per cent) is currently in deep offshore wells.

Based on the terms agreed in the 1990s when oil price was under

US$30, roya lty from o il wells deeper tha n 1,000 metres is zero per c ent

and the na tion is pa id only 20 per cent of the p rofit by oil c om panies

after deducting their expenses. As a result, the country has had

limited bene fits from high o il p ric es and inc rea sing outp ut, with most

of the gains going to multinational oil companies under an

ineq uitab le fisc a l a rra nge me nt.

Simila rly, the Committee expressed c onc erns about the genuinene ss

of d em a nd for pet ro leum imp orts. This yea r a lone , oil imp orters have

bought over US$7.0 b illion from w DAS, the reby, dep leting the

Nation s externa l reserves. This demand , in the Co mmittees view,

might have b een fue lled by rent -see king and subsid ies.

It is imp era tive tha t the ena b ling leg isla tion for correc ting fisc a l terms

be put in place under a Petroleum Industry Bill (PIB) that reflects


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international best practice. Unfortunately, discordant voices are

delaying these processes to the long-term detriment of the

ec onomy. Wherea s the labour unions have genuine co ncerns

about the impact of subsidy removal on the poorer segments of

soc iety, the sta rk rea lity is tha t the c ountry is living above its me ans.

The G ree k governme nt rec ently pa ssed a b udget in which 33,000

public sector workers had to be retrenched as a result of failure to

take difficult but necessary economic decisions in the past. Nigeria

cannot afford to delay, any further, the reforms of the petroleum

industry.

Third , the d ra ft 2012 bud get and the und erlying assump tions a re

based on a n o il p ric e o f US$75 per ba rrel and a n outp ut o f 2.4 million

barrels per day. This ma kes the 2012 budget even more

expa nsiona ry than the 2011 bud get and further damp ens any hop e

for an early fisc a l ret renc hme nt. The fisc a l autho rities have c lea rly

signaled a commitment to medium-term consolidation and indeed

the projected deficit in 2012 is lower than the deficit in the 2011

budget. This notw ithsta nd ing, the p rojec ted inc rea se in spend ing,

particularly the high levels of recurrent expenditure, would suggest

inc reasing p ressure o n p ric es in genera l.


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Fourth, structural bottlenecks in the Nigerian economy that

perpetuate import dependence make import-demand highly

inelastic.

Finally, real interest rates have been low, partly driven by a cautious

approach to monetary tightening at a time of financial system

instability. Although the MPC recognized inflationary pressures and

has consistently acted prudently in policy tightening based on

expectations, a gradualist approach has been the pattern thus far,

g iven the situa tion with the b anking system and eq uity ma rkets.

Policy Issues and Dilemmas

In the face of the spectre of declining oil prices, declining foreign

reserves, inc rea sed demand for foreign exchange , fisc a l dom inanc e

and capital flow reversals, monetary policy must bear a larger

burden of ec ono mic ad justme nt. The M PC ha s, there fore, to ma ked iffic ult c hoice s, eac h of w hic h ha s c lea r c osts and bene fits.

One op tion is p ro tec ting reserves by red uc ing the supp ly of d olla rs a t

the w DAS. This w ill lead to a rap id dep rec ia tion of the c urrenc y and

the emergenc e of a para llel ma rket, lea d ing to further pressures on

the Naira , imp orted infla tion a nd a genera l loss of c onfidenc e on the

part o f investors.

Inde ed , the impa c t on p ric e a nd exchange ra te stab ility will be such

as to undermine the key mandates of the Central Bank. Given the


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highly inelastic demand for imports, it is doubtful that increasing the

cost of dollars will significantly reduce quantity demanded. Indeed,

ge nuine d em and will be c omp ound ed by high levels of spec ula tive

demand.

A second option is to address monetary and liquidity conditions

more aggressively. By tightening liquidity and raising domestic

interest rates, a number of advantages follow. First, this is the logical

response to fisc a l expa nsion, espec ia lly w ith the antic ipa ted c ap ita l

releases in the fourth quarter as well as repayment of backlog of

Nigeria National Petroleum Corporation (NNPC) debt to the

Fed eration ac c ount. Sec ond , it p rovides an inc entive for

reallocation of portfolios by improving real returns of holding the

na ira as a store o f va lue. Third , it inc reases, afte r a lag, the ra tes pa id

on deposits and savings, thus reversing any tendency towards

disintermediation and capital flight. Finally, it increases the cost offoreign currency positions held for speculative purposes, and

reduces the tendency to pre-pay dollar obligations with naira

liabilities.

The o p tion has d isadvanta ges in the form of high lend ing ra tes,

financial cost to the banking system and possible losses on fixed

inc ome instruments due to cap ita l losses. Besides, tightening of

liquid ity would run the risk of slowdown in c red it g rowth.


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Having considered the pros and cons of each option (and

combinations of options), the Committee is of the view that given

the completion of shareholder meetings on all banks and approvals

from the courts for many, the risks to the banking system of tighter

liquidity conditions have been significantly reduced, as the banks

are in the process of receiving all approvals and fresh capital

inc lud ing AMCON bonds. Now tha t the banking system

recapitalization is complete, monetary policy can be freed from

c onc erns about its imp ac t on financ ia l system stab ility.

The Co mmittee rea ffirmed its belief tha t ma inta ining exchange rate

stability, especially in times of global uncertainty, is crucial to the

mandate of price stability. Moreover, the interest of the economy is

best served, by maintaining an unequivocal stance of non-

accommodative monetary policy, given the existing fiscal

conditions.

The Committee a lso rea ffirmed its c om mitme nt to imp roving returns

on naira assets and protecting the capital of investors against

erosion due to huge exchange rate losses, in order to encourage

appropriate asset allocation decisions.

The Com mittee rec og nized the need to rema in very c lea r on the

Banks primary mandate and maintain the credibility it has

established so far by sending strong signals of continuing

c ommitme nt to pric e a nd e xc hange ra te stab ility.


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Finally, the Committee noted that the Committee of Governors has

already commenced full investigation of compliance with rules

gove rning foreign exc hange tra nsac tions by a uthorized dea lers and

endorsed the declared commitment to sanction all infractions and

imp rove the level of supervision a nd c omp lianc e in the ma rket.

Decisions:

1. The mo neta ry p olic y rate (MPR) is ra ised by 275 basis pointsfrom 9.25 per c ent to 12.0 per c ent (by a vote o f 8 in favo r and

1 in favor o f sta tus quo);

2. Maintain the current symmetric corridor of +/-200 basis pointsa round the MPR (by unanimo us vote);

3. The c ash reserve ra tio(CRR) is inc reased from 4.0 per c ent to 8.0per cent from the maintenance period beginning October 11,

2011 by a vote of 7 to 2 (2 members voted for a 6.0 per cent

CRR);

4. The net o pen position (NOP) is red uc ed from 5.0 per cent to 1.0per c ent o f share-holders funds with immed ia te e ffec t and with

full compliance by Friday, October 14, 2011 (by unanimousvote); and


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5. It was further agreed that the reserve averaging method ofcomputation be suspended in favour of daily maintenance

until further notice.

Sanusi Lamido Sanusi, CON

Governor

Ce ntral Ba nk of Nigeria

October 10, 2011

mpc communique no 79_10-10-2011

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