Central Bank of Nigeria Communique No. 137 of the Monetary Policy Committee Meeting held on Monday 26th and Tuesday 27th July, 2021

CENTRAL BANK OF NIGERIA COMMUNIQUÉ NO. 137 OF THE MONETARY POLICY

COMMITTEE MEETING HELD ON MONDAY 26th AND TUESDAY 27th JULY, 2021

The Monetary Policy Committee (MPC) met on the 26th and 27th July, 2021 faced with cautious optimism for the recovery of both the global and domestic economies. The performance of the global economy in the first two quarters of the year had been favourable and is expected to continue for the rest of the year. There is, however, renewed downside risk to this optimism associated with the fast spread of new and deadlier strains of the COVID-19 virus. The high rate of vaccination across the globe seems promising to drive herd immunity to reduce mortality rates. In the domestic economy, the continued support by both the monetary and fiscal authorities, is expected to yield favourable outcomes and hopefully return the economy to a strong recovery path in the next few quarters. The Committee reviewed the developments in the global and domestic economic and financial environments over the second quarter of 2021 and the outlook for the rest of the year.

Nine (9) members of the Committee were in attendance at this meeting.

Global Economic Developments

The Committee noted that while there has been reasonable gains in subduing the Pandemic, lowering of restrictions and reopening of several economies, the fast pace of mutation of new and deadlier strains of the virus is posing a downside risk to the full recovery of the global economy. In addition, the uneven access of vaccines across several countries is a significant risk to the attainment of global herd immunity. Despite the above challenges, governments all over the world have continued to ease restrictions to enable the recovery of supply chain networks and enhance aggregate demand. The

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expected rebound in global output growth is dependent, therefore, on the efficient deployment of COVID-19 vaccines with the expectations that the evolving deadlier strains would be subdued. Even with the current outlook, the International Monetary Fund (IMF) projects global growth at 6.0 per cent in 2021, compared with the last projection of 5.5 per cent. In line with this, the Advanced Economies are projected to grow at 5.1 per cent while the Emerging Markets and Developing Economies are projected to grow at 6.7 per cent.

Price development across several economies is expected to remain moderate in the short to medium term with some prospects of a mild uptick. The Committee further noted the rise in inflation above the long run objectives of some key Advanced Economies, although reported as transient and therefore not expected to lead to an adjustment of the stance of monetary policy. There however, remains the lingering risk of an early return to monetary policy normalization, should price development continue to trend upwards. Across several Emerging Market and Developing Economies, inflationary trend was on average mixed, with some of the economies recording higher rates, compared with their peers. This was largely due to exchange rate pressures, capital flow reversals, high energy costs, weak supply chains and poor response to policy stimulus to combat the macroeconomic slowdown associated with the Pandemic.

In the global financial markets, the Committee noted the increased demand for equity securities, an indication of improved investor confidence in the global recovery. In addition, it observed the progressive weakening of long-term sovereign bond yields, as the demand for equities pick up. The MPC further noted the moderation in the price of gold, signaling reduced demand, as investors return to the financial markets. The unprecedented stimulus provided by monetary and fiscal authorities to ease the impact of the Pandemic has, however, heightened the risks of global financial crisis post-Pandemic and calls for central banks across the globe to remain vigilant, should the need for sudden policy adjustments arise.

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Domestic Economic Developments

Real Gross Domestic Product (GDP) grew by 0.51 per cent in the first quarter of 2021, compared with 0.11 per cent in the preceding quarter. In the non-oil sector, Agriculture and Industry sub-sectors, were the major drivers of growth, with growth rates of 2.28 and 0.94 per cent, respectively. The oil sector, year-on year, contracted by -2.21 per cent in first quarter of 2021, compared with -19.76 per cent in the previous quarter. The weak performance in the oil sector was attributed to several factors, including the declining quality of oil infrastructure, lack of new investment in the sector and the need to comply with the OPEC+ production quota.

The Committee noted that the Manufacturing Purchasing Managers' Index (PMI), improved to 46.6 index points in July 2021, compared with 45.5 index points in June 2021. Though it remained below the 50-index point mark, the improvement is an indication of gradual recovery of output growth in the economy. The Non-Manufacturing Purchasing Managers' Index (PMI) also increased to 44.8 index points in July 2021, compared with 43.0 index points in June 2021.

The employment level index for July 2021 stood at 46.5 index points, relative to the preceding month's figure of 45.0, but, remained below the 50.0-index point threshold. The Committee welcomed the sustained monetary and fiscal stimulus to revamp the domestic economy and hoped that the distribution of vaccines to subdue the Pandemic will continue unabated.

