MPC Communique No 79_10-10-2011
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Transcript of 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