Salary increase may cause inflation -MPC •As external reserves decline by $25bn •Declining rese


Written by Samuel Ibiyemi and Gbola Subair, Abuja Tuesday, 06 July 2010


The Monetary Policy Committee has said that  the proposed salary increase for the civil servants had the tendency of increasing inflationary pressure on the economy, just as the apex bank said the declining external reserves posed no threat to the Nigerian economy.


Governor of CBN, Mallam Lamido Sanusi, addressing a press conference after the 71st Monetary Policy Committee meeting in Abuja, on Monday, stated that the down trend in the domestic price level could be attributed to a number of factors, including the continuing underperformance of the monetary aggregates with the associated constraints demand, adequate food supply, stable exchange rates and improvement in the availability of petroleum resources, amongst others.


Notwithstanding this, the MPC reiterated its earlier position on the threat of inflationary pressure arising from several factors, including the effect of salary increase in the civil service and the rising food prices against the backdrop of famine in neighbouring Niger Republic.


However, the apex bank has reiterated the readiness of the Monetary Policy Committee (MPC) to continue to monitor price developments, with a view to taking appropriate measures to stem any inflationary threat and ensure that the downside risk of inflation growth was minimised.The CBN governor said the external reserves were $34 billion in 2008, but went down to $9 billion in 2009, thus showing a decline of $25 billion.


With $9 billion external reserves, the CBN governor said this could finance imports for 16 months, adding that there was no cause for alarm on the development.According to him, Nigeria should count itself lucky for the external reserves, citing the example of the United States, whose external reserves could only finance imports for three months.


Explaining the reason for the declining reserves, Mallam Sanusi said Nigeria’s external reserves swelled up when oil price was about $140 per barrel and a daily production of about 2 million barrels per day, adding that with oil price as low as $40 per barrel, nothing short of declining external reserves should be expected.


Reviewing the domestic economic conditions in the first quarter of 2010, the CBN boss said the year-on- year headline inflation declined to 11.0 per cent in May 2010 from 12.5 per cent in April and 11.8 per cent in March.Similarly, the CBN governor said core inflation fell to 8.8 per cent in May 2010, from 9.8 per cent in April and 9.5 per cent in March.


He said the capital market was still showing some signs of recovery as the all-share index increased from 20,827.17 in December 2009 to 25,554.35 as of June 23, 2010.In the same vein, he said market capitalisation equities increased by 24.9 per cent from N4.98 trillion to N6.28 trillion over the same period.


The number of deals, volume and value of shares traded, according to him, also increased by 16.34, 19.23 and 100 per cent respectively.On the global scenes, the committee noted that market anxiety over the fiscal position of several European area countries was posing new challenges for the world economy, even as global economic recovery remained fragile.


To address the weak fiscal position, Mallam Sanusi said governments in these countries had started unwinding the fiscal stimuli by cutting spending.However, he said such cut in government’s spending might have serious implications for growth and employment and might lead to a double dip recession, with possible effects on the global economy.


The Federal Government recorded $25 billion shortfall in foreign exchange earnings from oil and non-sector in 2009, as inflation dropped to 11 per cent at the end of May 2010.This is also as the Central Bank of Nigeria (CBN)  announced plans to retain Monetary Policy Rate (MPR) at six per cent and projected 7.74 per cent as overall gross domestic product (GDP)  for 2010.


Sanusi, at the end of MPC meeting in Abuja, on Monday, said the drop in external reserves to $37.63 billion on June 23 was as a result of the shortfall of $25 billion in the nation’s foreign exchange earnings in 2009.He blamed the steady fall in foreign exchange earnings on low oil prices and crisis in the Niger Delta. 


However, Sanusi said the MPR would remain unchanged at six per cent as a result of the stability in exchange rate and continuing under-performance of monetary aggregates since the beginning of the year.According to him, developments in interest rates structure indicated that the retail lending rates were still relatively high, though they were declining.


Similarly, he noted that the weighted average savings rate dropped marginally to 2.92 per cent in May 2010 from 3.36 per cent in December 2009, while the consolidated deposit rates declined to 3.30 per cent in May 2010 from 6.13 per cent in December 2009.He added that the spread between the average maximum lending rate and the consolidated deposit rate widened to 19.27 per cent in May 2010 from 17.34 per cent in December, 2009





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