The Committee noted the continued moderation in headline inflation (year-on- year) to 17.75 per cent in June 2021 from 17.93 per cent in May 2021, the third consecutive month of decline. The decrease was attributed to a marginal decline in both the food and core components to 21.72 and 13.09 per cent in June 2021 from 22.28 and 13.15 per cent in May 2021, respectively. The MPC noted that, though, headline inflation remained well above the ceiling of the

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Central Bank's 6-9 per cent corridor, it expressed optimism that the current interventions by the Bank in various sectors of the economy will further depress inflationary pressure as output growth improves and the negative output gap closes.

On the performance of monetary aggregates, the Committee noted that broad money supply (M3) declined to 2.02 per cent in June 2021, compared with 2.99 per cent in May 2021. This development was largely driven by a slowdown in the growth rate of Net Domestic Assets (NDA) and Net Foreign Assets (NFA). Net Foreign Assets contracted by 3.65 per cent due to the contraction of foreign asset holdings of the central bank, as well as non-interest, primary mortgage, and microfinance banks. The marginal decline in Net Domestic Assets reflected the slowdown in aggregate credit net, which decreased to 4.30 per cent in June 2021, from 4.79 per cent in May 2021.

Accordingly, aggregate credit at end-May 2021 stood at N24.23 trillion, compared with N22.68 trillion at end-December 2020. This represents a year-to- date increase of N1.55 trillion.

Under the Bank's development finance initiatives, the Bank granted N756.51 billion to 3,734,938 small holder farmers cultivating 4.6 million hectares of land, of which N120.24 billion was extended for the 2021 Wet Season to 627,051 farmers for 847,484 hectares of land, under the Anchor Borrowers' Programme (ABP); for the Agribusiness/Small and Medium Enterprise Investment Scheme (AGSMEIS), the sum of N121.57 billion was disbursed to 32,617 beneficiaries; and for the Targeted Credit Facility (TCF), N318.17 billion was released to 679,422 beneficiaries, comprising 572,189 households and 107,233 Small and Medium Scale Enterprises (SMEs).

Under the National Youth Investment Fund (NYIF), the Bank released N3.0 billion to 7,057 beneficiaries, of which 4,411 were individuals and 2,646 SMEs. Under the Creative Industry Financing Initiative (CIFI), N3.22 billion was disbursed to 356

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beneficiaries across movie production, movie distribution, software development, fashion, and IT verticals.

Under the N1.0 trillion Real Sector Facility, the Bank released N923.41 billion to 251 real sector projects, of which 87 were in light manufacturing, 40 in agro- based industry, 32 in services and 11 in mining. On the N100 billion Healthcare Sector Intervention Facility (HSIF), N98.41 billion was disbursed for 103 health care projects, of which, 26 are pharmaceuticals and 77 are in the hospital services. Similarly, the sum of N232.54 million was disbursed to 5 beneficiaries under the CBN Healthcare Sector Research and Development Intervention (Grant) Scheme (HSRDIS) for the development of testing kits and devices for Covid-19 and Lassa Fever.

On the National Mass Metering Programme (NMMP), N36.04 billion was disbursed to 17 Meter Asset Providers, to nine (9) DisCos, for the procurement and installation of 657,562 electricity meters. On the Nigerian Electricity Market Stabilization Facility - 2 (NEMSF-2), the CBN released N120.29 billion to 11 DisCos, to provide liquidity support and stimulate critical infrastructure investment needed to improve service delivery and collection efficiency.

On money market development, the net liquidity position and interest rates in the economy reflected the impact of the Bank's liquidity management operations. Accordingly, the monthly weighted average Inter-bank Call and Open Buy Back (OBB) rates rose to 16.87 and 16.39 per cent in June 2021 from 15.95 and 16.18 per cent in May 2021, respectively.

The Committee noted the weak performance of the equities market despite the recent increasing patronage by domestic investors. The All-Share Index (ASI) decreased by 1.28 per cent to 37,947.18 on July 16, 2021, from 38,437.88 on May 31, 2021. Similarly, Market Capitalization (MC) decreased by 1.30 per cent to N19.77 trillion on July 16, 2021, from N20.03 trillion on May 31, 2021.

The MPC noted that the Capital Adequacy Ratio (CAR) and the Liquidity Ratio (LR) both remained above their prudential limits at 15.5 and 41.3 per cent,

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