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You are here:Home>>Strategic Research & Analysis>>Key Domestic Macroeconomic and Financial Developments
Saturday, 04 February 2012 15:03

Key Domestic Macroeconomic and Financial Developments

Written by Governor Sanusi Lamido Sanusi
CBN's Sanusi CBN's Sanusi


Key Domestic Macroeconomic and Financial Developments : GDP, Interest Rate  and Unemployment

*Unemployment rises to 23%

*Retains MPR at 12%

*Gross Domestic Product (GDP) grew by 8.68


Output and Prices

Provisional data from the National Bureau of Statistics (NBS) indicated that real Gross Domestic Product (GDP) grew by 8.68 per cent in the fourth quarter of 2011 up from  6.64, 7.72, and  7.40 per cent in the  1st , 2nd and 3rd quarters, respectively.  The overall GDP growth  rate  in  2011 was estimated by the NBS at 7.69 per cent, marginally lower than the 7.87 per cent recorded in 2010.  This projection is based on the  estimated Quarter III and Quarter IV growth rate of  7.40 per cent and 8.68 per cent respectively.  The 2012 Budget proposal assumed a growth rate of 7.2 per cent. This is in line with the latest World Bank forecast of 7.1 per cent growth for Nigeria in 2012.  The Committee noted with satisfaction, the good 4 performance of non-oil activities including agricultural and services sectors as well as the recovery in crude oil output in 2011, particularly in the fourth quarter. In the Committee‟s view, the opportunity to build on the robust non-oil growth with further  investments in infrastructure and manufacturing and processing activities should be utilized  in order to  mitigate  any  negative impacts  from the  likely external shocks during the year.


The Committee also noted  the  NBS survey data on the  rise in the unemployment rate to 23.9 per cent in 2011  from  21.4 per cent in 2010. The latest unemployment rate is considerably higher than the 12.3 per cent  recorded in 2006 by the NBS survey, which suggests that the consistently high output growth during this period had failed to create adequate employment for the growing labour force. In view of this, the Committee recommends that in addition to the structural reforms being currently pursued, emphasis should be placed on technical and vocational education in order to produce a labour force that is compatible with the current stage of the country‟s development.

In 2011, the Inflation rate fluctuated within the lower double-digits range during the early part of the year, but moderated thereafter. The year-on-year headline inflation rate, which was 12.1 per cent in 5 January 2011 rose to 12.8 per cent in March, before moderating to 10.2, 10.3, and 10.3 per cent in June, September, and December, respectively. Similarly, food inflation rose from 10.3 per cent in January 2011 to 12.2 per cent in March and thereafter moderated to 9.2, 9.5, and 11.0 per cent in, June, September, and December, respectively.  Core inflation also  rose from 12.1 per cent in January to 12.8 per cent in March stabilizing at 11.5, 11.6, and 10.8 per cent in June, September and December, respectively.

The headline inflation rate stood at 10.3 per cent in December 2011, by far the lowest since December 2008 and lower than the average of 12.75 per cent during the period 2001-11.  Food inflation, at 11.0 per cent in December 2011, was lower than its level in the preceding three years.   Similarly, the year-on-year core inflation declined  in

2011.  At 10.8 per cent in December 2011, core inflation was marginally lower than the 10.9 per cent in December 2010 and 11.2 per cent in December 2009.  The Committee noted that both food and core inflation have remained high exerting immense pressure on the headline inflation rate. The Committee was therefore of the view

that while the focus on growth continues to be a key imperative, the containment of  inflation equally deserves immediate attention. It noted that the inflation outlook in the short- term will be impacted by the  anticipated fiscal injections in relation to the proposed 2012 budget, the recent partial deregulation of pump price of PMS, and 6 new tariff regimes on certain food imports.   The Committee has also noted comments indicating possible plans by the National Assembly to revise the budget benchmark price of oil from $ 70 per barrel to $75 or even $80 per barrel. Such a measure  would significantly increase expenditures especially given the already high oil output assumptions.


In addition, it would reduce accretion to the Excess Crude Account (ECA) and increase the inflationary pressure already in place on the supply-side.  In the event of this happening, the likelihood of further tightening during 2012 increases.  The Committee would like to  reaffirm its commitment to price and  exchange rate stability and its determination not to pursue an accommodative policy stance.  The Committee therefore, strongly  supports the recommendations of the Executive for a benchmark price of a maximum of $70 per barrel.


