The Monetary Policy Committee met on September 23 and 24, 2013, with all of the 12 members in attendance. The Committee reviewed the economic conditions and challenges that confronted the domestic economy up to September, particularly since the last MPC meeting in July 2013. It re-assessed the short-to-medium term risks to inflation, domestic output, external balance and financial system stability.
International Economic Developments
The global economy continued on the slow path to recovery with financial systems responding swiftly to new and expected risks. The risks include the possibility of the US FED tapering off its accommodative monetary policy stance (QE) and higher long-term interest rates as the economy enters the recovery mode. This move which has been temporarily postponed portends uncertainties in external conditions for emerging markets and developing economies, including Nigeria. Meanwhile, the underlying risk of a recession in the Eurozone, weak domestic demand and slowing growth in China have created tight financial conditions; which could easily worsen and reduce global growth prospects by the time monetary contraction begins in the U.S, Japan and the other advanced economies. The conclusion of German elections (and the re-election of Angela Merkel for a third term as Chancellor), should however open the door to much speedier progress in key reforms, especially around the common resolution mechanism for European banks.
In the interim, the IMF has declared that global growth is strengthening on the back of accommodative monetary policy. The Fund has further emphasized that though an end to unconventional monetary policy was certain, its impact would largely depend on country specific circumstances and the pace of recovery recorded by various economies.
The Organisation for Economic Cooperation and Development (OECD) has noted that the momentum in the global economy was shifting away from the emerging markets back to the advanced economies. The pace of business activity increased in the Eurozone, while an official index of leading economic indicators for the US also strengthened in August. Consequently, the OECD growth forecasts for most advanced economies in 2013 have been revised upward to between 1.5 and 1.8 per cent. The positive outlook in the advanced economies has compensated for the slowdown of growth in the major emerging markets. However, the OECD warned that a prolonged slowdown in major developing countries could have profound effects on the world economy and translate into weaker growth for the advanced economies. The IMF had projected global growth at 3.1 per cent in 2013.
Domestic Economic and Financial Developments
Output
The National Bureau of Statistics (NBS) has reported a slowdown in the growth rate of real Gross Domestic Product (GDP) in Q1 and Q2 2013 relative to Q4 2012. Growth was estimated at 6.18 per cent in Q2, down from 6.56 per cent recorded in Q1, 2013. Overall, GDP growth for fiscal 2013 was projected at 6.91 per cent up from 6.58 per cent in 2012. The non-oil sector remained the major driver of growth at 7.36 per cent in Q2 (lower than the 7.89 per cent reported for Q1) in contrast to the oil sector output decline of 1.15 per cent (worse than the decline of 0.54 per cent in Q1). The drivers of the non-oil sector growth remained Agriculture; Wholesale and Retail trade; and Services which contributed 2.14, 1.48, and 3.0 per cent, respectively. The Committee expressed concern about the worsening performance of the oil sector, which is principally due to the reported incidence of growing crude oil theft and significant revenue leakages in the oil sector. The Committee, therefore, urged the government to step up efforts aimed at curtailing the malfeasance in the oil sector, and adopting best practice in establishing strong controls, independent oversight and transparency in the official oil sector.
Prices
Inflationary pressures continued to moderate in response to the tight stance of monetary policy. Headline inflation declined from 8.7 per cent in July to 8.2 per cent in August. Food inflation declined to 9.7 per cent in August from 10.0 per cent in July while core inflation, rose slightly to 7.2 per cent in August from 6.6 per cent in July. The Committee noted with satisfaction that, overall, headline inflation has remained below 10.0 per cent for eight (8) straight months and represented the lowest level achieved over the past 5 years, the longest such stretch since 2008; and that the six-month inflation outlook indicates that inflation would remain within single digit range. The Committee was nonetheless, conscious of the potential risks on the horizon, including the possibility of pressures coming from the fiscal activities of the government in the later part of the year, and in the run up to the 2014 elections.
Monetary, Credit and Financial Market Developments
Broad money supply (M2) contracted by 5.58 per cent in August 2013 over the level at end-December 2012. When annualised, M2 contracted by 8.37 per cent, compared with the growth of 3.51 per cent in the corresponding period of 2012. M2 growth rate was also below the benchmark of 15.20 per cent for 2013. This is to be expected, given the tight monetary policy stance.
Aggregate domestic credit (net) grew by 3.85 per cent in August 2013 which annualises to a growth rate of 5.78 per cent over the end-December 2012 level, compared with the contraction of 3.56 per cent in the corresponding period of 2012. The annualised growth rate in aggregate domestic credit (net) at end-August 2013 of 5.78 per cent was below the provisional benchmark of 22.98 per cent for 2013.
Reserve money (RM) rose by 30.64 per cent to N4,227.61 billion at end-August 2013 from N3,236.15 billion by end-June. At that level RM was N343.06 billion or 8.83 per cent above the 3rd quarter, 2013, indicative benchmark of N3,884.55 billion.
