Last week, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) met to review the latest domestic and international developments and their implications for the Nigerian economy. At the meeting, it observed the impact of weak global demand and falling crude oil production on Nigeria’s external and fiscal performance during the second quarter of the year.

While noting the reported prospects of economic recovery in some emerging market economies, it added that this development (economic recovery in some emerging market economies) is not likely to offset the continued weak economic performance in advanced economies.

In view of the openness of the Nigerian economy, the Committee observed that the growth prospects may weaken in the remainder of 2009, especially as inflationary tendencies appear to be persisting.

However, the recent economic and financial developments point to the need for policies to be focused on growth, exchange rate and financial market dynamics. More importantly, monetary and credit policies have to be properly integrated with exchange rate policies, indicating the need for policymakers to assure that liquidity, both domestic and foreign currency, is adequate to meet genuine demand and ensure that real lending rates are moderated.

Provisional data from the National Bureau of Statistics (NBS) indicate that the Gross Domestic Product (GDP) at 1990 constant basic prices grew by 4.85 percent in the first quarter of 2009. It is estimated to grow by 5.13 percent in the second quarter of 2009, compared with 5.20 percent in the corresponding period of 2008. The non-oil sector is estimated to grow by 8.03 percent in the second quarter of 2009, mainly as a result of the performance of agriculture (2.84 percent); wholesale and retail trade (2.20percent), and services (2.28 percent).

The NBS forecast, according to MPC, showed a lower growth of 5.75 percent in overall real GDP for 2009, compared with 6.41 percent in 2008. This is notwithstanding the projected weak performance of the global economy.

On price developments, the marginal decline in headline year-on-year inflation rate was 13.2 percent in May from 13.3 percent in April, 2009. “The persistence of high food inflation at 15.7 percent in May compared with 15.3 percent in April remains a matter of serious concern given its overwhelming weight in the consumer price index (CPI) basket. It is, however, expected that the headline inflation would slow down in the coming months on account of slack demand and the likely improvement in the supplies of agricultural produce.”

On monetary developments, MPC noted how provisional data indicated that broad money (M2) decelerated sharply by 4.9 percent in the first five months of 2009, in contrast with the growth of 29.9 percent during the corresponding period of 2008. “On a year-on-year basis, M2 grew by 15.6 percent, mainly on account of the decline in net foreign assets and slowdown in credit to the private sector. The decline in net foreign assets reflected the fall in oil export receipts and deceleration in other inflows, calling for policy initiatives to improve the availability of foreign exchange in the system. The slowdown in credit to private sector is not unconnected with the slack domestic demand as well as financial squeeze, requiring a combination of credit and structural measures to ensure that there are no enduring adverse effects of credit slowdown on growth and employment.”

Also, key interest rates at the inter-bank market rose in May and June, 2009. The weighted average inter-bank call rate on unsecured transactions stood at 12.5 percent in April, 13.2 percent in May and 18.6 percent in June. In the first few days of July, the inter-bank call rate ranged from 21 to 22 percent. The weighted average open buy- back rates in April, May and June were 7.1, 7.2 and 7.7 percent, respectively. “The average spread between the call rates and the rates on secured transactions has been very high at 1090 basis points in June, 600 basis points in May and 540 basis points in April.

“The average prime lending rate rose from 19.34 percent in April to 19.53 percent in May, 2009; while the average maximum lending rate declined from 23.17 percent in April to 22.86 percent in May. The weighted average rate on all categories of deposits rose from 5.98 percent in April to 6.13 percent in May 2009. Thus, the spread between the two rates is higher than the current inflation rate, which provides a unique opportunity to banks to improve efficiency and reduce lending rates.” Regarding exchange rates, the MPC noted with satisfaction that recent measures to stabilise the Naira exchange rate have posted some positive outcomes.

“The Naira exchange rate has stabilised at the rDAS in recent weeks, while in the other segments, the rates have appreciated, thereby narrowing the arbitrage opportunities. However, the premium over the rDAS rate has remained significant.

“The present situation offers an opportunity to further narrow the gap between the two rates by measures aimed at further liberalising the inter-bank foreign exchange market.” Meanwhile, foreign exchange reserves as of July 3, 2009 amounted to $43.19 billion (provisional) compared with $53 billion at end December, 2008. MPC said the decline in reserves mirrored mainly the relative downward drift in international crude oil prices from the levels reached in mid-2008 and the slowdown of other foreign exchange inflows.

“However, the decline in reserves is likely to moderate in the next two quarters, owing to the expected rise in international crude oil demand arising from recent reports of improvement in the recovery prospects of the US and other developed countries. [This includes] the relatively favourable outlook for growth in some important emerging economies.”