External Sector Developments

Foreign exchange reserves amounted to US$ 32.64 billion as at end December 2011, more or less flat relative to the US$32.34 billion as at end December 2010, despite the higher oil price in 2011. Notwithstanding the high prices of  Nigeria’s reference  crude oil (Bonny Light) which averaged US$106.32 per barrel for the year, the

limited accretion to external reserves was due to the high demand for  foreign exchange  in the market.   The Committee noted  that pressure on the exchange rate emanating from the high demand reflected  the import-dependent nature of the economy,  probably compounded by the activities of speculators. The reduction in

arbitrage opportunities in the oil marketing sectors  combined with stronger controls in foreign exchange practices have already led to a noticeable moderation in foreign exchange net demand. The official wDAS rate (inclusive of 1 per cent commission) moved up from N151.62 per US$1 in January 2011 to N154.45/US$1 in June and

further to N158.21/US$1 in December 2011. The volatility in the official rates, however,  was limited with the coefficient of variation being 9 1.28 per cent for the year as a whole compared to 0.32 per cent in 2010.  The Committee  commended the CBN for its efforts at establishing stability in the market. It also urged the CBN to strive to

eliminate speculative demand for foreign exchange.  The Committee  also noted that as at January  24, 2012, the exchange rate was N158.57/US$1, while the foreign exchange reserves amounted to $34.18 billion on January 27, 2012, which could finance over 6 months of imports of goods and services. The outlook for oil prices in the short-term as well as the forecast demand/supply balance, suggest that the current exchange rate band should be retained while still achieving moderate continuous  accretion to reserves


The Committee’s Considerations

The Committee  is pleased that ahead  of  most  African  countries, Nigeria had been proactive by responding to the threats of inflation induced  by fiscal spending and  global food, fuel and other commodity prices as well as to the challenges of financial stability.  The Committee observed tat the mandate of the Bank was largely

achieved, as inflation was contained within tolerable levels and the exchange rate was generally stable throughout 2011. The resolution of the banking crisis during the year was also commended.  Against this background, the Committee welcomed the stated fiscal stance of the Federal Government as part of its programmed  movement 10

towards fiscal  consolidation.  The  increased share of  capital expenditure in the proposed total expenditure in 2012 is an important signal of the commitment of the Federal Government to improve the productive capacity of the economy.  The Committee finds the current environment to be conducive for improved  cooperation and  coordination between fiscal and monetary


The Committee acknowledged that the decision to remove the fuel subsidy was a major development that took place since its last meeting in November 2011. It commended the Federal Government on the  partial  removal of subsidy on Premium Motor Spirit (PMS),  which it noted will have salutary effects on the external reserves and exchange rate as well as on investment in oil and gas downstream sector.  It further commended the Federal Government for the commitment towards the passage of the Petroleum Industry Bill (PIB) which, it believes, would further complement the benefits of the fuel subsidy removal.    On  the other hand, it recognized  the possible

negative impact of the partial removal of fuel subsidy on the general price level and hence inflation  in the short run.   In this regard, it underscored the need for the speedy implementation of the palliative measures and entrenchment of social safety nets for the more vulnerable groups.  However, the long-term benefits far outweigh the likely short term costs as far as inflation is concerned. 11 Furthermore, the Committee commended the fiscal authorities for the benchmark crude oil price of $70 per barrel as proposed in the 2012 budget and advocated for its retention as any upward revision would tend to undermine macroeconomic stability.

The Committee considered the need to sustain the high output growth that the country has seen in recent years partly because of the slowdown in the advanced and other emerging economies and partly because of the need to  generate employment in the economy. However, to help generate new jobs, it would be essential for the Federal Government to move  quickly with the structural reforms  such as (a) power sector reforms, (b) implementing the agricultural sector transformation programmes and the associated value chain, and (c) refocusing attention to  the provision of technical and vocational training to bring about skills development that would match the needs of the economy. The Committee underscored the need for maintaining price stability in a manner conducive to the achievement of  employmentgenerating growth.  In this connection, it observed that the announced increase in import duties on some food items by the end of June 2012 would exert further pressure on food prices which would

compound the effect of  increased transportation costs induced by 12 the partial removal of the fuel subsidy on the general price level and the associated inflation expectation.


The Committee noted that historically, upward adjustments in the price of PMS have tended to have a short-term impact on the rate of inflation.  A review of previous instances of adjustment in fuel prices shows that without exception, each instance is accompanied by an increase in the rate of inflation followed almost immediately

by a moderation in the short - to - medium term.    Staff estimates indicate that inflation  in the  first two quarters of 2012  would range between 11.0 per cent and  14.5 per cent, and then moderate steadily towards the single digit zone by late 2013. Real interest rates are therefore likely to remain positive  on a trend basis, even if the

rate of inflation were to rise briefly above the MPR in the second quarter. Finally, the Committee recognized the current security challenges and Government’s efforts to find a lasting solution through dialogue, economic measures and enhanced intelligence. It  expressed confidence on the ability of Government to resolve the problem.13

Decisions In  the light of the above, and considering the clear impact of previous tightening on the rate of inflation and exchange rates up to December 2011, the Committee unanimously decided as follows:


1. Retain MPR at 12.0 per cent with interest rate corridor of  +/- 200

basis points;


2. Retain CRR at 8.0 per cent;


3. Retain minimum liquidity Ratio of 30.0 per cent; and 4. Retain the Mid-point of  exchange rate at N155/US$1  with a band of +/-3.0 per cent.


The Committee also resolved to watch closely developments with  respect to  the  fiscal stance and to respond appropriately if,  and when, the need arises.


Sanusi Lamido Sanusi, CON


Central Bank of Nigeria

January 31, 2012


Last modified on Saturday, 04 February 2012 15:12

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