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How external development issues shape CBN’s policy decisions


THE evolving trends in the economy of the global community may have exerted enormous influence on the policy decisions of the nation’s apex bank.

  Specifically, beside the challenges of the free falling crude oil prices, which at present, have sustained over 50 per cent decline in the last six months, activities in individual economies like the United States of America, Japan and Europe have shaped the decisions of the Central Bank of Nigeria (CBN).

  CBN in its review of key external developments as well as domestic economic and financial conditions and outlook for 2015, ahead of the Monetary Policy Committee, had particularly paid attention to the tepid recovery of the global economy in 2014. 

  It noted that the major strength for global growth in 2014 came from the U.S, and supported later in the year by the drop in oil prices, which also failed to return the global economy to the pre-crisis growth path. 

  According to the CBN Governor, Godwin Emefiele, global growth continues to be constrained by a number of old and new adversities including high debt and rising unemployment in many countries (both industrialized and developing), geopolitical tensions and conflicts; and the negative impact of commodity price shocks on commodity exporting countries.

  Others, he said, were weak external demand; and the tapering and eventual exit of the U.S. Federal Reserve Bank from quantitative easing, which triggered sharp corrections in the financial markets. 

  But the Monetary Policy Committee, given these developments, noted many downside risks to the outlook as the Euro area and Japan appeared trapped in low inflation and low growth conditions. 

  It also acknowledged the high possibility of an increase in interest rates in the United States, which portends negative consequences for emerging and frontiers economies, including Nigeria.

  According to the committee, these challenges could be compounded by increased geopolitical risks arising from the Ukrainian stand-off, militancy, armed insurgency and the aftermath of the Ebola epidemic in some countries in the West African sub-region. 

  Furthermore, the divergence between the U.S. and Euro Area monetary policy stance, non-inclusive growth and the regional impact of falling oil prices with acute revenue shortages in countries like Nigeria, Venezuela and Russia add to the risk factors.

  In the domestic front, the committee observed that the resurgence of the non-oil sector, particularly services, which contributed 2.53 percentage points, agriculture, 1.21 per cent and trade, 1.08 percentage point was however, a positive development. 

  But concerns were also raised over the weakening contribution of the oil sector to overall growth, which is now being exacerbated by the rapid drop in oil prices and the security challenges in some parts of the country, contributing to the dampening effects on overall growth in the country.

  Specifically, credit to government contracted during the period under review by 21.8 per cent, far below the growth benchmark of 28.4 per cent, while Net Foreign Assets (NFA) declined by 15.02 per cent as well. 

  Credit to the private sector, however, grew by about 12.1 per cent, essentially pushing aggregate domestic credit growth of about 11.0 per cent. 

  The weak performance of NFA was largely due to the lower oil prices with the attendant consequence of reduced accretion to external reserves.

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