Interest rates in all segments of the money market moved in tandem with the tight level of liquidity in the banking system. The inter-bank call and OBB rates, which opened at 10.69 and 10.22 per cent on July 29, 2013, closed at 15.67 and 14.92 per cent, respectively, on September 20, 2013. The average inter-bank call and OBB rates for the period were 14.86 and 13.93 percent, respectively.
The recovery in the Nigerian capital market continued, as equities market indicators all trended upward during the period under review. The All-Share Index (ASI) increased by 28.9 per cent from 28,078.81 on December 31, 2012 to 36,188.72 on September 20, 2013.
Market Capitalization (MC) increased by 28.4 per cent from N8.97 trillion to N11.53 trillion over the same period. Improved earnings and investor confidence in the economy contributed to the rise in stock prices.
External Sector Developments
The naira exchange rate remained stable at the wDAS segment of the foreign exchange market. The exchange rate at the wDAS-SPT during the review period opened and closed at N157.32/US$ (including 1% commission). The average wDAS exchange rate during the period was N157.31/US$. At the interbank segment, the naira exchange rate opened at N160.75/US$ and closed at N161.47/US$, representing a depreciation of N0.72/US$ or 0.45 per cent. The average interbank exchange rate during the period was N160.78/US$. At the BDC segment, the selling rate opened at N162.50/US$ and closed at N163.00/US$, representing a depreciation of N0.50k/US$ or 0.31 per cent. The average BDC exchange rate for the period was N162.14/US$. The stability of the exchange rate reflected the commitment of the Bank to supporting the currency at a time of massive depreciation in the currencies of emerging and frontier countries. This commitment was underscored by the policy of intervention to improve supply conditions, and the very tight monetary conditions maintained since the last MPC meeting.
The Committee noted the decline in external reserves to US$45.27 billion as at September 19, 2013. External reserves, however, still increased by US$4.08 billion or 9.91 per cent, year-on-year, compared with US$41.19 billion at end-September 2012. However, the Committee noted that this level of accretion is too low given the relatively high price of crude oil and further underscores the need for much-needed reform of the oil sector.
The Committee’s Considerations
The Committee noted with satisfaction the positive developments in the economy, especially, the moderation in inflation, stability in the financial system and currency markets. It also noted the strong growth forecast by the National Bureau of Statistics for Q3 and Q4 on the back of relatively slow growth in Q2. It observed that the actions taken by the Bank since the last MPC yielded their intended effect on stabilizing the exchange rate while maintaining inflation within its target range. The Committee also noted that the fundamentals in the economy which necessitated the July MPC measures had not changed substantially; except that the US Federal Reserve had provided clearer insight into the tapering off of its asset purchase programme – Quantitative Easing3.
The Committee noted that in more than 30 countries surveyed, the Naira exchange rate remained one of the most stable having depreciated by only 2.3 per cent from year to date compared with the massive depreciation in the value of other currencies such as the Indian Rupee, the Indonesian Rupiah, the Brazilian Real, the South African Rand and the Ghanaian cedi.
The clarifications provided by the Fed over its QE3 policy brought substantial relief to the financial markets globally and initiated a reversal of the trend in capital outflows from the country. However, the Committee noted the existence of strong foreign exchange demand pressures coming domestically and which are not necessarily linked to an increase in the import of goods. This non-import related demand was attributed to the buildup in political activities in the country and increasing resort to dollarization of the economy by the political class. The Committee charged the Bank to ensure the stability of the currency in the face of these challenges and to fast-track plans for adopting new regulations aimed at combating money laundering in the BDC segment.
The Committee considered the developments in money market rates which rose astronomically to peak at 40.0 per cent on 18th September 2013. However, these developments were temporary, arising from the postponement/stalemate in sharing the monthly Federation Account Allocation Committee Revenues. Banks which participated in the wDAS widow expressed a preference for paying high interbank rate for one day rather than their borrowing from the CBN at 14.0 per cent and being barred from the wDAS window.
In any case, the Committee noted the continued dependence of the banking sector on monetised oil revenues for its liquidity and stressed the need to keep pushing banks into altering their business model to reduce vulnerability.
Decision
The Committee noted that the actions taken at the last MPC have served the purpose of helping the naira avoid the fate of other
developing-country currencies by keeping it relatively stable. It also noted the continued moderation in inflation and the benign outlook for the next six months. Finally, with the FOMC decision not to begin tapering asset purchases immediately, and the improved outlook for financial stability in Europe after the German elections, the risks of currency instability are significantly reduced. The monetary stance maintained by the US Federal Reserve is positive for international oil prices and portfolio flows.
In consideration of all the issues, the Committee decided by a vote of 11 members to hold the MPR at 12.0 per cent. One member voted to reduce the MPR by 50 basis points. 11 members voted to retain the symmetric corridor of 200 basis points around the MPR while one member voted for an asymmetric corridor of 200 basis points above the MPR and 400 basis points below the MPR. All members voted to retain the 50.0 per cent Cash Reserve Requirement (CRR) on public sector funds, and 12.0 per cent CRR on private sector deposits.
Thank you.
Sanusi Lamido Sanusi, CON
Governor, Central Bank of Nigeria
24th September, 2013
